Investor Dialogue: Naked Wines

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

The obvious place to start is the trading update, today. You mentioned you were impressed with sales retention. Do you have any comments on what you think might be driving that 80% retention rate?

Analyst 1: I think there are two things. Firstly, it’s validation that it’s a good product that people enjoy, irrespective of what is happening with Covid. It’s hard to say that for sure, but that would seem to be what you would hope would be driving retention. The other is, they acquired a very large cohort towards the end of calendar 2020, beginning of 2021 but in terms of ordering frequency, that was really high in the second half of the prior year and I thought that would be a pretty substantial headwind. But I think that proved, in at least part of the year, to not be as much of a challenge as I thought.

I think the inventory, the year before, was also a headwind, where you improve the availability of your product and you can replace some lost orders from the prior year. I know, at least where I was, by the end of the last fiscal year – not this one, but the previous one – inventory was really low and it wasn’t worth making an order at all.

The second thing is the number of Angels; people are sticking with the product. Credit card data had led people to believe things would look a lot worse and partly that’s a mismatch in terms of what is defined as an Angel and also, the fact that people’s charges go into their Angel balance, rather than directly to an order. It definitely led to a much greater degree of negative expectation than manifested in reality.

On that inventory point, are you suggesting it is the higher inventory availability that has driven more frequency that has, potentially, kicked up the retention. Even though you don’t have new customers coming through, you’ve got 11% growth in repeat customer sales.

Analyst 1: Basically, yes. Maybe there is a little give and take between getting more frequency back from better inventory and losing some frequency from wine consumption at home that otherwise would have been in a restaurant. I think that was a big part of why expected sales could be worse than it was. These things added up pretty nicely, in the end.

Do you have any views on retention and maybe why this 2022 80% retention might not be sustainable? I understand that H1 was over 100% retention, as well, which potentially distorts it a bit.

Analyst 2: Your guess is as good as mine. I know that, from Virgin Wine, for example, the acquired cohorts are also stable. Virgin Wine is much smaller and they are not deploying anywhere close to the amounts that Naked is deploying into customer acquisition, but it just gives another data point. My fear was that it might not be sticky, but it seems to be quite sticky.

I always ask myself, how good is the mousetrap here? How good is the product, really? We’ve recently done a winetasting – as you do, as a good research-oriented company – and we brought in two professional sommeliers and 10 or 12 people, and we tested, in AB testing, Naked Wines versus the equivalent bottles of wine from the likes of Tesco, Sainsbury’s, Aldi and so on. We tried to be as scientific as you can after tasting 10 or 15 wines. The outcome was, in terms of the perception, Naked Wines was just slightly better. Interestingly, the two professional sommeliers were able to detect a better quality amongst the Naked Wines versus the other comparisons.

The UK is not as clear, in terms of the price advantage. I wonder if any of you guys, based in the US, have done something similar and whether the reception of Naked Wines is much more pronounced or perceived better than comparable ones?

Analyst 3: I think this is one of the key issues. The customer surplus is much, much larger in the US than it is in the UK, just because of our inefficient distribution and how, as a result of the three-tier network, the US consumer can’t go to Aldi, Sainsbury’s or Tesco and pick up a decent bottle of wine for £10. That just doesn’t really exist in the US. While I’ve done testings of my own, I do consistently scrape the Vivino data. As we all agree, wine is very subjective and a bottle of wine I like, you may not like and vice versa. Using the aggregated reviews of customers on Vivino, gives me comfort that, on an apples for apples basis – a Napa Cab versus a Napa Cab – there is significant customer surplus in terms of the same quality wine at a lower price or, at a given price point, a better bottle of wine, for the US consumers of Naked.

Sometimes, I don’t think that is understood by non-Americans who are not used to how terribly screwed up our alcohol distribution system is.

Analyst 2: Does that match what others from the US researched or found out or think about it?

Analyst 1: Yes; we did surveys of a lot of people in the industry, from other wine makers to people who work in distribution or in marketing. Formerly, they had way more negative opinions and, now, have turned pretty positive. It wasn’t exactly a taste test but it was sentiments on the quality of wine.