Naked Wines: Business Model Economics

Nick, I just want to take a step back to when you first joined Majestic. What really attracted you to the business?

It was just over five years ago; I joined three weeks before my wedding, so I can remember the date pretty well. I think, really what attracted me at first, was Rowan, the founder of Naked. The way I got involved with the Majestic group was that, in my previous job I was a retail strategy consultant and I had actually just led a strategic review, in 2014, of the Majestic Wines business. One of the things that came out of that review was some recommendations around the management team at Majestic, at the time, and also around the broader strategy. In particular, they had a business, back in 2014, that was seeing negative volume movement in their online business which, at that time was quite an achievement. There were some clear themes they needed to work on.

The chairman, at the time, saw the opportunity for a combination with Naked and saw and an opportunity to address both of those things; to bring in a very different, visionary management team, led by Rowan and also to infuse the business with digital capability.

Wind forward a little bit and, as Rowan was doing his due diligence, I got a chance to meet him. I remember, vividly, having a meeting with him in London and I also met with James Crawford who now runs our UK business. I thought, these are a couple of people who have got a really interesting perspective on an industry that is, in general, quite tired. This is a combination of a couple of brands which are really interesting and, I think, could do a lot more. It was a story I knew I wanted to follow. I dropped Rowan a note after the deal closed, and said congratulations; it was a pleasure meeting you. I don’t suppose there is anything interesting that I might be able to get involved with? He sent me a nice note back saying, I was actually thinking about giving you a call. We had a half hour chat, over coffee and I surprised my wife when I went home and said, I’ve taken a new job.

What did you learn, in those early days?

It was a really interesting time. For me, it was a combination of what we learned as a business and what I learned, personally. On a personal level, it was a great chance to work directly with Rowan, for a number of years and get a sense of, not just how the business worked in terms of numbers and mechanics, but the philosophy behind founding it and the ideals and aspirations that we were always trying to get Naked to. I think that was really helpful. If I took one thing away from it, it was the absolute criticality of making sure we construct this business as a win/win business; an ecosystem where winemakers are winning, in partnership with customers. A logical, inevitable consequence of getting those two things right will be that, internally, we’ll do fine and shareholders will do well.

In terms of the business, I think it was a time where we really started to professionalize and made great strides, in terms of how we interrogated our performance and, in particular, our investment performance. A lot of my role, at the time, was helping us go from having a good theoretical understanding of a return on investment, but still being a little bit abstract. We maybe knew and measured the return on a channel, in a market, but the reality is, within that channel, you are investing with seven or 10 different people and some of them could be great and some of them could be bad. If I learned one thing, it’s that in particular, in investment, averages can hide a multitude of sins. Disaggregating that down to a specific level of detail is critical, if you really want to be credible when you say that you take capital allocation seriously.

Can we just walk through how Naked works, with winemakers? Let’s say, I’m a winemaker and you, at Naked, approach me. What exactly is the process for us to work together?

The nice thing is now, probably what would happen, Will, is that you would come and approach me. We’re in the nice position of being courted, as opposed to having to do so much courting. The first thing we will always do is start with a conversation around you and your passion, your motivation and your desire. What are you looking to achieve and how can we, with the assets and capabilities we’ve got at Naked, help you to deliver that? Is there a fit? Does that match what we are trying to do, as a business?

Here are some of the things that are on our winemaker checklist. First off, you’ve got to be an amazing winemaker that makes great wine. That’s a given. Almost think of that as a hygiene factor. There are lots of great winemakers out there – it’s a great skill and a great calling – and there are lots of people who can make really good bottles of wine. The next thing we spend a lot of time asking people questions about and understanding, is their intrinsic motivation; what makes them tick? There are some people who are fantastic winemakers but their motivation is all around status or making wines that really give them gratification because a sommelier, in a fancy restaurant, on the West Coast, really likes it. Or because some of their friends think it’s really interesting and esoteric. Those type of people don’t tend to fit very well with Naked.

The type of people who work really well with Naked take passion in producing something of really high quality that can be enjoyed by lots of people. They love the idea that they would be able to directly interact with millions of people who have actually consumed their wine and hear what those real people think. They tend to have a real sense of pride in over-delivering. The idea that you can make something that tastes like a $40 bottle of wine and sell it for $20, really appeals.

On the flip side, there are still some people out there who say, if it’s not going to sell for $200, I don’t want to do it. Those people are never going to be a great fit for what we are trying to achieve.

What exactly do you offer me, as a winemaker?

Let’s get to the point where we’ve worked out that, attitudinally, if feels as if you fit. You’ve got a point of view; you’ve got something you are interested in doing. The next thing we will work out is, what do we need to do to support you, to make that wine happen? Let’s take a couple of different examples. It could be that you are a really talented winemaker that is stuck in one of the big corporate wine entities, here in the US, that make about 80% of all wine sold in the USA. But you’ve probably got a good black book of contacts, you’ve got a lot of experience, but what you won’t have is any capital. What we might do, in that instance, is to say, hey, let’s put a range together. We’ll fund your first couple of vintages, which mean we will go and help you put the fruit contracts in place; you probably already know the growers you want to work with, but we can hold the contracts for you. We can help you work out where you want to crush that wine and we can buy you barrels, set you up with those projects and get you ready to go.

Obviously, we’ll also help you with thinking about how you interact on our community, set up your profile and build your brand, within Naked. We’re giving you absolute clarity, in terms of the volume of wine that you are producing and an iron-clad commitment to take all of that wine. You have got a totally de-risked scenario to go and launch your own brand.

On the flip side, it could be that you are a small producer that has already got a facility and is already making wine. It may be that the only thing we need to help you with, to scale your business and make your business more efficient and reduce your costs is to say, we love your wines and we would like to help you make many more of them. Maybe you are selling excess fruit, at the moment, and you’d like to actually turn that fruit into wine yourself. In that instance, maybe all we need to help you is to give you a long-term commitment, with certainty around volume.

There is no one size fits all solution. It’s a question of thinking, we have some assets; we have a stream of cash flow, about $280 million a year, if you now multiply out the 800,000 members we have globally, coming in, to help us fund projects. We have a predictable and scaling business, which means we can give commitments with certainty. Frankly, we’ve got an ethos that we think that is just the right way to do business, which is not shared by everyone, but that’s important too. Then we have this distribution network and capability. That means that you don’t need to worry about marketing, you don’t need to worry about selling. That’s the other big thing for a winemaker. We’re able to eliminate a lot of costs that just don’t go to the taste of the product at all.

Let’s say you are running a 5,000-case winery, in Paso Robles, California; you are probably going to be spending as much money on things that aren’t making wine as you do on making wine. Those kind of things are going be that you probably operate a tasting room, with a tasting room manager and a couple of staff working there. You will have a small direct-to-consumer business, which needs a D2C manager. You’ve probably got someone doing shipments and you will have a couple of people working on your distribution network, trying to sell to 42 different distributors, to cover the whole USA. We can make all of those costs disappear and, you know what, the wine doesn’t taste any different.

What is the split, in your winemakers, between those smaller producers that already have the facilities versus individual winemakers that have to go and work with the growers and then come to you, as an individual?

I would identify three big groups of producers we work with. The first one is incredibly talented winemakers, coming out of a corporate background and we’re helping set them up in their business. They are a big group of winemakers we have. They tend, individually, to be slightly lower-volume projects, so probably a third of winemakers – maybe less than that – in volume. I’m doing this roughly, off the top of my head; I haven’t got any numbers in front of me.