Analysis: Five things you need to know about booze specialist Naked Wines

Naked stocks booze from independent winemakers around the globe and has online retail operations in the US and Australia as well as the UK.

Shorn of the bricks-and-mortar MajesticWine business since the end of 2019, Naked management has invested in growth, honing its direct-to-consumer business model, with the pandemic providing a boost for online wine purchasing. 

Naked is shifting from a high-mass, high-churn model to one that prioritises high-quality repeat customers, but it could be at risk of breaching one of the covenants on a new loan if repeat customer sales continue to fall short of forecasts. The business entered the $60m (£47m) asset-backed lending facility earlier this year to fund investment in wine stock levels.

Here are five things you should know about the wine industry disruptor from our Prospect analysts.

1. The cost of subscriber growth  

Naked has almost doubled in size since selling Majestic  in 2019, thanks in part to the impact of the coronavirus pandemic and associated lockdowns, which sent alcohol shoppers online in their droves. 

Within its subscription ecosystem, Naked now connects nearly a million ‘Angel’ investors – customers who commit to a fixed pre-payment each month – to more than 260 independent winemakers, offering the vintners advance funding and large regular orders.

As such, it provides a solid alternative to traditional distribution models. Its Angel subscriber base rose 9% to 964,000 in the year to the end of March 2022, up from 580,000 in 2019/20. But growing the subscriber base has come at a hefty cost.

The group made £95m in proceeds from the sale of Majestic, much of which was ploughed into new customer acquisition and infrastructure. Over the past two years alone, Naked has spent more than £90m on acquiring new customers, but that helped it edge back into the black in the year to March 28, generating an operating profit of £1.9m on sales of £350.3m. 

2. The $25bn opportunity

Management believes that Naked is still very much in the early stages of its growth journey, with a $25bn (£21bn) addressable market across the territories it operates in, where it currently only has around 2% penetration.

Its ability to increase this is clearly supported by behavioural trends, including the ongoing transition to online purchasing – with particular scope for growth in the US where online penetration is lower – and the growing desire to access products of localised provenance.

While it had previously relied on customer reviews to entice customers, it is now gaining recognition for the quality of its wines from industry bodies to improve its credentials among potential customers. This year, for example, it scooped a number of accolades at the Decanter World Wine Awards and the International Wine & Spirit Competition, as well as the International Wine Challenge and its Merchant Awards.

3. Learning from Down Under

The US is Naked’s biggest market – accounting for 45% of total sales in 2021/22 – and also where it sees the largest growth potential. But its operations in Australia are playing a key role in shaping its strategy.

Shifting focus away from new customer acquisition towards customer retention and high-quality repeat customers drove both sales and margin growth across the Australian region in 2021/22. Total sales in the market edged up 1% to £45.9m during the financial year, although a 7% uplift in repeat customer sales to £40.8m was offset by a 28% slump in new customer sales, to just £5.1m, as a result of reduced marketing investment.

Adjusted EBIT came in at £2.9m (up from £900,000 in 2020/21), reflecting a 16% increase in repeat customer contribution profit to £11.3m.

Naked’s former Australian boss Alicia Kennedy has now taken on the new position of chief operating officer at group level, charged with improving the lifetime value of the customer base right across the business.

4. Going upmarket

Within the UK market, Naked is repositioning its ecosystem towards a more premium offer after it placed too much emphasis on growing the volume of new customers at the expense of quality during the pandemic. This is being supported by partnerships with additional winemakers and the extension of its range of higher-priced products.

Naked is reshaping its strategy for customer acquisition in this country, including a short-term reduction in new customer investment and limiting the subsidy of initial orders to improve margins on new customer sales.

While this is set to reduce sales growth in what is Naked’s most mature market, it is hoped the move will have a positive impact on the bottom line. 

5. Ambition to double sales

Given the current economic uncertainty and cost-of-living crisis, Naked expects group sales to be in the range of £345m to £375m (-4% to 4%) during its current financial year, ending March 2023.

This forecast reflects higher pressure on repeat sales, while short-term growth will also be dampened by the shift to a more premium proposition as customers in search of regular promotions look elsewhere.

Naked also anticipates a reduction in new customer revenue following the reduction in investment in this area. Nevertheless, management believes it can double the size of the business over the next five years, to around £700m in revenues, with the potentially lucrative US market expected to drive much of that growth.

Chair Darryl Rawlings points to the ongoing opportunity to disrupt the wine industry, with “plenty of opportunities to grow in all our markets, especially the largest, the US”.

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