Naked Wines' James Crawford reflects upon H1 results

20 November, 2020

Drinks International caught up with Naked Wines’ chief financial officer James Crawford to discuss the firm’s impressive H1 results.

Revenue increased 79.6% to £157.1 million in the 26 weeks to September 28, with gains in the US, the UK and Australia.

Crawford has been juggling the CFO and UK managing director roles this year. Sean Tabak will become the new CFO on December 7, allowing Crawford to focus on building up the UK business.

Naked Wines has enjoyed exceptional short-term growth, but do you think this will mark a permanent shift in the way people buy wine online?

Prior to the pandemic, about 5% of sales were transacted online in the US. Any benchmark for the UK would have seen that number in the early 20s. By the end of April in the US, 20% of wine sales were happening online, and the reality is that a lot of consumers in the US didn’t even know they could buy wine online. Alcohol is a more highly regulated product in the US in terms of how it gets to market than it has been in the UK. We see comments on social media and through our customer service team, with people saying, ‘how did I not know I can do this’. It would be a very unusual situation, not one I’ve ever seen, where a category moves to 20% and then reverses that back to 5% when people are finding something convenient and better value.

Pretty much every number [in the H1 results] is up by a big percentage, which is great. It has been an extraordinary, unusual year, and we have been one of the companies in the lucky position that we fit what customers are looking for.

There are some signs that the scale we have achieved and the changes in customer behaviour mean that this is a fairly enduring change in the outlook for the business, because we’re both stronger in terms of our scale – delivering better economics and enabling us to invest more aggressively in continued growth – and customers are behaving differently, particularly in the USA, which is now our biggest market.

We are the biggest direct to consumer wine business in the USA by volume. About one in four bottles of wine in that segment. That puts us in a position where, with continued customer demand for that proposition, we think there’s a lot of headroom for additional growth.

Selling Majestic when you did worked out well in hindsight?

We’re not going to claim that we saw that coming, but you make your own luck. The reason we separated from Majestic was we wanted to have capital available to invest in what we felt was the stronger long-term model and in the market where we can see the biggest opportunity [the US], so we were in the fortunate position of having a really strong balance sheet and focusing entirely on the Naked Wines business. Trying to do what we’ve done, had we been focused on what we do with stores and staff, would have been that much more challenging. But ultimately we always felt this was the right model to invest behind, and I think the changes we’ve seen in the past six months accelerate our journey by a few years.

There is a large addressable market for online wine purchases. Is it realistic to expect these huge growth figures again when you present results over the next couple of years?

This is an extraordinary time where we’ve seen the trampling of footfall in the direction of online. We do believe that over the medium to long-term we can continue to grow this business at double-digit growth rates. I’m not going to promise you an 80% number every year. If you look at the latest forecasts the analysts have arrived at, they’re seeing very strong growth this year. They’re seeing a very moderate growth rate next year, because we’re lapping those big numbers. It’s like when you sell beer in a World Cup year. Lapping those numbers is difficult. They see a moderate 10% to 20% growth rate in the medium-term. We think that’s eminently achievable.

Is there any pressure from shareholders to deliver profit, or are they broadly happy to keep reinvesting revenue in new customer acquisition?

Our shareholder base is generally supportive of the strategy we’ve laid out. We freed up cash from the sale of Majestic. We said we were doing that to invest in Naked. The way you invest in Naked is not by investing capital into shops or vineyards, it’s about investing through the P&L into new customers. We give a lot of detail disclosure about the payback we’re getting on that investment to address exactly that question: is this a good investment or not?

The reality is that over 20 years we expect to get seven to eight times our money back on the money we’ve just spent. Long-term that should still be a 4x number. If you compared that to a return on capital basis like you would to a store, it’s 20% to 50%, and stores often generate 5% to 10%, so we think it’s a very attractive use of capital. Our shareholders generally support that, and we’ve freed up the cash to enable us to run at a loss for several years into the future if we choose to.

Following the sale of Majestic we had about £55 million of cash. We generated £20 million of cash this six-month period, so we closed the period with £76 million of cash to invest in more customers, more wine to support those customers, and that’s the strategy we will continue to follow.

The addressable market in the US has increased significantly, making it more attractive for rival businesses. What makes Naked Wines uniquely placed to continue thriving in a more competitive market? What sort of competition will traditional retailers pose, and why should wineries work with Naked rather than selling direct to consumer themselves?

The majority of wineries will have a direct to consumer business, but it will be on a very limited range of wines that that winery produces. We sell over 200 different wines in the US. There’s a set of skills you have to bring together, which we’re pretty uniquely placed to do. You have to be able to produce wine, build the tech to manage hundreds of thousands of customers in an effective way, build a distribution network that can get wine to the end consumer effectively, and so the benefits we’re seeing of the scale we’ve got, four distribution hubs, hundreds of thousands of customers, dedicated CRM systems that do that. It’s not a traditional skill set of a winery, which has been more about the production and vinification.

For the traditional retailers, is a very formidable business, and a bigger business in the US than us, but ultimately it is legislatively regulated as a retailer, so has to buy their products from a distributor, who has bought it from a winery, and therefore there are already layers of cost involved in that business before it reaches the customer.

We can sell in 44 states. There are slightly different regulations in every single state, but ultimately it is permissible for a winery – which is what we are, we have a winery, we crush grapes, we have a licence for production – to sell direct to consumer in 44 states. In doing that, you don’t have to sell to a wholesaler, who then sells it to a retailer, who then sells it to a customer. You sell direct to the customer. That gives you a higher margin. You pay some of that to FedEx and UPS, because you’ve got to ship the stuff around the country. But ultimately we believe that model gives the consumer better value, because it cuts out middlemen. We benchmark that value. We look at Vivino data, for example, and look at wines getting the same Vivino score as that appellation and category, and we look at our prices, and we find them 20% to 40% cheaper.

We are fairly unique in the breadth of range we have as a winery, but at the same time having the scale to operate from multiple warehouses and therefore we can reach 95% of our customers within 48 hours. In the US that is a top tier service level. It’s not unusual in the US, if you were to order wine from a winery, for it to take seven to 10 days to reach you. There’s a confluence of scale and range and capability that we have, that we don’t see replicated in the market at the moment.

The business made a loss of £8.9 million for the six-month period, up from a £5.4 million loss the previous year. That was driven by a £4 million non-cash write down to nil in the fair value of the Calais-related deferred contingent consideration from the sale of the Majestic Wine business after the UK government said Brits’ personal allowances for duty free import of alcoholic beverages will be considerably lower once the UK leaves the EU on December 31. Is there any chance that you might receive something from that Calais business?

That’s an accountant’s stroke of the pen. The contract we signed to sell Majestic, we said 12 months after we have exited the EU, we will look at the performance of that business, and there’s a commercial framework that says this is what it’s worth, knowing you bought it with the uncertainty of Brexit. With the tight personal allowance that the government announced in September, 18 bottles of wine, six bottles of fizz, the indication from the Majestic management team is they believe that will have a material impact on that business. Accountants being prudent people, you strike a pen through that and say, it’s possible we won’t receive that money. That’s all we’ve announced. The proof of what happens there will happen over the next 12 to 18 months.

Some analysts focused on climate change and wildfires in California and Australia after you delivered your H1 results. Is that a genuine threat to the stability of a business like Naked?

Wine is a business that has a lot of challenges in its production. That can be frost at the wrong time of year, droughts during summer, it gets wet during harvest and grapes go rotten. You can add the number wildfires to that. California and certain areas of Australia have been significantly impacted by wildfire over the last 12 months, and you do have to run a business that has a process for seeing if there’s risk of smoke taint and seeing if you want to take on those grapes. It’s another challenge in the production of wine, which is why wine is this wonderful, challenging product to make and produce. We have a very diversified supply footprint. There’s not going to be a risk that we can’t produce wine around the world. It just ebbs and flows between different areas, depending on those conditions, including fires.

Would Naked Wines thrive or struggle if a lockdown extended to Christmas?

You could speculate in either direction. If you’re not out partying in the pub, will you party at home? Or will everyone have a muted Christmas because the economy is weaker under the stress of Covid? I don’t have a crystal ball for that. When we put our Christmas case on sale last week, normally we would expect it to sell out over the course of two weeks or so. It sold out in five days, so there seems to be ample demand to get good value Christmas cases delivered to people’s houses early in the season.  

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