Karooooo announced in its latest financial results that it had made the decision to discontinue its Carzuka business.
Karooooo is a leading global provider of real-time data analytics, with over 1.88 million connected vehicles and assets.
The company, headquartered in Singapore, owns 100% of Cartrack, 100% of Carzuka and 70.1% of Karooooo Logistics.
Cartrack and Karooooo Logistics produced standout results. However, Carzuka’s operating loss was R25 million for the half-year period.
Carzuka is a digital platform that connects vehicle buyers and sellers in a virtual marketplace to make transacting easy.
It is in direct competition with other motor dealerships with whom Cartrack has business relationships.
Karooooo said that Carzuka’s business had a negative impact on the relationship Cartrack has built with motor dealerships.
It explained that the Carzuka business has become a threat to the business interests of Cartrack, its main profit driver.
Carzuka has shown strong growth. From May 2021 to October 2023, the number of vehicles sold grew from 2,600 to 85,000.
Despite the strong sales growth, Carzuka was not able to scale its operations in a cost-effective manner.
As vehicle sales increased, operating costs grew quicker, pushing the company’s operating losses deeper into negative territory.
Karooooo’s latest results revealed that Carzuka reported a R53 million operating loss in the trailing year – three times more than the loss it reported in Q2 2023 of R16.5 million.
Many people may perceive Karooooo’s decision to pull the plug on Carzuka as bad news that showed poor capital allocation.
However, it is a good sign when management disposes of poor-performing segments instead of pumping more money into them.
SaltLight Capital Management portfolio manager David Eborall highlighted this point when he tweeted on Carzuka.
“It is nice to see Karooooo discontinuing Carzuka after a R100 million loss per annum,” Eborall said.
“I love the fact that entrepreneurs try to grow new S-curve businesses. However, scale is what matters in the Carzuka business.”
“If your pricing can’t be materially better, or you have other business lines that the new business can impede, it’s best to cut your losses and find opportunities elsewhere.”