Bringing ZIP A$3.9B to America

🧠 The Takeaways

Today we’re buying ZIP and turning it into a legit BNPL contender.

1. Bring the biz to the states to focus on its largest + most profitable market.

2. Narrow the markets we’re supporting to grow faster from more density.

3. Launch consumer lending to really leverage up the profits.

+ 4 tools to help you recover lost money when your vendors break of BFCM.

Let’s Community - Get Paid When things break

Next week, you will plow the most traffic through your site of the entire year.

Inevitably, your operations will break. Whether it's your fulfillment center,  Amazon,  your carriers, or something down the stack. Something will get messed up. Plan to reduce your exposure as much as possible, but also be prepared for when it happens.

And I think the little secret that most brands don't really know you can actually get compensated any time these Ops vendors mess up.

You can get essentially “insurance” to reimburse you for the vendor mess up.

• Chargebacks: Chargeflow (I’m an advisor) automatically fights Chargebacks for you to win as many cases, especially when there’s fraud.

• Amazon Mess ups: If you sell no Amazon and they mess up your inventory of shipments to customers. (Brands usually get 1-2% of Sales back).

• Carrier Reimbursement: When Fedex/UPS naturally mess up your deliveries get reimbursed.

• 3PL Reimbursement: When your 3PL messes up an order and sends it to the wrong place or over charges you.

There are plenty of providers that offer these services.

As you push more scale, you have to plan for things to get messed up. Don't let it ruin your business.

These are ways you can inexpensively recoup as much of that money as possible, all while continuing your operations. Offloading the manual labor intensive work from your CS/Ops team.

Don't get blindsided by this.

Be prepared and take advantage. Usually you can add 1-3% of Rev back to your bottom line through these reimbursements. A massive swing in your profitability, especially over this period.

Let’s Examine This Biz

Note: As always, none of what follows is legal, tax, investing, financial, or any other sort of advice. And I was never here 😉.

Zip Co the BNPL provider from down under has been hammered over the last 5 years because it’s operating in the wrong markets. It apparently is better to run your biz in the US.

Trading at A$1.98/share with a A$3.94B market cap, it’s -52% L5.

Zip is barely beating Sezzle (the runt of the pack).

1. Klarna: Still private rumored to be going public ~$20B

2. Afterpay: Block ‘22 acquisition ($45B)

3. Affirm: $12.2B

4. Sezzle: $1.13B

The wild piece is there’s no standard valuation system here. 

• Affirm is wildly unprofitable but growing 50%, at a massive scale.

• Sezzle is profitable: trades at a 24x P/E Ratio

• We can’t access Afterpay’s numbers and don’t know Klarna’s yet.

But 1 thing is painfully obvious. Zip is really lagging behind the big 3 in the space. And traded into the ground because of it.

Financial Summary

TLDR Analysis: Turning the ship around

• BIG Gross Profit unlock from US expansion saved this biz. 🎉

• Got Overhead in line with big cuts. Didn’t impact growth. 💪

• Flipped a brutal ‘23 Net Loss into a baby Net Income. 🫡

Zip is on the right path, but it has so many obstacles to overcome. The massive cuts to OPEX were a great move to right size the operations + stop torching money. They took 1 year too long to get fit and are now paying the price.

And despite cutting the GTM budget by 7%, the biz actually grew 28%. Goes to show how much focus and leverage always matter more than resources + size.

But Zip still needs to scale into a much larger biz for the math to make sense to investors.

Let’s Scale This Biz!

Here are the 3 moves I’ll make to turn this Zip into a real BNPL player and make it a $10B market cap biz.

1) Relocate the Biz to the U.S.

While Zip was founded in Australia and remains an Australian biz, all the value is being created in the US.

The US represents 52% of Zip’s Rev, but accounts for 70% of the Net Income. The greatest difference is in the Gross margins by region.

1. U.S. Market: $235m in Gross Profits @ 52% Gross Margins.

2. Australia/New Zealand (ANZ) market: $143m in Gross Profits @ 34% Gross Margins.

Despite Australia’s official interest rate being roughly equivalent as the U.S.’s (4.3%), the cost of loaning out money in the ANZ market to ANZ customers is more expensive than in the US.

The US are also where Zip is seeing the most growth:

• Rev +45% YoY (vs. ANZ +13%)

• GMV Processed +39% YoY (vs. ANZ -14%)

• Transactions +33% YoY (vs. ANZ -11%)

Despite having 2.2x the number of ANZ Merchants processing 1.2x the number of transactions, Zip’s U.S. market still processes 1.8x the GMV as their ANZ market. The north star here.

The #1 reason ZIP needs to move to the US: U.S. Merchant growth was only +1% YoY vs. ANZ’s +14%. Acquiring Merchants is the key to the whole flywheel.

A meaningful heads down focus on the U.S. is the key to growing the brand.

It’s already a more profitable market. We’re going to relocate Zip’s GTM + financing focus to scale into real profits.

Takeaway: You have to be all in to win your best markets.

2) Streamline the focus

Zip is playing the conglomerate playbook way too early in their evolution. While that is understandable because Australia (their home market) is much smaller than the U.S., it’s a bad biz move for a brand at this stage.

The Consumer options on their site looks like the Chase points portal. Consumers can shop on typical brands, plus Groceries, Airfare, Hotels, and Phones?

It’s not the wrong strategy, just the wrong time for only processing $10B in annual GMV. 

They need to go deep into key categories like consumer shopping and grab a lot of brands in that vertical to gain a network effect. In a biz like this, having a dense network of brands that consumers will buy from is even more important because:

1. The more brands you sign on, the more similar brands will also sign up. Especially when you can drop insanely impressive brands like Fashion Nova as customers.

2. The more similar brands you sign on, the more shopping breadth you offer customers who are more likely to spend more through your payment rails.

3. The more customers you have buying from more brands attracts (even) more brands to sign on, reinforcing the core value prop.

And that flywheel opens up other monetization opportunities in other areas. All of this leads to a profitable biz.

1. The biz grows faster on a lower Marketing & Sales budget because $$ and focus are centralized. 

2. Support costs are lower.

At the same time, they need to get out of some categories that make absolutely no sense, like Grocery, Phones, Education, and Fitness. Then, they really need to rethink their Travel and Entertainment strategy.

It’s counter-intuitive to shrink your focus to grow into the required scale to support more markets, but it would unlock faster, more profitable growth and tell a better narrative for Zip.

Takeaway: Zip needs to focus on taking more existing market share than trying to play in every market.

3) Move into Multi-Product more aggressively

The beauty of being 4th in a massive category is that you don’t need to reinvent the wheel to be more successful. 

You can create a massive amount of value by just playing catch up. Especially when your market cap is $3.9B, and the leader’s is $12.2B.

If you take out Affirm’s loan biz, it’s actually the same size as ZIP.

1. Affirm’s payment processing Rev is $826m

2. Zip’s is $868m

Zip needs to rip a play right out of Affirm’s book and offer consumer loans. Remember: 50%+ of Affirm’s Rev comes from loan sourcing. Not loaning out the money themselves but middle manning it with another bank.

Other than the obvious (it will add WAYYYYY more Rev at fat profit margins to their books), the other no-brainer reason Zip should offer consumer loans is it will make their own Corp loans cheaper.

Zip’s entire biz model is: 

1. Take out a loan from a much bigger financial player.

2. Offer our Pay in 4 service to end consumers through merchants.

3. Take a cut of GMV in payment processing to cover Tech + defaults (= our profits).

When you think about Zip’s greatest costs, it’s 1) borrowing costs and 2) paying for Engineers. At scale it’s really just borrowing costs.

What’s one of the best ways to get lower borrowing costs? Providing more scale and providing more biz to your loan partners.

If Zip can provide more payment volume to their loan providers, it’s a classic economies of scale argument: 

We should get cheaper rates because we’re bringing

• 5/10/20x the volume

• directly sourcing higher loan $$$ volume

• Doing most of the GTM + qualification work (AKA the lion’s share of financial institutions' costs in providing loans). 

Concentrating these efforts in the U.S. where Zip’s borrowing costs are already lower than in ANZ will provide a double bounce:

• Maximizing growth

• Lowering the per-unit costs to scale

Takeaway:   If you’re behind, don't reinvent the wheel. Take a different angle on what’s working.

Final Thought

Zip has been around for a long time (founded in 2013) and has been public since 2015. They’ve gone on an international acquisition spree, acquiring BNPL providers in America, UK, Singapore, and the MIddle East. Most of that strategy has been unsuccessful.

It’s interesting to see how little of that worked, while the US expansion has been so successful. It’s really easy to underestimate how deep the US consumer market is.

At the end of the day, they are trying to flip a loan for more than then their cost of borrowing. I can understand why this biz has struggled over the last 4 years, but they have one incredible benefit waiting for them on the other side of next year:

Interest rate arbitrage. 

The beauty of this entire biz model is that consumer goods don’t really deflate. Consumers will continue spending higher $$$ to buy goods, while Zip’s cost of borrowing decreases, unlocking more margin for them.

Don’t get me wrong, I can see why no one wants to touch this biz. They’re up to their hairline in debt, drawing down 87% of the credit facilities. Basically, they're standing on a razor’s edge. If anything goes wrong, this biz immediately goes under.

Their stock will continue to trade on investors’ expectations of a recession. As soon as markets hit a downturn the creditors own the biz. If there’s a boom, this is a risky biz whose loan arbitrage worked out.