Zooplus When Good Management Meets Bad Business – a Structural Short-Selling Opportunity…

Zooplus When Good Management Meets Bad Business – A Structural Short-Selling Opportunity…

15 February 2019 Disclaimer

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2 Source: Burggraben Holding AG 15/02/2019 BURGGRABEN HOLDING AG “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Warren Buffett

3 15/02/2019 BURGGRABEN HOLDING AG Snapshot

Basics Share Price Development (in Euro/share)

• Online only: Established in 1999, Zooplus is Europe’s largest 250 pure-play pet supplies online platform with a footprint in 30 202 countries. 200

• Rapid Growth: Between 2010 and 2017, the company grew 150 revenues by 27% on average per annum. As at year-end 2018, 112.5 the company reported €1.3bn in sales from approx. 7 million 100 customers. 50 • Niche Category: Pet supplies are well suited for online retail as they are standardised products, with a regular & repeat demand 0 pattern while offering high-convenience home delivery in Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Europe; • Products: Today, the company offers 8,000 articles across all sub- Capitalisation & Market Valuation categories of pet supplies on its webstores. However, 83% of sales are food orders with an average basket size of €54 25/01/2019 and an annual turnover of €250-€290 per customer. In essence, Share Price Euro 112.5 Zooplus is really about ordering food for your cat & dog from Number of shares million 7.2 branded goods such as whiskas or Frolic. ______• Zero Moat: Zooplus, like most eCommerce retailers, does not Market cap Euro mio 805.6 have switching cost to the consumer. Instead, a customer can Net Debt (cash) Euro mio ______(19.1) purchase the exact same product at Amazon if this means to get a better bargain or have more convenient shopping experience Enterprise Value Euro mio ______786.5 or delivery time. • Margin Compression: This constant threat of client migration Sales 2018 Euro mio 1,342 makes pet supplies retailers compete on price. The result is steadily compressing margins. EV/Sales x 0.59

4 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Executive Summary

Zooplus is substantially over-valued and makes for a compelling structural short-selling opportunity…

• The Business: Founded in 1999 in Munich, Zooplus is Europe’s leading pet supplies online retailer with a market cap of €0.8bn. Over the last 10 years, the company achieved an impressive 27% sales growth per annum. As at year-end 2018, the company reached net sales of €1.3bn from 30 countries. Its typical customer is female, 40 years old and spends €250-€290 annually on cat & dog food with an average basket size of €54. The order pattern has low seasonality, suggesting Zooplus has certain “consumer staple” qualities at first glance. • Zero Moat: A closer look at the company however reveals that it hardly has the free cash flow generating qualities of a defensive stock. Instead, Zooplus cannot differentiate itself from the competition as its core turnover items are one click away from Amazon.com or many other similar pet supplies services. Zooplus is what we like to call a “commodity shopping” experience. Consequently, Zooplus has to match or lower the best price in the market in order to retain existing customers or gain new ones. Otherwise, customers will switch to the competition at basically zero cost. Not surprisingly, the result was steadily compressing gross margins, down from a high of 37% back in 2010 to 24% today. • Zero Economies of Scale: Between 2010-2015, Zooplus was able to compensate for its margin compression by improving its overall efficiency. Recently however, this trend has been reversed as the company has to invest more into new fulfilment centres, marketing or IT in order to improve its logistics costs or simply to keep up with the competition. More importantly, the company has less then 4% fixed cost, leaving little room for it to scale by adding new customers. On the contrary, management’s obsession with growth adds complexity from managing an organisation in 30 countries, in- and outside the EU, in likely more than 20 languages. In our view, after 20 years of efficiency management, Zooplus has “maxed” out its potential for operational excellence. • Illusive Customer Lifetime Value: And yet, management seems to be committed to grow and build a platform at the expense of mid- term profitability. This is because of the belief that “customer retention” has a strongly positive “customer lifetime value” as the repeat order pattern of a customer will lead to incremental sales at stable or decreasing operating cost in the future. Management calculates such a repeat customer to accumulate €164 in contribution over 11 years when assuming steadily increasing sales per customer, 93% sales retention and 9.5% contribution margin. Our work however reveals that a more realistic number is to assume €13 customer lifetime value, subject to no further pricing pressure from the competition, when applying a realistic 3% contribution margin and when discounted to the present value – hardly a “strongly positive contribution” when compared to €19 acquisition cost for each new customer in 2017.

5 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Executive Summary (continued)

Zooplus is substantially over-valued and makes for a compelling structural short-selling opportunity…

• Competing with Amazon on Price: It gets worse. In 2018, Amazon identified the pet supplies category as a “unique & highly valuable” category. Given its superior service (it has 72 fulfilment centres in the EU versus 11 for Zooplus), scale in combination with captive customers (54% of online shopping starts with Amazon directly) as well as a third party platform to grow the category rapidly without cost or risk, we expect Amazon to compete aggressively on price in order to cross-sell to existing customers as well as to gain access to new ones. But competition does not end with Amazon. Among others, local grocers, DIYs, drugstores as well as specialised pet supplies retailer compete for the same consumer base when being visited at their local store network. Which is why we expect future retention for Zooplus to continue to come at the price of compressing gross margins. • When good management meets bad business: In essence, Zooplus is caught in a commoditised pet supplies market in which growth will most certainly never return its cost of capital. If anything, it will lead to a “strongly negative customer lifetime value”. This is because Zooplus neither has scale nor loyalty. A good captain then won’t save the sinking ship. Rather, Zooplus is a ticket on the Titanic. In other words, it is a great example of an industry with bad economics. In such an industry, as Warren Buffett explained, it is the bad economics that will prevail over a good management team. But this has been true for some time. So what will change shareholders’ perception about the business now and make them accept that Zooplus's eCommerce story of “growing today and monetising tomorrow” is structurally broken? • Catalyst: We are convinced the answer is less sales growth. Our work reveals that ever-increasing marketing cost from expensive AdWords bidding auctions due to increased competition will force the company to slow down customer acquisitions in order to keep breaking even. In turn, we expect a reduction of its past growth target of €2bn by 2020 to a more realistic number of €1.75bn. Alternatively management may opt to incur losses in order to keep its pace of above €300m annual sales growth until 2020. But in the past, management lived within its means. We are thus convinced the team will guide the market lower at its annual session in March, rather than overspend by adding debt to the balance sheet for the sake of vanity. • Structural Short: Such guidance will catch analysts by surprise. Bloomberg’s consensus forecasts assume Zooplus to improve its EBIT from an estimate of zero in 2018 to €20 million come 2020 while every single metric we have reviewed points in the opposite direction. As for revenues, consensus estimate is for Zooplus to achieve €2bn sales come 2020. While earnings revision has not hurt the story in the past 5 years so far, sales revision will be a novum among analysts. We are convinced it will lead to a renewed focus on the weak fundamentals of the business and ultimately trigger a stock sell-off this year. As at 28 January 2019, Zooplus trades at €112.5/share. Our calculation assumes an intrinsic value of €44 - at best – or at least 60% downside potential from today’s closing price.

6 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Investment Summary

Burggraben is convinced that Zooplus is an attractive “short-selling” investment for three main reasons…

Zero-Moat: Despite its size, Zooplus has significant and growing competition 1 (including Amazon) that continues to compress its margins. The likely result will be unprofitable growth or outright losses for years to come.

Expensive: Zooplus's margins deteriorated rapidly in the past 2 years and yet, the 2 market values the business at €0.8bn – a price 60-90% above its intrinsic value;

Low Risk Investment: Starting in 2017, Amazon made a big push into the attractive EU pet food market. We are convinced that this fact alone will make 3 more growth slowdown and further compressing margins a certainty which ultimately lead to consensus revisions in coming quarters.

7 Source: BGH analysis 15/02/2019 BURGGRABEN HOLDING AG Short Thesis

8 15/02/2019 BURGGRABEN HOLDING AG Zooplus is an Expensive Stock

As a fast growing company, Zooplus is valued at 0.6x EV/Sales…

Share Price Development (in Euro per share) – in synch with sales growth (in Euro million)

Peak Share Price: €202 1,342 In April 2017, PetSmart EV/Sales: 0.6x acquired Chewy.com for $3.35bn or about 2.5x 202 1,111 EV/Sales. Soon after, Zooplus's share price 189.9 rallied by 80% 909

711 112.5

543

407 63.129 319 245 178 15.346

Jan 10 Oct 10 Jul 11 Apr 12 Jan 13 Oct 13 Jul 14 Apr 15 Jan 16 Oct 16 Jul 17 Apr 18 Jan 19

9 Source: Bloomberg, Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG But Zooplus struggles to Earn its Cost of Capital

The expensive valuation stands in contrast to the economic reality of the business model which struggles to earn its cost of capital. An EV/Sales of 0.17x seems fair.

Zooplus Common Size P/L plus Implied ROIC & Valuation

ROIC & Valuation Average Great Comment Year Year Assumptions Sales Price 1.0% Logistics Cost -1.5%

Results: Sales 100.00% 101.01% Upside from improved product mix CoGS ______-75.50% ______-75.50% 85% food product mix assumed Gross Margin 24.50% 25.51% before IFRS 15 reclassification; higher margin from product mix Logistics -19.70% -19.41% Upside from improved product mix Acquisition -1.80% -1.80% Personnel ______-3.50% ______-3.50% EBIT Margin 0.40% 1.70% 3y average: 0.5%; TTM: negative Inventory Turn (x) ______10.5x ______8.5x Higher margin from product mix, but less turn ROIC pre-tax 4.2% 14.5% assuming unchanged NWC Tax Rate ______33.0% ______33.0% according to annual reports ROIC 2.8% 9.7% WACC ______9.0% ______9.0% ROIC > WACC NO Just

Reasonable EV/EBIT 5.0x 10.0x Implied EV/Sales 0.02x 0.17x

10 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG A Zero-Moat Business

This is because Zooplus does not have any switching cost to the consumer. Instead, a customer can purchase the exact same product at Amazon if this means to get a better bargain or have more convenience. This constant threat of client migration makes pet retailers compete on price in order to achieve retention. The result is steady margin compression.

Switching Cost Pillars of Investment Focus (March 2018)

EBT Margin Compression (in %)

EBT Repeat Customer EBT New Customer

4.09% 3.54% 3.51% 2.50%

-2.48% -1.98% -3.61%

-6.27% 2014 2015 2016 2017

11 Source: Burggraben analysis; https://www.investopedia.com/terms/s/switchingcosts.asp 15/02/2019 BURGGRABEN HOLDING AG Why does the Opportunity Exist?

Zooplus's equity story is a good example of a false eCommerce bull case as it assumes that unprofitable growth for early market share can automatically be monetised at a later stage.

The eCommerce Equity Story Template Analysts “Love” The Story

1. Grow customer base rapidly because customer acquisition costs are a fraction of the overall customer lifetime value while high retention rate creates first-mover advantage; ZO1 2. Monetise customer value by increasing (a) the number of transactions per customer as well as (b) the average basket size per transaction while (logistics) cost remain unchanged as parcels (nearly equals basket) is the main cost driver. In theory, the company becomes more profitable;

3. Maximise profitability from (a) Economies of scale due to a larger installed (customer) base, fixed costs will spread over more volume and hence profit margins increase. (b) Efficiency gains will add to profitability. (c) Purchasing power will result from size (higher order volume).

In addition, high retention rate means that fewer new customers need to be acquired to keep sales constant or even growing (because customers buy more over time). As the company matures, it becomes automatically more profitable. The sky is the limit…!

12 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG The Inconvenient Truth (in eCommerce Retailing)

However, in order to monetise your customer later, a company needs to fulfil two fundamental conditions in eCommerce retailing. Zooplus has neither.

Have A Captive Customer… Have a Lasting Cost Advantage…

Having a captive customer in eCommerce is even harder than for a store A captive customer in combination with certain cost advantages such as network. It really means to have a connection with the consumer so that he unique technology, purchasing power or economies of scale can be a source or she uses your Website directly (as opposed to search on Google for the of future profitability. The competitive advantage of economies of scale product) in order to fulfil a product purchase. We call this “share of mind” – needs fixed cost (against which one can scale) and high relative market which is worlds apart from having “market share”. Market share comes and share. Scale does not depend on absolute size, but rather on the size goes with price competition among rivals with little switching cost to the difference between it and its rivals (market share). If average cost per unit consumer. Share of mind however stays. Few eCommerce companies have it. decline as a firm produces (sells) more, then smaller competitors will not be Zooplus certainly does not belong to them. Amazon instead is the prime able to match the costs of the large firm. Zooplus does not have economies example, as illustrated below. Online shopping really starts with Amazon. of scale because it does not have fixed costs to scale against.

Zooplus's asset-light business model does not scale (Fixed Cost 2017 estimate as % of total)

Fixed Cost, 3.9%

Variable Cost, 95.6%

13 Source: Burggraben analysis; Jumpshot Inc, 2018; CMD Presentation, March 2018 15/02/2019 BURGGRABEN HOLDING AG Under attack from all sides

Meanwhile, competition intensifies. Zooplus has to compete with countless off- and online retailers that offer similar or better customer experiences, thus leaving it no choice but to compete on price to retain existing clients or acquire new ones.

Zooplus: Under attack from all sides

14 Source: Hauck & Aufhäuser, Christian Salis, June 2018 15/02/2019 BURGGRABEN HOLDING AG Unrealistic Consensus Estimates 2019 & 2020

And yet, sales and earnings forecasts for Zooplus in 2019 & 2020 remain highly optimistic. Analyst consensus is for it to reach €2bn revenues by 2020 and generate €20m EBIT, a significant improvement when compared to its 2018 results. In other words, analysts continue to believe in the “story” of growing today and monetising tomorrow. We think this sets the stage for a share price correction.

Sales & Earnings Estimate 2018 - 2020 (in Euro)

15 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG Expect Significant Revenue Revisions

In the past, management broke even while growing. Assuming similar restraint, a simple check reveals that Zooplus has “natural limits” to growth when assuming higher marketing cost from increased competition. Our calculations reveal growth of €200 million per annum to be more realistic. This in turn translates into significantly lower growth rates going forward…

Limits to Growth (when assuming increasing marketing cost while breaking even)

Limits to Growth Euro 2017 2018E 2019E 2020E Comments Actuals & Assumptions for new customers In Yellow - Input cells Actual & "Target" Sales million 1,111 1,342 1,550 1,750 1) Starting Point: assume Euro 1.55bn sales for 2019E

Marketing cost in % ______1.73% ______1.91% ______1.78% ______1.78% 2) At 1.78% marketing cost in % of sales, Zooplus should breakeven in 2019

Marketing cost (& budget) million ______19.3 ______25.7 ______27.6 ______31.2 3) This gives a marketing budget of Euro 27.6 million for 2019

Customer Retention Rate in % 65% 65% 65% 65% 4) In the past, about 65% of customers made a purchase in following year

Marketing cost per new customer Euro ______11.06 ______15.78 ______17.00 ______19.00 5) In the past two years, marketing cost per new customer increased (Google bidding) Number of new customers 000 2,674.0 2,505.0 2,497.0 2,522.0 6) Euro 27.6 million divided by Euro 17 divided by 65% = 2,497,000 new customers

Sales per new customer Euro ______101 ______115 ______110 ______110 7) We know past purchases per new customer and assume similar ones for 2019 New Customer Sales million 271 287 275 277 8) 2,497,000 clients buy on average Euro 110 of products in first year = Euro 275 mio

Actuals & Assumptions for repeat customers Average sales retention rate in % 92.45% 95.00% 95.00% 95.00% 9) according to Cohort analysis & Trading Update 24 Jan 2019

Sales of previous period million ______909 ______1,111 ______1,342 ______1,550 Repeat Customer Sales million 840 1,055 1,275 1,472 10) Resulting repeat customer sales

Actuals & Result Total New Sales million 271 287 275 277

Total Repeat Sales million ______840 ______1,055 ______1,275 ______1,472

Total Actual & "Resulting" Sales million ______1,111 ______1,342 ______1,550 ______1,750 11) re-iterate result with marketing cost as % of sales to match starting point

Effective Sales Growth yoy million ______202 ______231 ______208 ______200 BGH assumption for Zooplus' natural growth per annum

Effective Sales Growth yoy in % ______18% ______17% ______13% ______11% BGH assumption for Zooplus' natural growth rate per annum - in %

16 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Zero Revenue Downward Revisions in the Past

…but a revenue downward revision will come as a surprise to most analysts and investors alike. Below, the red line illustrates that, if anything, 2020 revenues have been revised up over the past 8 years. Today, the expectation is for Zooplus to achieve €2bn. €1.75bn seems realistic – a big miss is about to hit the market.

Revenue Revision for 2020 will be «Unprecedented News»

17 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG Our Price Target

Zooplus is substantially overvalued, even in a best-case scenario and as illustrated below.

Intrinsic Value substantially below current share price of Euro 112/share

Zooplus, in Euro million Average Great Margins Year Margins Year

Revenues ______1,750.0 ______1,750.0 EBIT 0.4% 7.0 1.7% 29.8 EV/EBIT Multiplier 5.0x 10.0x

Valuation: Enterprise Value 35.0 297.7 Net Cash ______19.1 ______19.1 Equity Value 54.1 316.8 Number of shares ______7.2 ______7.2 Value per share 7.6 44.2 Share Price today ______112.5 ______112.5 Upside / (Downside) ______-93.3% ______-60.7%

18 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG The Company

19 15/02/2019 BURGGRABEN HOLDING AG Zooplus – Operation

Since 2010, Zooplus has been growing its platform at 27% pa. For 2018, it will achieve a gross margin of 24-25% while turning its inventory about 10x. It also steadily reduced its working capital while growing which is remarkable. And yet, Zooplus will hardly achieve a positive EBIT margin in 2018.

Euro mio except if otherwise stated 2010 2011 2012 2013 2014 2015 2016 2017 TTM CAGR 10-17 Customers: Repeat Customers (in thousand) 485 743 942 1,265 1,580 1,987 2,479 3,143

New Customers (in thousand) ______989 ______1,213 ______1,561 ______1,429 ______1,762 ______2,037 ______2,347 ______2,674 Active Customers (in thousand) 1,474 1,956 2,503 2,694 3,342 4,024 4,826 5,817 21.7% Growth pa 45% 33% 28% 8% 24% 20% 20% 21%

Customer Retention Rate 48% 50% 48% 51% 59% 59% 62% 65% Sales Retention Rate 80% 81% 79% 85% 91% 94% 92% 93% Basket: average order size (in Euro) 48.1 49.0 50.7 52.9 54.3 56.0 55.7 54.7

P/L: Sales (excluding other income; in Euro million) 177.8 244.8 319.2 407.0 543.1 711.3 908.6 1,110.6 1,342.0 29.9% EBITDA 3.9 (6.8) (1.8) 4.9 9.9 15.4 19.7 5.3 (12.1) EBIT 3.3 (7.6) (2.6) 4.2 9.2 12.8 18.1 1.0 (13.9) EPS (Euro per share) 0.49 (0.93) (0.25) 0.42 1.17 1.24 1.99 0.04 (0.74)

Operation: Revenue growth (yoy) 49.9% 32.8% 30.3% 27.2% 33.5% 31.6% 27.9% 21.8% 16.1% Gross Margin (before IFRS 15 reclassification) 36.8% 35.6% 32.7% 31.1% 27.5% 26.9% 24.7% 24.2% 24.2% EBIT Margin 1.8% -3.1% -0.8% 1.0% 1.7% 1.8% 2.0% 0.1% -1.1%

Efficiency: Inventory Turnover (per annum) 6.1x 6.4x 6.9x 6.9x 6.8x 7.1x 8.5x 8.7x 9.6x 5.1% Net Working Capital: days on hand 65.5x 59.5x 49.0x 57.6x 58.2x 45.2x 35.7x 29.7x 14.1x -10.7%

Profitability: ROIC (EBIT * Inventory Turnover * (1- Tax Rate of 33%)) 7.3% -13.1% -3.7% 4.7% 7.6% 8.5% 11.2% 0.5% -6.9%

20 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Zooplus - Balance Sheet

At year end 2017, Zooplus has net cash of €40 million. Intangibles are mainly software related. Lease expenses relate to future payments in connection with the Polish fulfilment centre. Derivates are FX related.

Balance Sheet as at year end 2017 (in Euro million)

Assets, Euro million 31/12/2017 31/12/2017 Liab & Equity Ratios: Euro Mio ST Assets: Current Liabilities Cash 51.2 78.1 Payables Net Working Capital 41.49 Investments 0.0 0.5 Derivatives Net Debt (Cash) (40.2) Acc. Receivables 54.5 24.6 Other Tax Receivables 1.2 1.3 Tax payables Equity Ratio 46.5% Inventory 89.7 2.1 Finance leases Other 14.8 7.4 Provisions Total 211.4 2.9 Deferred income 117.0 Total

LT Assets: LT Liabilities PP&E 15.0 1.2 Provisions Intangibles 13.1 1.0 Deferred tax Other 0.0 8.9 Finance leases Total 28.1 11.1 Total

Equity 104.6 Capital 6.8 Retained Earnings 111.4 Total Assets 239.5 239.5 Liab & Equity

21 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG The «Price»

The typical customer of Zooplus is 40 years old, female, lives in a city and spends around €250 per annum to order food and/or accessories for her pet.

Target Customer

22 Source: Investor Relation, 2017 15/02/2019 BURGGRABEN HOLDING AG Market Presence

Starting in 1999 in Germany, the company is now active in 30 countries with a store of 8,000 articles for pet supplies.

Market Presence & Key Figures 2017

23 Source: Company filings 15/02/2019 BURGGRABEN HOLDING AG Revenue breakdown

Zooplus is about ordering food for cats & dogs. Germany, France and Great Britain are its largest markets, with a combined €550 million in net sales (51%).

Sales by country Sales by category

Accessories Finland, 2% Other countries, 17% Sweden, 2% 4% Denmark, 2% Food, 83% Czech Rep, 2% Switzerland, 3%

Austria, 3% Germany, 25%

Belgium, 4% Sales by Pet

Spain, 6% Others, 4%

Netherlands, 7% France, 17% Dogs, 47%

Poland, 7% Cats, 49%

Great Italy, 8% Britain, 8%

24 Source: Company filings 15/02/2019 BURGGRABEN HOLDING AG Yes, Customer Growth

Zooplus had 5.8 million active customers in 2017. Over the prior 3 years, it was able to add about 2.3 million new customers each year on average. But…

Customers by type (in thousand)

5,817 Active Customers New Customers

4,826

4,024

3,342

2,694 2,674 2,503 2,347 1,956 2,037 1,762 1,474 1,561 1,429 1,213 989

2010 2011 2012 2013 2014 2015 2016 2017

25 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG But Less New Customers Year over Year

…a closer look at 2018 reveals a slowdown in customer growth. Although Zooplus boosted “new customer acquisition” by 22% in Q4 2018, it added less new customers in 2018 when compared to the previous year. The last time this happened was in 2013. We think this is an important early warning sign.

Weak Customer Growth in 2018… …means decreasing “new” customer growth yoy!

2018: 2,505 Million New Customers versus Change in the Number of New Customers (year over year in %) 2017: 2,674 Million 722.0

(in ‘000) 28.7% 22% 23.3% 644.0 22.6%

594.0 15.6% 15.2% 13.9%

545.0

2011 2012 2013 2014 2015 2016 2017 2018E

Q1 2018 Q2 2018 Q3 2018 Q4 2018 -6.3% -8.5%

26 Source: Burggraben analysis; company filings 2018 15/02/2019 BURGGRABEN HOLDING AG Growth Strategy built on “Customer Lifetime Value”

Regardless, management seems committed to grow the company at the expense of mid-term profitability. This is because it believes that “customer retention” has a strongly positive “customer lifetime value” as the repeat order pattern of a customer will lead to incremental sales at stable or decreasing operating cost. Zooplus calculates such customers to generate €164 of profit before tax or about 9.5% contribution margin over 11 years. We will review and cross check this over the following slides…

Customer Lifetime Value (LTV) as presented by Zooplus

Very High Margin:

9.5% (164/1730) Customer Contribution Margin over life of customer

27 Source: Investor Relations Presentation December 2018, page 10 15/02/2019 BURGGRABEN HOLDING AG Benchmarking LTV

28 15/02/2019 BURGGRABEN HOLDING AG Benchmarking Customer Lifetime Value

In 2016, Conversio benchmarked 19 categories in US eCommerce for their respective LTV from $1.5bn worth of transactions. Shockingly, the Animal & Pet Care category has the lowest LTV with $57.05 as, among others, small order size categories have less LTV long-term. Could it be that Zooplus's management is too optimistic about the future value of its customers? Or do European consumers really offer so much more value?

19 US categories compared by Order Size & Customer Lifetime Value (in US$, 2016)

250 LTV (US$) R² = 0.7908 Business

200 PCs

150 Books Garden & DIY

Software Sports Hobbies Arts 100 Food Health & Beauty Wedding Pet Care Toys & Games Jewelry 50 LTV $57

Basket Size (US$) 0 0 20 40 60 80 100 120 140 160 180

Source: Burggraben analysis; Source: https://conversio.com/deep-dive/increase-customer-lifetime-value/ 29 Note: LTV = (((average monthly transactions x average order value) x average gross margin) x average customer lifespan (in months)) 15/02/2019 BURGGRABEN HOLDING AG Zooplus - Highly Unlikely LTV Predictions

It gets worse. Zooplus assumes a LTV of Euro 164 per customer when using a contribution margin of 9.5%. Using Conversio’s gross margin approach for its benchmarking study and leaving everything else unchanged, Zooplus's seems to suggest 8.4x more LTV than its US pet supplies peer group. In fact, €422 LTV would make Zooplus's LTV the most valuable one of all the benchmarked categories by Conversio in the US. Needless to say that we find that completely unrealistic.

Cross Checking Customer Lifetime Value (LTV)

Zooplus Unit LTV LTV Comments Zooplus Conversio <----- Methodology Input: Retention Years - Nominal x 11.0 11.0 years Retention over period in % 53.7% 53.7% Based on sales retention rates over 11y ______Average Retention Years - Real x 5.9 5.9 years

Sales: Average Sale per Transaction Euro 54.7 54.7 average for year 2017 Number of Repeat Transactions x 5.3 5.3 per annum

Average Retention Years - Real x ______5.9 ______5.9 years Sales per Customer Euro 1,724 1,724 versus Zooplus Euro 1,730 ______

Value: Average Value per Transaction Euro 5.2 13.4 implied value Number of Repeat Transactions x 5.3 5.3 per year Average Retention Years - Real x 5.9 5.9 years ______

Value per Customer Euro ______164 ______422 according to Zooplus

Implied Contribution Margin / transaction in % ______9.5% ______24.5% <--- Gross margin in 2017

Conversio Customer Lifetime Value Euro ______50.1 For US Animal & Pet Care Category Zooplus Uplift compared with US peers x 8.4 ______

30 Source: Burggraben analysis; Note: Retention over life = Rate Y1 * Rate Y2 * …. * Rate Y10 (weighted by sales each year) 15/02/2019 BURGGRABEN HOLDING AG Spot the Difference

For now Zooplus has a 60% bigger basket size over its US pet supplies peer group which justifies a higher LTV. But Zooplus €422 is not 60% higher, it is 8.5x higher. Besides, Zooplus's basket size is getting smaller by 2% yoy. Clearly, something is off. Let us dig deeper…

Basket Size – US Peers versus Zooplus Zooplus: Decreasing Basket Size Trend (in Euro)

In Euro 54.70 56.0 55.7 60% 54.7 54.3

52.9 34.28

50.7

49.0 48.1

US peers Zooplus 2010 2011 2012 2013 2014 2015 2016 2017

31 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Assessing Customer Lifetime Value (LTV)

So again, the entire growth strategy is built on management’s conviction that “customer retention” has a strongly positive LTV as the repeat order pattern of a customer will lead to incremental sales at stable or decreasing operating cost in the future. Conceptionally, this is true only if certain future conditions are met.

High margins require…

1) Demand Advantage: Zooplus needs a captive 1 customer to monetise in the future. Customer captivity is based on habit, on the cost of switching or on difficulties or expenses of searching for a substitute product or service; 22) Supply Advantages: Zooplus needs a cost advantage from privileged access to crucial input cost (such as lower marketing cost than rivals) and/or economies of scale from declining 9.5% unit costs while volume increases because fixed costs make up a large share of total costs;

If false…

Average Margins: If none of the above applies, Zooplus may have some LTV, but certainly not €164 which implies a high 9.5% margin contribution. Maybe it will have €30-50 LTV and 3.5% margins. 3 3) Negative Margins: But if the industry has or will have a dominant rival that has some or all of the above demand and supply advantages, Zooplus may only breakeven or incur losses in the future.

32 Source: Burggraben analysis; CMD March 2018, page 59; Bruce Greenwald, Competition demystified, page 9 15/02/2019 BURGGRABEN HOLDING AG Sales are vanity, profits are sanity, cash is reality

33 15/02/2019 BURGGRABEN HOLDING AG The Big Dream (in eCommerce Retailing)

In our view, a “strongly positive” Customer Lifetime Value (LTV) is the big dream in eCommerce retail equity stories. The story goes as follows…

If we can acquire lots of customers (cross the bridge), we will get… …the Price (i.e. €164 LTV)

A B

Analyst Forecast: 8% EBIT margin C ZO1

34 Source: Indiana Jones 15/02/2019 BURGGRABEN HOLDING AG The Inconvenient Truth (in eCommerce Retailing)

However, in order to monetise your customer later, a company needs to fulfil two fundamental conditions in eCommerce retailing…

1 Have A Captive Customer… Have a Lasting Cost Advantage 2

Having a captive customer in eCommerce is even harder than offline. It really A captive customer in combination with certain cost advantages such as means to have a connection with the consumer so that he or she uses your unique technology, purchasing power or economies of scale can be a source Website directly (as opposed to search on Google for the product) in order to of future profitability. The competitive advantage of economies of scale fulfil a product purchase. We call this “share of mind” – which is worlds apart needs fixed cost (against which one can scale) and high market share. Scale from having “market share”. Market share comes and goes with price does depend not on absolute size, but rather on the size difference between competition among rivals with little switch cost for the consumer. Share of it and its rivals (market share). If average cost per unit decline as a firm mind however stays. Few eCommerce companies have it. Amazon certainly is produces (sells) more, than smaller competitors will not be able to match the prime example and as illustrated below. Online shopping really start with the costs of the large firm. Amazon.

Zooplus's asset-light business model does not scale (Fixed Cost 2017 estimate as % of total)

Fixed Cost, 3.9%

Variable Cost, 95.6%

35 Source: Burggraben analysis; Jumpshot Inc, 2018; CMD Presentation, March 2018 15/02/2019 BURGGRABEN HOLDING AG The Inconvenient Truth (in eCommerce Retailing)

As importantly, an eCommerce retailer is best off to avoid Amazon altogether. Alternatively, it has to have goods & services that offer a customer experience significantly different from Amazon’s (such as certain fashion brands). Otherwise you are “Amazoned Away”…

3 No Dominant Player Advertisement – 10 January 2019

Amazon has all the demand and supply advantages we discussed. It has captive customers which allows it to generate cross-sales without incremental marketing cost (usually paid to Google). It is able to build a profitable platform business with third parties to generate fees without any incremental input cost. It owns (not leases) the best logistics network in Europe, thus allowing it to decrease unit cost with each incremental volume sold. It has the most powerful proprietary technology which not even the largest rivals can match, leave alone smaller ones. Rest assured, if Amazon attacks a category, it will most certainly win.

Zooplus wants to keep Amazon at a “distance”…

36 Source: Burggraben analysis; Reuters January 2019; 15/02/2019 BURGGRABEN HOLDING AG Having Doubts?

Check yourself – quite beautiful. But let us now dig deeper…

Bruce Greenwald – Competition Demystified

37 Source: Competition Demystified by Bruce Greenwald 15/02/2019 BURGGRABEN HOLDING AG 1 Captive Customer?

38 15/02/2019 BURGGRABEN HOLDING AG A Two-Trick Pony

Management likes to present Zooplus as a company with a “low seasonality” revenue profile due to its 83% share of food products for dogs & cats. We agree on seasonality.

Sales by type (in % in 2017) Sales by pet (in % in 2017)

Others, Accessories… 4%

Dogs, 47%

Food, 83% Cats, 49%

39 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Commodity Shopping

The key point however is that shopping for branded cat & dog food leaves zero room to differentiate Zooplus's shopping experience from the competition and thus to create an emotional bond with the consumer that would result in meaningful retention without the need to match the best price.

Zooplus versus Amazon – Exact Same Product – Exact Same Price

40 Source: company filings 15/02/2019 BURGGRABEN HOLDING AG Zero Moat

In essence, Zooplus has zero switching cost to the consumer from its product category. For an existing customer, Amazon is “one click away”. She can purchase the exact same product if this means to get a better bargain.

Low – if any – Switch Cost Hardly «bowled over»…

41 Source: https://www.investopedia.com/terms/s/switchingcosts.asp 15/02/2019 BURGGRABEN HOLDING AG Yes, Customer Retention

Yes, Zooplus has customer retention. In fact, in 2017 it was able to retain 65% of its new customers. But again, does that mean Zooplus has a “captive” customer? Or do Zooplus and its shareholders have to pay a “price” for such retention by matching the best price in the market?

Customer Retention Rate (in %) Mind the Gap

Note that «customer» retention is not the same as 65.1% «sales» retention as usually presented by Zooplus as 61.6% «retention rate». 59.5% 58.6%

50.4% 50.5% 47.6% 48.2%

2010 2011 2012 2013 2014 2015 2016 2017

Source: Burggraben analysis; 42 Note: Customer Retention Rate = (Total Customers End of Period – New Customers) / Total Customer Beginning Period 15/02/2019 BURGGRABEN HOLDING AG But No Free Lunch

Of course, there is no free lunch here. Customer retention comes at the expense of profitability in combination with a commodity shopping list. This is illustrated by the below collapse in gross margins as a result of a constant and ongoing price biddings war in order to gain new customers and keep existing ones engaged in an otherwise commoditised cat & dog food online market.

In a commodity industry, a higher share in pet food means lower gross margins (in %) 85% 38.0% 83% 82% 36.8% 36.0% 80% 80% 35.6% 34.0% 77%

75% 32.7% 32.0% 75%

31.1% 30.0% Dog/cat food (26%) 70% sales (of total) 28.0%

66% 27.5% 66% 26.9% 26.0% 65% 63% 24.7% 24.0% 24.2% Gross Margin

60% 22.0% 2010 2011 2012 2013 2014 2015 2016 2017

Source: Burggraben analysis Note: The above gross margins do not adjust for IFRS 15 reclassification. The latter will become effective starting in 2018. Then, 43 income from marketing services in the form of marketing refunds are offset against cost of materials for the period; 15/02/2019 BURGGRABEN HOLDING AG Race to the Bottom

It gets worse. We are convinced that a commodity shopping list such as branded cat & dog food is destined to fail long-term. This is because modern eCommerce algorithms compete for such business in real time which will reduce product prices as a reaction to increasing competition. Zooplus's obsession with enlarging its installed base due to its belief in grow today and monetise later will not work simply because it has a commodity shopping list.

Beat Competitor by 10% means... …a race to the bottom for commodity offers!

• That is: If the competitor’s price is greater than the cost of making the item, and the competitor isn’t running a onetime promotion, then undercut the competitor by 10 percent. • But that’s not the end of the story. The price cuts will register on competitors’ pricing sonars. Whether or not to respond in kind depends, in part, on how their algorithms interpret the signal. Is this the first shot in a pricing war? Or is the retailer just trying to clear inventory from its warehouse? In practice, it’s hard to tell. • So an innocuous, temporary price cut may set off a machine-against- machine price war that, if left unchecked, could quickly devastate a retailer’s bottom line. • Faisal Masud, the chief technology officer at Staples, thinks human involvement makes sense only in rare cases. “We want to make sure the software makes the decisions, not the human being,” he says. “It’s all automatic. Otherwise you’re losing.”

44 Source: https://www.theatlantic.com/magazine/archive/2017/05/how-online-shopping-makes-suckers-of-us-all/521448/ 15/02/2019 BURGGRABEN HOLDING AG More of the Same

A quarterly perspective does not alter the grim picture. A normalised gross margins is likely between 23% - 25% going forward, and subject to stable competition (a big if). More competition in the future will likely mean lower gross margins in the future.

Quarterly Gross Margins (in %)

28.0% 27.4% 26.7% 26.5%

25.6% 25.7% 25.3% 15 Quarter Average: 25.1% 25.3% 24.5% 24.5% 24.3% 24.1% 24.3% 23.6% 23.1%

2015 Average: 26.9% 2016 Average: 24.7% 2017 Average: 24.2% 2018 Average: 24.2%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

Source: Company filings; Burggraben analysis; 45 Note: Gross margins for Q1-Q3 2018 are adjusted (IFRS 15 reclassification) in order to allow like-for-like comparison with prior quarters. 15/02/2019 BURGGRABEN HOLDING AG Mind the Gap

Starting in 2018, the IFRS 15 reclassification – moving marketing refunds away from other income and into CoGS (offset) – will increase reported gross profit margins by 380bps while leaving substance unchanged.

Effects of IFRS 15 reclassfication Note about IFRS 15 effects, 9M 2018 Report

IFRS reclassification, Euro million 2016 2017 2018E Other Income Reclassification: Income from marketing services 33.5 45.0 49.7

Income from FX, frees, other ______19.2 ______7.8 ______8.1 Other Income before IFRS 15 43.4 52.8 57.9

Other Income reclassified ______19.2 ______7.8 ______8.1 Cost of Goods Sold Reclassification: Cost of Goods Sold (681.6) (839.6) (984.3)

Offset: Income from marketing services ______33.5 ______45.0 ______49.7 Cost of Goods Sold (reclassified) (648.1) (794.6) (934.6)

Old - Before IFRS 15: Sales 908.6 1,110.6 1,298.5

Cost of Goods Sold ______(681.6) ______(839.6) ______(984.3) Gross Profit 227.0 271.0 314.1 Margin 24.98% 24.40% 24.19%

New - IFRS 15: Sales 908.6 1,110.6 1,298.5

Cost of Goods Sold (reclassified) ______(648.1) ______(794.6) ______(934.6) Gross Profit (reclassified) 260.5 316.0 363.8 Margin reclassified 28.67% 28.45% 28.02%

Gross Margin Spread due to reclassified ______3.69% ______4.05% ______3.83%

46 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Amazon has Captive Customers

Not everybody needs to bid at Google though to generate eCommerce traffic. Amazon is different. It is so prominent in eCommerce that it overtook Google in product search over the past 2 years. In 2018, 54% of all US consumers directly went to Amazon in order to find what they were looking for. In the case of Pet Supplies, 95% of all traffic generated by Amazon was generated in-house. Clearly, Amazon has captive customers. But we will get back to that.

Amazon overtook Google in product search

95%

47 Source: Jumpshot, Inc; 2018 15/02/2019 BURGGRABEN HOLDING AG Sustainable Cost 2 Advantage?

48 15/02/2019 BURGGRABEN HOLDING AG Growth does not equal Value

Zooplus justifies its growth targets with structural cost advantages. Our assessment however reveals that the company does not have such advantages. If anything, it has disadvantages from the complexities of running an operation in 30 different countries (due to its obsession to find new customers).

The Value of Growth according to Zooplus Burggraben View

11) No Evidence of Purchasing Power from more sales. Instead, Zooplus incurs higher purchasing cost from its focus on branded goods.

22) No Economies of Scale as 96% of total cost are variable. In addition… a) Zooplus has increasing acquisition cost which it cannot control (but Google does); b) It has no scale in logistics, but a decreasing basket size from certain countries it operates in; c) It has little, if any scale in personnel due to outside pressure to keep its proprietary technology relevant; d) It has weak relative market share which prevents scale advantages at country levels vis-à-vis competition;

33) No More Efficiency Gains as the business model is «maxed out»

44) Other issues at country level

49 Source: Burggraben analysis; Investor Presentation Nov 2016 15/02/2019 BURGGRABEN HOLDING AG 1 No Evidence of Purchasing Power

On a per customer basis, Zooplus does not have purchasing power. In fact, Cost of Goods Sold (CoGS) per customer increased by 23% over 10 years and despite the number of articles (SKU) only increased by 14% during the same time.

Increasing Cost of Goods Sold per Active Customer (in %)

80.0% SKU 2010: 7,000 SKU 2017: 8,000 75.0% 75.0% 75.6%

72.4% 72.9% 70.0%

68.7%

65.0% 67.1%

64.2%

60.0% 61.6%

55.0%

50.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

50 Source: Burggraben analysis; Note: CoGS per customer = ((COGS divided by active customers) divided by avg sales per active customer) 15/02/2019 BURGGRABEN HOLDING AG 1 Branded Consumer Goods have Pricing Power

The reason is that 75% of all pet food products sold by Zooplus are from branded consumer companies like Nestle, Mars or P&G which limits any purchasing power for the future.

Food Share of Total Product Mix (in % of sales)

83% 82% Private Label Share: 10% Branded CG Share: 90% 80%

77%

75%

66% 66%

63%

2010 2011 2012 2013 2014 2015 2016 2017

51 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 1 Can «Private Labels» improve margins?

One way for Zooplus to improve margins from lower sourcing cost is to improve its product mix by increasing the share of “Private Labels” to lower material cost over time.

Private Label Business by Zooplus

Really?

52 Source: Investor Relations presentation, December 2018 15/02/2019 BURGGRABEN HOLDING AG 1 Private Labels Stagnate

A closer look however reveals that the Private Label initiative made little progress. Certainly, the management team did not nearly achieve its Private Label mix of 20%-25% as proclaimed back in 2011. Neither have margins improved during that time. We doubt Private Labels will improve margins - ever.

Annual Report 2011, page 20 Private Label Share in % of Product Sales

14.0%

11.0% 10.8% 9.8% 9.2% 7.8% 8.0%

2012 2013 2014 2015 2016 2017 2018

53 Source: Annual Report 2011, page 20; Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 1 What would your pet order?

“Feeding your cat’s instincts” – “Katzen würden whiskas kaufen”

The Power of Branding

54 Source: www 15/02/2019 BURGGRABEN HOLDING AG 2 All Variable Cost - Zero Scale

Zooplus's asset-light business model has likely less than 4% fixed cost in 2017 to lever a larger customer base going forward. Such a model leaves no room to benefit from economies of scale.

Fixed Cost Estimate of Zooplus Business Model (in %)

Operating Cost in % of Revenues Variable Variable Cost Fixed Cost Source 2017 in % in % Cost of Goods Sold 71.1% 100.0% 71.1% 0.0% Zooplus Logistics 19.7% 91.0% 17.9% 1.8% Zooplus Customer Acquisition 1.7% 100.0% 1.7% 0.0% Zooplus Payment Cost 1.0% 100.0% 1.0% 0.0% Zooplus Personnel Cost 3.5% 75.0% 2.6% 0.9% BGH Others ______2.6% 50.0% ______1.3% ______1.3% BGH Total Cost ______99.5% ______95.6% ______3.9%

Assumption for 2020: 15% cost improvement due to scale ______15.0% Lever ______0.59%

Note: Revenues: including other cost

55 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 2a No Scale, but Higher Acquisition Cost

Our assessment of customer acquisition cost is another early warning sign for the overall weakening business fundamentals of Zooplus. Starting in 2015, the company incurred steadily higher cost per new customer acquired. The likely reason is higher Google AdWords bidding prices from increased online competition. Let us explain…

Customer Acquisition Cost (in Euro / new customer) According to Zooplus

33.54 We are unable to reconcile the company’s acquisition cost per new customer of Euro 19. The likely difference are cost contributions from sales discounts that are given to attract first time customers onto the Zooplus 24.26 platform.

20.34

14.80 15.78

11.06 9.55 2017 8.88 8.87

2010 2011 2012 2013 2014 2015 2016 2017 2018E

Source: Burggraben analysis Note: Acquistion costs per new account with repurchasing activity; 56 Acquisition cost = Marketing cost divided by No of New Customers, divided by Customer Retention Rate (note: not Sales Retention Rate) 15/02/2019 BURGGRABEN HOLDING AG 2a Google – your eCommerce Landlord

Acquisition costs are primarily Google AdWords biddings. When retailers want to generate online traffic they require visibility where consumers search for their products. That is Google Search. Retailers therefore need to bid for a prime (high-up) spot on Google Search in order to get new clients. Think of it as renting a well visited retail location in the offline world in order to generate traffic into your store.

A consumer searching for pet supplies online is going to start at Amazon or Google. This is because Google Search has about a 92% market share for online search (and 35% for direct eCommerce shopping). Therefore, if Fetch, Wanimo or Fressnapf want to generate traffic for new, “marginal” business they have to do so by bidding for keywords at Google AdWords Services. The result means perfect “traffic” competition (or zero fragmentation), higher acquisition cost and lower product pricing for all and in real time.

«Katzenbett» 3 «Poissons»

«Cane» «Dog Food»

57 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 2a More Bidding – More Cost

And keywords matter. 75% of consumers never travel past the first page of Google Search. So as more online retailers look to generate more traffic for the same key words (such as cat food), Google forces them through a «bidding process» in order to maximise its profits. Zooplus now has a choice, pay more and outrank the competition on Google Search or pay less but generate less new customers. Again, think of it as renting a “high street” location in offline space in order to generate more traffic. The better the location and the higher the competition for it, the higher the rental cost.

New Customer Growth requires Google… …making AdWords «bidding cost» to online retailing what «leasing costs» are to offline retailers!

58 Source: https://www.wordstream.com/articles/what-is-google-adwords 15/02/2019 BURGGRABEN HOLDING AG 2b No Improvement in Logistics

Logistics cost are the company’s largest cost block and show little evidence over the past 15 quarters that “size” equals “cost scaling or efficiency gains”. They do not seem to reduce due to the larger platform. Why?

Logistics Cost in % of Sales

20.48% 20.45% 20.33% 20.29% 20.11% 20.01% 19.80% 19.73% 19.72% 19.61% 19.54%

19.27% 19.25% 19.12% 18.95%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

59 Source: Burggraben analysis; company filings 15/02/2019 BURGGRABEN HOLDING AG 2b Logistics Cost are 90% Variable

Again, Zooplus cannot improve logistics cost because more than 90% of them are variable. Variable cost however can not scale with higher volume. Worse, in countries such as Italy or Spain, both entered in 2008, higher logistics cost seem to be a function of a smaller shopping basket sizes when compared to Germany or Poland.

Logistics Costs 2017: inbound & outbound logistics, line haul, distribution & packaging as a percentage of sales

2017 2016 2015 2014 Variable 18.4% 17.6% 17.6% 18.0% All-in 20.2% 19.4% 19.4% 20.1%

Var in % 91.1% 90.7% 90.7% 89.6%

Average 90.5%

60 Source: Company filings 15/02/2019 BURGGRABEN HOLDING AG 2b Less Scale from Smaller Shopping Basket

The average size of the Zooplus shopping basket peaked in 2015 and has since decreased to €54.7 per order. The order size is a function of country differences in pet ownership or available household income and outside Zooplus's control. Another important factor is the trend (or push) by Zooplus for an increased mobile order mix (25% in 2017). It will likely be a source of margin compression going forward and is why we are convinced future growth will at best be able to hold today’s profitability for the foreseeable future.

Size of shopping basket (in Euro per order) and year over year change in size (in %) 58.0

56.0 55.7 56.0 54.7 54.3 54.0 52.9

52.0 50.7

50.0 49.0 48.1 48.0

46.0

44.0 2010 2011 2012 2013 2014 2015 2016 2017

61 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 2b More Mobile Order – Smaller Order Basket

Zooplus customers can access the online shop via desktop, tablet, smartphone or by using its app. However, the increased share of mobile use will likely mean, among others, a smaller average basket order size. The latter will put even more pressure on logistics cost. So expect the business model to “scale” less…

More Mobile Investment Mobile order share in % of total order

43%

39%

34%

29%

23%

15%

2015 2016 2017 2018E 2019E 2020E

62 Source: Annual Report 2017, page 38 15/02/2019 BURGGRABEN HOLDING AG 2b New Price Pressure from Partners

Meanwhile, last mile partners themselves feel the pressure to increase prices in 2019, which is easiest achieved for bulky and heavy goods products. This will increase future logistics costs.

Source: https://www.dpdhl.com/en/media-relations/press-releases/2018/dhl-parcel-adjusts-retail-outlet-price-for-parcels-weighing- 63 up-to-5kg.html 15/02/2019 BURGGRABEN HOLDING AG 2c More Size means More Staff

Lower labour cost – the second largest cost block - is hardly a source of scale either. Of a total of 512 employees by year-end 2017, 178 or 35% work in IT – its fastest growing department. In fact, the department grew faster than sales and added 70 FTEs between Q4 2016 and Q4 2017 alone. We are convinced that Amazon alone will continue to force Zooplus to having to invest in its proprietary technology in order to stay relevant. It will not become a source of scale.

Employee Cost as % of sales Staff Growth CAGR 2012-17 by Department

9.8% 34.8% 42.8% 12.7% of total

5.2% 27.9% 5.0%

4.7% 4.7% Sales Growth: 20.3% 21-23%

14.5% 3.9%

3.5% 3.5%

3.2% 2.1%

2010 2011 2012 2013 2014 2015 2016 2017 Operation IT S&M Admin

64 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 2d Misleading Market Position

Zooplus is Europe’s largest online pet supplies retailer in 2017 but its size needs to be compared on the basis of relative market share in a country. Then, Zooplus does not compare favourably as shown on the next page.

Market Position as presented by Zooplus Market Position “Demystified”…

Strong ? • Zooplus does not have economies of scale. And even if it had scale, the latter would depend not on the absolute size of Zooplus's €1.1bn sales from 30 different countries but on its market share within a country (relative market share). • So, its statement of being 10x bigger than the No. 2 online specialist is irrelevant. Rather, its market share in a country such as the UK or France matters. If Zooplus would be 10x bigger than Wanimo.com in France, such difference could be a source of economies of scale, if only Zooplus had fixed cost to scale against. • So, the size difference between it and its rival could be a source of competitive advantage if average cost per unit declined as Zooplus sold more. Theoretically, Wanimo then would not be able to match the cost of Zooplus, even though it has equal access to technology and resources (but cannot reach the same scale); • However, Zooplus's cost are all variable, not fixed. Hence, they cannot decline due to size. Meanwhile, Fetch, Wanimo or TiendsAnimal all have entrenched positions in their respective local markets with likely similar or slightly smaller sales than Zooplus in that particular regional market. They have products & services well Strong tailored to their local audiences. But they do not incur cost from the complexities of running an international operation with 20+ different languages. In short, they are likely to be cost competitive when compared with Zooplus today. • In essence, a market in which all firms have equal access to customers and common cost structures, and in which entrants and incumbents offer similar products & services, should divide more or less evenly among competitors over time. Then, margins will be at best average. 65 Source: Burggraben analysis; CMD Presentation March 2018 15/02/2019 BURGGRABEN HOLDING AG 2d Weak Relative Market Share

A closer look reveals that Zooplus does not have meaningful market share in any of its markets. In its largest markets, Germany, France & the UK it has between 2.4% and 7% by year end 2017. We doubt that Zooplus was able to establish a relative cost advantage vis-à-vis the competition such as Fressnapf with €1.2bn sales in 2017 from Germany alone (versus Zooplus's €272m). Worse, it operates in 16 other countries (such as Turkey) which, combined, contribute a mere 4.3% of total 2017 sales but certainly add overhead cost from local complexities such as country directors, languages, taxes, marketing or distribution costs.

Market Share as % of total market size (according to Zooplus, 2017)

? ? ? ? ?  No. 1

Core & Non Core Markets (except others): 95.7% of total 2017 sales. Zero Focus: 12.20% 4.3% of total 2017 sales from Core Markets: only 56% of total 2017 sales are 16 countries managed by Zooplus fulfilment centres, all of them which means with a strong local champion in place. all cost, no scale! 7.00% 6.20% 5.10% 4.50% 4.50% 3.70% 3.90% 2.40%

DACH FRA Benelux UK ITA PL Scandi Iberia Other

66 Source: Burggraben analysis; company filings 15/02/2019 BURGGRABEN HOLDING AG 3 «Maxed Out»

After 19 years of operational excellence, we are convinced that Zooplus's business model has little efficiency gains left…

67 Source: CMD, March 2018 15/02/2019 BURGGRABEN HOLDING AG 3 Neither Efficiency Nor Scale

Certainly, for the past 12 months every cost category has either stalled as a percentage of sales or has worsened. Is it possible that after 19 years in business, Zooplus has already optimised substantially all “low & high hanging fruits” in a commoditized industry?

68 Source: Investor Relations Presentation, December 2018 15/02/2019 BURGGRABEN HOLDING AG 4 Other Issues - UK Market

We are convinced that the UK market will continue to disappoint due to «Brexit effects» such as a weaker Pound as well as strong local competition (Amazon, Pets at Home, Fetch).

UK Market

69 Source: company filings 15/02/2019 BURGGRABEN HOLDING AG And then there is 3 Amazon…

70 15/02/2019 BURGGRABEN HOLDING AG The Elephant in the Room

Below, management compares Zooplus with Amazon’s market positioning in the pets supplies category. We find the table to be totally irrelevant as it does not illustrate why Amazon will compress Zooplus's margin sustainably. Let us explain…

Burggraben View on Amazon

• Amazon makes a big push into pet supplies; It already has over 50,000 pet supplies available (vs. 8,000 Zooplus); • delivers pet supplies to 90% of the relevant markets for Zooplus; • Amazon launched private labels for dogs & cats (EU roll out 2019); • We agree

• Amazon has 72 EU fulfilment centres and countless in- and outbound hubs, it is specialised on bulky items & food, prime members have 2h delivery time slots; it owns & manages its logistics, allowing for economies of scale;

• We estimate Amazon to achieve sales of €600-800 million EU pet supplies in 2018;

71 Source: CMD March 2018 15/02/2019 BURGGRABEN HOLDING AG Amazon Pushes Pet Supplies Category Now

In 2018, Amazon revealed bold plants for the pet supplies category. First such signs already became visible in in January 2019, when Amazon sent free-of-charge samples of 3 products it wants to push in Germany – yes, pet food was one of them.

Zu Werbezwecken! Amazon reveals bold plans for pet category…

Just when you thought you understood how formidable a challenge Amazon is to the ongoing health of your pet store(s), I'm hear [sic] to tell you that you ain't seen nothing yet [writes Mark Kalaygian from Pet Business]. This is a point that was made painfully clear at a recent pet supplies industry conference in Naples, Fla., where two key executives from Amazon's pet products division delivered a presentation that declared the company's intent to significantly grow its share of the pet care category and provided some insight into its strategy to do so. What they said will almost certainly have huge implications for pet retailers, so let's go through some of the major points: • Amazon has identified pets as "a unique and highly valuable category" to make this portion of its business a priority in 2018. And there are signs that this category is ripe for Amazon's growth—for example, pets represent a top-three voice shopping category through the company's Alexa. • Amazon has an entire (growing) team dedicated to expanding its pet business. This goes beyond buyers focused on expanding its product selection—which the company aims to make the most extensive in the world—and into areas such as IT, logistics and media. It is even using innovations in robotics to make it easier than ever to handle big, heavy products such as large bags of pet food and litter. • In addition to utilizing customer data, Amazon is using it own internal network of pet- owning staff members as a type of focus group to refine and grow its pet business. During their presentation, the executives even showed a brief video that illustrated how pervasive pets are in the company's corporate employee culture. • Amazon wants to go beyond being a transactional site to become a learning and informational resource, and thus build relationships with pet owners.

Source: https://www.wiwo.de/unternehmen/handel/zu-werbezwecken-amazon-verschickt-kostenlos-duschgel-kaffee-und- 72 tiernahrung/23850462.html; http://www.petbusiness.com/Amazon-Reveals-Bold-Plans-for-Pet-Category/ 15/02/2019 BURGGRABEN HOLDING AG Launch of Labels Shows New Focus on Category

Amazon already has its own dog & cat food labels. According to MainFirst, a bank, the roll out for Europe is scheduled for July 2019 which in our view illustrates Amazon’s new focus on the category.

73 Source: www.wag.com; MainFirst 15/02/2019 BURGGRABEN HOLDING AG Double the Growth Rate

And Amazon already grows its pet supplies category at double the rate of Zooplus. And not just in the US, also in Europe…

Growth in 2017 (pet supplies worldwide) Amazon Sales 2016 & 2017 (in US$ & Euro)

38.0%

21.8%

Zooplus Amazon

74 Source: https://www.petfoodindustry.com/articles/6948-amazon-pet-food-sales-reached-us14-billion-in-2017?v=preview 15/02/2019 BURGGRABEN HOLDING AG European Growth Rates

In Q3 2017, Amazon’s pet supplies sales were €93 million for the UK, Germany & France alone. That scales to €350- 380 million for 2017. With annual growth rates of 60-100% and including the rest of Europe, we assume this number to be well above €600 million in 2018.

Amazon Pet Supplies Growth in Q3 2017 Source

75 Source: https://www.petfoodindustry.com/articles/6786-infographic-5-nations-ranked-by-amazon-pet-product-sales 15/02/2019 BURGGRABEN HOLDING AG Customer Retention means Price War

Consequently, Zooplus has to compete on price with Amazon in order to achieve its grow targets and retain its “loyal” repeat customers. But what should the end game be when competing on price with the leading online retailer worldwide with a commodity product offer?

Zooplus - Competing on Price with Amazon (UK)

76 Source: JPM, October 2018 15/02/2019 BURGGRABEN HOLDING AG Race to the Bottom

We are convinced that a commodity shopping list such as branded cat & dog food is destined to fail long-term. This is because modern eCommerce algorithms compete for such business in real time which will reduce product prices as a reaction to increasing competition. Zooplus's obsession to enlarge its installed base, based on the belief to grow today and monetise later, will not work simply because it has a commodity shopping list.

Beat Competitor by 10% means... …a race to the bottom for commodity offers!

77 Source: https://www.theatlantic.com/magazine/archive/2017/05/how-online-shopping-makes-suckers-of-us-all/521448/ 15/02/2019 BURGGRABEN HOLDING AG Amazon’s Price Algorithm

Amazon has been estimated to alter its prices more than 2.5 million times daily. By comparison, retailers such as Best Buy and Wal-Mart make roughly 50,000 price changes over the course of an entire month. "What Amazon aspires to be is the fastest follower of the price leader," said Jenn Markey, the vice president of marketing for 360pi, the price intelligence firm that authored the report. Well, to us it sound like a bad idea to compete with Amazon on price.

Amazon made 8 prices changes in one day for this router

78 Source: https://www.businessinsider.com/amazon-price-tracking-2014-8?r=US&IR=T 15/02/2019 BURGGRABEN HOLDING AG Third Parties Compete on Price Too

But it gets worse. Third party resellers will also compete on price with Zooplus on Amazon’s platform in order to boost their sales or acquire new customers.

One Product (Frolic) – 4 Price Offers on Amazon.de

79 Source: www.amazon.de 15/02/2019 BURGGRABEN HOLDING AG Amazon as Price Leader

Want more? Below, we sampled a long-tail product to illustrated why it is a road to nowhere to compete with Amazon on price, be it as a third-party reseller on Amazon or for Zooplus, and for any product…

One Product (Katzenklo) – 9 Price Offers on Amazon.de

80 Source: www.amazon.de 15/02/2019 BURGGRABEN HOLDING AG Heavy Weight against Light Weight

Again, Amazon’s newly announced push is very bad news for all pet supplies retailers, but certainly for Zooplus. This is because Amazon has a significant structural cost advantages over Zooplus which will allow it to compete much harder on price in order to gain market share.

Amazon sells less than 50% pet Variable Cost Comparison (common size approach, in %) food, suggesting its more favourable product mix contributes 6% lower CoGS when Common Size - variable cost Zooplus Zooplus Zooplus Amazon compared to Zooplus. P/L for pet food category 3y Average variable % 3y avg variable BGH estimate Amazon has the world’s best Product Sales 100.0% 100.0% 100.0% fulfilment and delivery service. It owns a network of 72 centres in Cost of goods sold -75.5% -75.5% -71.2% ______Europe alone. We think due to high fixed cost in combination Gross Profit 24.5% 24.5% 28.8% with full utilisation, our estimate Salaries & Benefits -3.4% 75.0% -2.6% -1.5% with 12.5% logistics cost for the pet category to be conservative. Delivery cost -19.7% 91.0% -17.9% -12.5% Marketing cost -1.7% 100.0% -1.7% 0.0% Amazon does not have third party Payment cost -1.0% 100.0% -1.0% -1.0% marketing cost as it has in-house traffic on its site each day. We call Other cost -2.5% 50.0% -1.3% -0.5% this “share of mind” as 54% of all consumers start their search for Other income 4.7% 100.0% 4.7% 4.7% ______online shopping at Amazon (not Google Search). EBITDA ______0.7% ______4.6% ______17.9% Consequently, Amazon can refer traffic to its pet supplies category as it already possesses the data to better understand the consumer’s need from countless purchases. 35% of all Amazon purchases come from cross-selling at zero incremental acquisition cost. Source: Burggraben analysis; Amazon Fulfillment - https://www.aboutamazon.eu/job-creation-and-investment/our-european- 81 fulfilment-network 15/02/2019 BURGGRABEN HOLDING AG Economies of «Scaaaaaale»

This is because Amazon has enormous scale. It is the largest eCommerce retailer in Germany, the UK, France, Spain or Italy. While such scale steams from multiple categories, it allows Amazon to push a new category with an immediate cost advantage while cross selling to an already existing captive audience.

Top 10 Online-Shops in Germany (in Euro million, 2017)

Source: http://blog.wiwo.de/look-at-it/2018/09/12/e-commerce-in-deutschland-amazon-vor-otto-zalando-31-milliarden-euro- 82 gesamtumsatz/ 15/02/2019 BURGGRABEN HOLDING AG Share of Mind

And pushing a new category is what it can. A survey of 1,000 US consumers conducted by PowerReviews found that Amazon is the preferred starting point for product search. Google comes in a close second, followed by brand/retailer sites and e-commerce marketplaces. Our message: Amazon already owns the customer that Zooplus wants in the future.

Share Of Mind Explained Organic Traffic (from share of mind)

• A company has “share of mind” when a consumer thinks of it as the first place that comes to “mind” in order to fulfill such need. • This requires an emotional connection in order to achieve long term loyal buyers. You may have experienced drawing a blank when thinking of the nearest seafood restaurant or pet store in town only to notice later that you drive by one on your way to work every day. • On the other hand, kids around the world dream of going to Disney World long before they’re old enough to be paying customers themselves. Becoming popular and recognized as immediately relevant to your potential customer is when mind share is achieved. • Considering that 54% of initial product searches begin with Amazon in 2018, beating out Google’s 46%, Amazon’s organic traffic is hugely valuable. Clearly, it owns significant “share of mind”. • The result is that Amazon generates a “monstrous” amount of traffic going to it every day, from organic traffic to direct traffic and more. • The majority of Amazon’s sales rely on this organic traffic hitting their listings day in and day out. • While some categories do run paid ads (on Google et al) and do other external marketing, these are usually more the exception than the rule.

83 Source: Burggraben analysis; https://searchengineland.com/survey-amazon-beats-google-starting-point-product-search-252980 15/02/2019 BURGGRABEN HOLDING AG Amazon has Captive Customers

So again, Amazon overtook Google in product search. In Q2 2018, 54% of all US consumers directly went to Amazon in order to find what they were looking for. In the case of Pet Supplies, 95% of all traffic generated by Amazon was generated in-house. The message: Amazon does not need Google to acquire new customers. It has a huge structural advantage vis-à-vis Zooplus in marketing cost.

Amazon overtook Google in product search

95%

84 Source: Jumpshot, Inc; 2018 15/02/2019 BURGGRABEN HOLDING AG Prime Turns Captive Customers into “Addicts”

In Germany alone, Amazon has 17.1 Million Prime customers which experience unmatched convenience & speed of delivery (2 hour windows), among others. Statistically proven, they are more loyal and frequent customers at Amazon. To say Amazon has captive customers thus is an understatement - “addicts” is likely a better description.

Amazon Prime Customers in Germany (Zooplus's largest market): 17.1 Million

Source: http://blog.wiwo.de/look-at-it/2016/05/18/amazon-in-deutschland-44-millionen-kunden-davon-17-millionen-nutzer-von- 85 prime/ 15/02/2019 BURGGRABEN HOLDING AG A Cross Selling Machine

As importantly, Amazon knows how to harvest its enormous traffic. 35% of Amazon’s revenues comes from «frequently bought together» and «customers who bought this item also bought» features.

Focus on Customers & Cross Selling

86 Source: https://www.sellbrite.com/blog/how-does-amazon-make-money/ 15/02/2019 BURGGRABEN HOLDING AG Fulfilment Network creates Cost Advantage

Amazon Prime builds on world-class logistics. In Europe alone, it has 72 fulfilment as well as countless in- and outbound centres in order to deliver on time. In our view it is this field which marks the most uneven battle ground when comparing Amazon with Zooplus…

Fulfilment: Amazon versus Zooplus (January 2019)

Fulfilment Centers Amazon Zooplus Comments

owned Zooplus has 3 partners to operate centres and Business Model outsourced & operated incurs 90% variable cost (but saved capex in the past)

Total Fulfilment Centers 3,689,361 161,500 in square meters Average Size 51,241 14,682 in square meters

UK 22.0 1.0 Amazon has 5 more FF centres scheduled Germany 20.0 2.0 Amazon has 2 more FF centres scheduled France 10.0 2.0 Italy 5.0 - Spain 7.0 - Amazon has 3 more FF centres scheduled Benelux - 2.0 Antwerp & Tillburg Poland 5.0 2.0 Czech Republic 2.0 1.0 Slovakia 1.0 -

Turkey ______- ______1.0 3,000 sqm

No of Fulfilment Centers ______72.0 ______11.0

87 Source: Burggraben analysis; company filings; http://www.mwpvl.com/html/amazon_com.html 15/02/2019 BURGGRABEN HOLDING AG Bulky Items?

Amazon’s massive sized warehouses allow it to handle bulky items for certain pet supplies just as well or better than the competition. Back-check with Europe’s DIY sector...

Massive Scale

88 Source: https://www.visualcapitalist.com/wp-content/uploads/2018/09/amazons-warehouse-footprint.html 15/02/2019 BURGGRABEN HOLDING AG In Need of Logistics

Meanwhile, Zooplus lacks in-house fulfilment centres outside its core regions Germany, France and Benelux which will make it impossible to improve margins for 40% of its business. We think Amazon’s variable cost advantage is likely much bigger than indicated on a previous page.

Sales & EBT Distribution Repeat Customers Lack of fulfilment centres (2016; in Euro million and in %)

89 Source: Company filings 15/02/2019 BURGGRABEN HOLDING AG More Than a Retailer – A Platform

Meanwhile, Amazon also pushes its third-party pet supplies business (i.e. its platform). By doing so, it charges a transaction fee without incurring cost or risk. In addition, it charges «rent» for the space it gives to third parties, both online (ad fees) and offline (storage fees).

Source: https://www.amazon.de/s/ref=nb_sb_noss_1?__mk_de_DE=%C3%85M%C3%85%C5%BD%C3%95%C3%91&url=search- 90 alias%3Daps&field-keywords=tierfutter 15/02/2019 BURGGRABEN HOLDING AG More Than a Retailer – A Platform

In addition, Amazon pushes third party business for sponsored ads as a stable source of income. In other words, it «monetises» its traffic in multiple ways.

Amazon’s increasing focus on sponsored ads (2018)

91 Source: Jumpshot, Inc. 2018 15/02/2019 BURGGRABEN HOLDING AG Retailing & Platform – Economics on Steroids

Below, we illustrate the combination of the two business models that Amazon combines in one, those as a retailer (like Zooplus) and as a platform for third parties generating fees from advertising, transactions and logistic services at minimal risk. Now, who wants to compete with Amazon on price?

Amazon Pet Supplies P/Ls – Common Size (in %, variable cost only)

Amazon Business Model as a… Retailer Platform Platform Platform Variable Cost Only + Logistics + Logistics Amazon is a retailer as well as a platform for third Common Size in % + Ad party retailers. Such service is priced on a cost+ basis in order to attract more traffic and sell ads & Prime memberships (recurring income). Product Sales 100.0% 0.0% 0.0% 0.0% Cost of Goods Sold ______-71.2% ______0.0% ______0.0% ______0.0% Gross Profit 28.8% 0.0% 0.0% 0.0% Salaries & Benefits -1.5% -1.5% -1.5% -1.5% Delivery cost -12.5% 0.0% -12.5% -12.5% Marketing cost 0.0% 0.0% 0.0% 15% until unit price of 69.95, 18% above Payment cost -1.0% -1.0% -1.0% Other cost -0.5% -0.5% -0.5% Warehouse cost EUR 36 /m3 per month, delivery cost EUR 3.90 per parcel up to 2kg, return Sales provision 15.0% 15.0% 15.0% handling 3% of unit sales price Fullfilled by Amazon (FBA)* 10.0% 10.0% Amazon Ad ______15.0% Per Click, dynamic bidding, similar to Google. Other income 4.7% 15.0% 25.0% 40.0% ______Decision by retailer how much to spend on Amazon advertising. EBITDA ______18.0% ______12.00% ______9.50% ______26.00%

* FBA required to participate in Amamzon Prime and Amazon Promotions

92 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Amazon – The Long Tail

As a most beautiful side-effect, the platform business significantly enlarges its product offer to keep consumers engaged while keeping Amazon’s inventory turn at 11x. As of writing this, it has more than 50,000 «pet supplies». That compares with Zooplus's 8,000 articles.

93 Source: www.amazon.com 15/02/2019 BURGGRABEN HOLDING AG Higher Margin Product Mix

The result: Not only does Amazon grow faster in pet supplies than Zooplus does and has captive customers & significant cost advantages, it also has a more attractive shopping list (with a likely higher margin mix). Only 50% sales as a percentage of category sales is food related.

Food in % of overall pet supplies (H1 2018) Press Article

83.0%

50.0%

Zooplus Amazon

94 Source: https://www.petfoodindustry.com/articles/7378-pet-food-sales-on-amazon-up-34-percent-so-far-in-2018 15/02/2019 BURGGRABEN HOLDING AG Can’t Have it Both Ways

In response, Zooplus may increase its product offer. However, Zooplus managed to turn its inventory 10x in 2017 mainly as a function of a more “standardised” product mix. This helped growing in a resourceful manner as working capital intensive inventory items with less turn matter less. But the flip side is that this capital light strategy prevents it from matching Amazon’s consumer experience – Zooplus is stuck between a rock and a hard place.

Inventory Turn – Cost of Goods Sold divided by Average Inventory

SKU 2010: 7,000 9.67x SKU 2017: 8,000 9.16x 8.89x

7.41x 7.37x 7.23x 7.43x 6.62x 6.81x

2010 2011 2012 2013 2014 2015 2016 2017 TTM

95 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Disruption

Zooplus does not have the means to keep Amazon at a distance. It will be disrupted by Amazon – ever so slightly or quickly at once…

Good Luck with that…

96 Source: CMD, March 2018, page 105 15/02/2019 BURGGRABEN HOLDING AG Lots More Competition

97 15/02/2019 BURGGRABEN HOLDING AG More Online Competition

But it does not end with Amazon. Pet supplies has strong local champions such as Fetch in the UK, a subsidiary of Ocado. The latter is one of Europe’s most technologically advanced retailers. Again, do not expect a stable market or higher margins from Zooplus ever.

Zooplus versus Burggraben View

Burggraben View:

We fully agree. Pet supplies retailing is a zero-moat industry;

A local online pet supplies service can potentially succeed long-term from a very low cost structure as cross-country complexities are avoided while local customer needs are better served.

NB: Fetch belongs to the Ocado group which is considered to have to best fulfilment centre technology worldwide. It is so successful that it started to sell the technology to traditional retailers around the globe;

Source: company filings; https://www.digitalcommerce360.com/2018/05/15/uk-grocer-ocados-technology-is-so-successful-its- 98 selling-it-to-other-grocers/ 15/02/2019 BURGGRABEN HOLDING AG Brick & Mortar Competition

Likewise, outstanding specialised omni-channel retailers such as Fressnapf, Pets at Home or Futterhaus are not only here to stay, they do have an edge. They offer superior services to their local captive audience and not surprisingly offer real returns to their shareholders. Go check Pets at Home, it is listed in the UK.

Zooplus versus Burggraben View

Burggraben View: Higher prices from repeat offline traffic is here to stay;

Most large scale retailers follow omni-channel strategy, regardless of cannibalization;

High Private Label share seems to us what Zooplus is thriving for!?

Store networks save marketing cost from Google bidding to gain new customers;

Traditional retailers’ omni- channel strategy allows for superior customer experience (pick-up options, convenience). Examples: Tesco; REWE; Edeka; Kaufland; dm; Carrefour;

Fressnapf, Futterhaus or Pets at Home are here to stay. They are more than pet food retailers. Think vet services, etc.;

99 Source: company filings 15/02/2019 BURGGRABEN HOLDING AG Supermarkets, Grocers Matter Too

Grocers such as Carrefour, Tesco, REWE, Edeka or Kaufland matter too. While their individual offer maybe smaller, their legacy footprints and omni-channel strategy will make them effective long-term competitors. They, a bit like Amazon, have “share of mind”. Even worse, Europe has hundreds of them – well entrenched in their local communities.

Carrefour Pet Supply Market Split by Sales Channel

100 Source: MainFirst Research, December 2018 15/02/2019 BURGGRABEN HOLDING AG More Omni-Channel Competition

But not just old-economy grocers matter. “dm” is Germany’s biggest drug store network with some 3,566 stores all over Germany and Eastern Europe. It is well known for its pet food category with private labels such as “wow”. And it sells online. Expect them to stick around.

dm Online dm Store Network: 3,566 stores

101 Source: https://www.dm.de/unternehmen/ueber-uns/zahlen-und-fakten/ 15/02/2019 BURGGRABEN HOLDING AG Quality Matters Too

There is more: New and upcoming niche players address pet owners who care more about quality than price. These players make use of the online channel to avoid the purchasing power of traditional retailers. In many ways, it is a more focused business model than what Zooplus offers. Certainly, they compete for Zooplus's customer base.

NaVita (Switzerland)

102 Source: WWW 15/02/2019 BURGGRABEN HOLDING AG We Don’t Think So Our Message: None of the «driving factors» will «drive»…

Irrelevant

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Warren Buffett

103 Source: CMD, March 2018, page 108 15/02/2019 BURGGRABEN HOLDING AG Our View on Customer Lifetime Value

104 15/02/2019 BURGGRABEN HOLDING AG Unlikely Sales Forecasts

Because of all of the above, we find it very doubtful that Zooplus will experience steadily increasing purchases by an active account going forward. Yes, it may had increases in the past. But we doubt the positive trajectory going forward.

Zooplus: Sales Forecast per Customer (in Euro, for LTV)

Avg €292

105 Source: Company filings 15/02/2019 BURGGRABEN HOLDING AG Stagnating Sales per Customer

In fact, a closer look at sales per customer segment reveals already stagnating sales for the existing installed base (which has a history of 19 years). In our view, stagnation is only a precursor of what is to come going forward and in a more competitive pet supplies market. But given the few data points we have, we will take company sales forecasts to verify our LTV results.

Sales per new & repeat customer (in Euro) versus Euro €292 for LTV Sales Forecast

Sales per repeat customer Sales per new customer

265 267 256 3Y Average €263 232 217

108 101 92 94 99 5Y Average €99

2013 2014 2015 2016 2017

106 Source: Burggraben analysis, Company filings 15/02/2019 BURGGRABEN HOLDING AG EBT Margins Means Value

The key in our view is that the competitive nature of this commodity business makes EBT margin the relevant measure for LTV. Again, the company does not scale while facing stiff competition from all sides. In fact, in 2017 margins for both customer segments deteriorated. We call it the Amazon effect and expect more of the same.

Repeat customer and new customer contribution (in Euro million)

107 Source: Investor Relations, 2017 15/02/2019 BURGGRABEN HOLDING AG Amazon Effect

A quick check confirms the negative trend. Margins for both customer groups compress as a direct result of stiffer competition. This trend is here to stay.

EBT Margin Development (2014 until 2017, in %)

EBT Repeat Customer EBT New Customer

6.00%

4.09% 4.00% 3.54% 3.51% 2.50%

2.00%

0.00%

-2.00% -1.98% -2.48%

-4.00% -3.61%

-6.00% -6.27%

-8.00% 2014 2015 2016 2017

108 Source: Burggraben analysis; company filings 15/02/2019 BURGGRABEN HOLDING AG Our View of LTV

Our view of LTV per customer is less than €13. That compares with acquisition cost of €19! To calculate LTV, we took Zooplus’s optimistic sales forecasts per customer and applied a 3% EBT margin (in 2017, EBT for repeat customers was only 2.5%) and adjusted it for time value.

Little Customer Lifetime Value (in Euro)

Customer Lifetime Value Year ---> 0 1 2 3 4 5 6 7 8 9 10 Assumptions as presented by Burggraben Total: Sales per customer Euro 3,214.0 191.0 244.0 270.0 285.0 291.0 290.0 295.0 312.0 331.0 345.0 360.0 Account Survival Rate in % 100.0% 79.0% 81.0% 89.0% 93.0% 94.0% 95.0% 95.0% 96.0% 96.0% 95.0% Remaining customers sales share in % 79.0% 64.0% 57.0% 53.0% 49.8% 47.3% 44.9% 43.1% 41.4% 39.3%

Customer Lifetime Revenue Euro 1,724.3 191.0 192.8 172.8 162.3 154.1 144.4 139.5 140.2 142.8 142.9 141.6 EBT Margin -6.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% ______EBT Euro 34.5 (11.5) 5.8 5.2 4.9 4.6 4.3 4.2 4.2 4.3 4.3 4.2 Discount Rate in % 9.0% 1.0000 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 0.4604 0.4224 ______Customer Value over 11 years Euro 18.8 (11.5) 5.3 4.4 3.8 3.3 2.8 2.5 2.3 2.1 2.0 1.8 ______Tax Rate ______33.0% Customer Lifetime Value (post-tax) ______12.6 Customer Acquisition Cost ______19.0 according to Zooplus in 2017 Upside / (Downside) ______-33.8%

Sensitivity of LTV at different EBT margins 12.6 2.00% 5.8 2.50% 9.2 EBT Margins 3.00% 12.6 3.50% 16.0 €12.58 LTV 4.00% 19.3

109 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Imbalance – Cost versus Value

In our view, the company will most likely generate less than €13 of present value for every €19 spent per customer in 2017 (according to Zooplus). We are convinced that the company would be best off to stop growing, today!

19.00

12.58

Cost Value

110 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Zooplus cannot earn its Cost of Capital

In our view, Zooplus cannot earn its cost of capital – likely ever.

ROIC > WACC ?

ROIC & Valuation Average Great Comment Year Year Assumptions Sales Price 1.0% Logistics Cost -1.5%

111 Source: Burggraben analysis; Note: FF centres = fulfilment centres 15/02/2019 BURGGRABEN HOLDING AG You Know The Rest of the Story…

…yes, Indiana Jones had to drop the price eventually to save his life…

You know the rest of the “real” story…

112 Source: www 15/02/2019 BURGGRABEN HOLDING AG Oh, we forgot to mention…

…for a good eCommerce equity story, of course repeat customers may become «devoted» accounts. Well, that may change everything.

113 Source: company filings 15/02/2019 BURGGRABEN HOLDING AG Catalysts

114 15/02/2019 BURGGRABEN HOLDING AG Catalysts

Burggraben is convinced that the following catalysts will lead to more selling pressure of Zooplus's German listed shares in 2019…

Limits to Growth: Zooplus cannot meet its forecast sales target of €2bn by 2020. This is because marketing cost are increasing due to more competition which in turn limits how many new 1 customers the company can acquire per annum while remaining breakeven. However, revenue downward revisions will be a novum among analysts. Such revisions will most certainly revalue the stock lower.

Expensive: Zooplus's margins deteriorated rapidly in the past 2 years and yet the market values the business at 0.6x EV/Sales 2018E. While in the past such revisions did not hurt the “story”, we are 2 now in a risk-off environment. We are thus convinced future revisions will revalue the business, away from EV/Sales and towards a business that cannot proof it can produce earnings ever.

115 Source: BGH analysis 15/02/2019 BURGGRABEN HOLDING AG 1 Revision of Growth Forecasts

We expect a big miss of the €2bn revenue consensus target 2020. In our view, this will mostly likely translate into a sell-off from existing growth investors in Zooplus.

Revenues Estimates (in Euro billion, as at 15 January 2019)

116 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 1 Limits to Growth

This is because Zooplus has “natural limits” to growth and assuming management will not break tradition with its breakeven discipline from past years. In essence, this is illustrated by assuming below 2% acquisition cost as a percentage of sales to restrict how fast it can grow while breaking even. As Google AdWords bidding cost increase due to competition (which they do), the result really is a natural growth of €200 million per annum. In turn, that means significantly lower growth rates going forward and a miss of the €2bn revenue target by 2020.

Limits to Growth while staying breakeven

Marketing cost in % ______1.73% ______1.91% ______1.78% ______1.78% 2) At 1.78% marketing cost in % of sales, Zooplus should breakeven in 2019

Marketing cost (& budget) million ______19.3 ______25.7 ______27.6 ______31.2 3) This gives a marketing budget of Euro 27.6 million for 2019

Customer Retention Rate in % 65% 65% 65% 65% 4) In the past, about 65% of customers made a purchase in following year

Actuals & Assumptions for repeat customers Average sales retention rate in % 92.45% 95.00% 95.00% 95.00% 9) according to Cohort analysis & Trading Update 24 Jan 2019

Sales of previous period million ______909 ______1,111 ______1,342 ______1,550 Repeat Customer Sales million 840 1,055 1,275 1,472 10) Resulting repeat customer sales

Actuals & Result Total New Sales million 271 287 275 277

Total Repeat Sales million ______840 ______1,055 ______1,275 ______1,472

Total Actual & "Resulting" Sales million ______1,111 ______1,342 ______1,550 ______1,750 11) re-iterate result with marketing cost as % of sales to match starting point

Effective Sales Growth yoy million ______202 ______231 ______208 ______200 BGH assumption for Zooplus' natural growth per annum

Effective Sales Growth yoy in % ______18% ______17% ______13% ______11% BGH assumption for Zooplus' natural growth rate per annum - in %

117 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 1 Fewer New Customers in 2018

The effect of higher marketing cost is already visible in 2018. Even though Zooplus boosted “new customer acquisition” by 22% in Q4 2018, it added fewer new customers in 2018 when compared to the previous year – a novum that last occurred in 2013. We think this warning signal is not yet reflected in the consensus or the share price…

Weak Customer Growth in 2018… …means decreasing “new” customer growth yoy!

Number of New Customers (in ‘000) Change in the Number of New Customers (year over year in %) 722.0 28.7% 22% 23.3% 644.0 22.6%

9% 594.0 15.6% 15.2% 13.9%

545.0

2011 2012 2013 2014 2015 2016 2017 2018E

Q1 2018 Q2 2018 Q3 2018 Q4 2018 -6.3% -8.5%

118 Source: Burggraben analysis; company filings 2018 15/02/2019 BURGGRABEN HOLDING AG 1 Analyst Report

…but the sharpest observers in the forecasting business have noticed it straight away…

Extract of Analyst Report, 24 January 2019

119 Source: Hauck & Aufhäuser, 24 January 2019, Christian Salis 15/02/2019 BURGGRABEN HOLDING AG Zero Revenue Downward Revisions in the Past

Revenue Revision for 2020 will be «Unprecedented News»

120 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 2 EV / Sales is the Preferred Valuation Metric

As a fast growing company Zooplus traded between 0.5x and 1.7x EV/Sales.

Average Valuation 2010 until today – EV/Sales: 0.95x

1.90x PX_LAST CURRENT_EV_TO_12M_SALES 200

1.70x

150 1.50x

1.30x

100 1.10x

0.90x 50

0.70x

0 0.50x Jan 10 Oct 10 Jul 11 Apr 12 Jan 13 Oct 13 Jul 14 Apr 15 Jan 16 Oct 16 Jul 17 Apr 18 Jan 19

121 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 2 What will «Break» the eDream?

So let us illustrate what analysts are suggesting when valuating Zooplus at EV/Sales of 0.5-0.7x despite being in agreement with the headwinds ahead for the business.

122 Source: Mainfirst, 17 January 2019 15/02/2019 BURGGRABEN HOLDING AG 2 Zooplus's Shares are Ridiculously Expensive

To justify today’s 0.6x EV/Sales valuation, Zooplus must achieve 5% EBITDA margins and assuming a rich EV/EBITDA multiple of 12x…

Translating Sales into Margins for Valuation Purposes

Translating EV/Sales into EV/EBITDA:

EBITDA Margin 5.0% If a company achieves a 5.0% EBITDA margin and EBITDA Multiple ______12.0x is valued at 12x EBITDA (due to high growth and strong margins) Implied EV / Sales Multiple 0.6x It translates into an EV / Sales multiple of 0.6x

Sensitivity: EV/Sales multiple based on different EBITDA margin and multiples EBITDA Margin 0.6x 3.0% 4.0% 5.0% 10.0x 0.30x 0.40x 0.50x EV / EBITDA Multiple 12.5x 0.38x 0.50x 0.63x 15.0x 0.45x 0.60x 0.75x

123 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG 2 Patience is a Virtue (that investors do not have)

Applying MainFirst’s optimistic growth & margin forecasts as published in December 2018, Zooplus would need 5-6 years to “grow” into an EV/EBITDA multiple of 8-12x in order to justify its current valuation. We are convinced that investors will not wait that patiently…

How many years must Zooplus grow to justify its current valuation of 0.6x EV/Sales…

Input Cells EV / Sales 0.6 Growth EBITDA Implied Multiple Sales % EUR mio Margin EUR Today's EV EV/EBITDA 2018E 1,342 Year 1 1,706 27.1% 364 -0.4% -6.8 805.2 -118.0x Year 2 2,120 24.3% 414 -0.1% -2.1 805.2 -379.8x Year 3 2,587 22.0% 466 0.4% 10.3 805.2 77.8x Year 4 3,073 18.8% 486 1.2% 36.9 805.2 21.8x Year 5 3,399 10.6% 326 1.9% 64.6 805.2 12.5x Year 6 3,647 7.3% 248 2.8% 102.1 805.2 7.9x

CAGR 18% Mainfirst Mainfirst assumptions assumptions

124 Source: Burggraben analysis; MainFirst Research Jan 2019 15/02/2019 BURGGRABEN HOLDING AG 2 The Never Ending Story of Earnings Revisions

Yes, we know. The eCommerce dream is not to be «underestimated». We humans like to dream big about the future «Price». Which is why past revisions have not hurt the «story» yet…

Historic EBIT 2015 Consensus Estimate Revisions (in red)

125 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 2 The Never Ending Story of Earnings Revisions

…and yes again, the story remained in tact also during a constant stream of EBIT 2018 downward revisions over the past 5 years, down from as high as €70m to zero recently…

Historic EBIT 2018 Consensus Estimate Revisions (in red)

126 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 2 The Never Ending Story of Earnings Revisions

…and yes again, EBIT 2020 revisions are only at €20 million today, down from €100 million back in spring 2015. It hardly hurt the story. However….

Historic EBIT 2020 Consensus Estimate Revisions (in red)

127 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 2 This Time is Different: Risk Off

…now, markets are in a state of re-evaluating risk as the world economy slows down and central banks reduce liquidity. This can be illustrated for the S&P Index below in which Utilities outperformed cyclical stocks for the past 12 months by a wide margin. We think investors are in a rotation for “safety” and are thus returning to traditional valuation metrics in which they want to see cash flow, not a future “Price” which – over more than a decade - never materialised.

S&P 500 Performance (last 12 months, in % by Subsector)

ENERGY -18.37

MATERIALS -15.66

INDUSTRIALS -12.34

FINANCIALS -12.04

CONS STAPLES -7.78

COMM SVC -6.82

INFO TECH -4.69

CONS DISCRET -1.71

HEALTH CARE 2.69

REAL ESTATE 4.65

UTILITIES 9.85

S&P 500 -5.38

-20 -15 -10 -5 0 5 10 15

128 Source: Bloomberg 15/02/2019 BURGGRABEN HOLDING AG 2 GDP Slowdown & Inflation Decelerating

Again, the world economy (including the United States) is slowing down while inflation is decelerating. In such a world, growth stocks are out of favour. This is unlikely to change in the coming quarters. In fact, in Europe’s core economies the deceleration is even more severe.

Macro Picture for the United States: Rate of Change of GDP & Inflation (in bps)

Today

129 Source: Hedgeye, 4 February 2019 15/02/2019 BURGGRABEN HOLDING AG 2 Watch Out for 20 March 2019

Thursday’s trading update was – as expected – full of “eCommerce Dream” feeding news. But no mention of margins. We are convinced that the message will become sobering come 20 March 2019, both for growth and value investors. In fact, it may well become the key catalyst for the collapse of Zooplus's share price.

Financial Calendar 2019 Trading Statement 24 January 2019

130 Source: Company Website 15/02/2019 BURGGRABEN HOLDING AG Value versus Price

Zooplus is substantially overvalued, even in a best-case scenario and as illustrated below.

Intrinsic Value substantially below current share price of Euro 112.5/share

Zooplus, in Euro million Average Great Margins Year Margins Year

Revenues ______1,750.0 ______1,750.0 EBIT 0.4% 7.0 1.7% 29.8 EV/EBIT Multiplier 5.0x 10.0x

131 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Our Final Statement

Let us repeat our message. Bulls are best off to accept that eCommerce retailers are not by nature disrupters. They may take market share, but they become part of Schumpeter’s creative destruction just like everybody else. Only in rare cases we will find that a company is able to establish a lasting moat (ein Burggraben) – like Amazon did. Zooplus has zero indications that it was able to build such a moat after 20 years of trying.

The Law of eCommerce Retailing

• Any eCommerce retailer competes with countless offline & online retailers as there are no barriers to enter the business; • Meanwhile, the value from saving rent and shop-floor personnel mostly accrues to Google. It is the modern incarnation of the landlord in the online world. Very few eCommerce retailers can afford to avoid Google to access traffic. Amazon is such an example. Try and think of another one? Really hard. • Then, any economies of scale are only valuable in combination with a captive customer from high switching cost. However, in eCommerce there are no switching cost. Competition is just one-click away. Hence, loyalty from repeat customers in reality has to be paid for each day by matching the lowest price. This in turn will prevent above-average margins. • As a result, eCommerce retailers can at best earn their cost of capital – and regardless whether Amazon competes in the category or not. It is the law of capitalism. Any above-average margin will be competed away over time as everybody has access to the same demand (customers) or supply side (technology, input cost) advantages. • But it gets worse. If Amazon is focused on the category, likely everything changes. Then for most other companies it will not be possible to earn their cost of capital as Amazon has a significant structural cost advantages. On top, it may choose to cross-subsidize a new category until it reaches critical mass; • Only in very rare cases will an eCommerce company achieve sustainably higher margins (say an EBIT of 4%). Then, the company usually combines a niche with unique products and services that others cannot or will not offer. Here an example: www.bogensportwelt.de

132 Source: Burggraben analysis 15/02/2019 BURGGRABEN HOLDING AG Appendix

133 15/02/2019 BURGGRABEN HOLDING AG Managment

Burggraben met with the CFO on several occasions in the past years. We think management did an good job to grow a difficult business debt-free.

Management

134 Source: company filings 15/02/2019 BURGGRABEN HOLDING AG Contact Details

Burggraben Holding AG Baarerstrasse 8 CH-6300 Zug

[email protected] [email protected]

135 Source: Burggraben Holding AG 15/02/2019 BURGGRABEN HOLDING AG