SMALL CAP SHARE IDEAS: Naked Wines sees 20-year shift in buying habits in one month

A slide in a recent Naked Wines investor presentation summarises the incredible progress the company has made since the onset of the coronavirus pandemic.

It charts the change in wine ‘channel share’ from 5 per cent online increasing to 20 per cent in the US, revealing that there had been a 20-year shift in buying habits in just one month.

You could make a joke about America drinking its way through lockdown, but that might be considered poor taste given the human toll the virus has taken.

In demand in America: Naked Wines has seen a change in wine 'channel share' from 5 per cent online increasing to 20 per cent in the US

In demand in America: Naked Wines has seen a change in wine ‘channel share’ from 5 per cent online increasing to 20 per cent in the US

Commercially, though, there is no doubting that some businesses are better equipped to withstand the pressures of the new world in which we live – and prosper.

Naked Wines is one prime example. It stands out alongside the other notable online success stories – Boohoo, Asos, Ocado.

But there are other elements too. It is asset-light and, for what is ostensibly a retail business, it has a high rate of repeat business.

The Naked model merits close inspection for it is shaking up the international wine industry from grape to glass. This is because the company invests in winemakers directly and will pledge to take a certain number of bottles based initially on how it thinks the red, or white will sell.

This relationship between winemakers and the retailer works on several levels. It allows the former to do what they do best – concentrate on the viticulture.

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So, there’s none of the stress associated with marketing and distributing a new product, for example. Naked takes this on.

The company, meanwhile, gets access to exclusive, high-quality wines, which in turn results in quality and value for money for discerning customers.

In the US, where the market is subject to oligopoly pricing, the direct to consumer approach has brought real competition as it has stripped out costs from the supply chain.

Customers tend to be introduced to the Naked concept via promotions, which then leads on to them becoming a regular subscriber called an ‘Angel’. By depositing £20 a month in their account Angels are also helping support independent winemakers.

‘At Naked we bring together wine lovers – we’ve got over 600,000 members globally – and some of the world’s best independent winemakers,’ explains chief executive Nick Devlin.

'You get a great quality bottle of wine...  and you pay less for it', says boss Nick Devlin

‘You get a great quality bottle of wine…  and you pay less for it’, says boss Nick Devlin

‘We use the funding that we have from our Angels, as we call our members, and that gives us a pool of money that we’re able to invest into creating exciting projects with some of the world’s best independent winemakers.

‘They are passionate about making wine, and with us, they’re not worried about selling wine, they’re not worried about marketing.

‘They don’t have to work with a distributor, the wine doesn’t go through distribution and retail. All of this means you get a great quality bottle of wine, you know who made it, and you pay less for it,’ Devlin added.

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If you think this is some online cottage industry, think again. The platform boasts 211 winemakers in 19 countries producing 1,000 different wines. Stock is held in eight distribution hubs around the world.

As Devlin points out, Naked Wines now has more than 600,000 Angels, while the repeat customer/sales retention rate is a commendable 83 per cent. And it boasts a database with more than 23million (I repeat 23million) reviews. That knocks the Sunday Times wine section into a cocked hat.

Naked Wines invests in winemakers directly

Naked Wines invests in winemakers directly

Last year Naked generated over £200million in revenues. And, as mentioned above, the stay-at-home culture engendered by the pandemic has only accelerated growth.

The company in August said it expected turnover to increase by at least 40 per cent this year. City broker Liberum Capital is predicting it will generate sales of £289million in the current 12 months, rising to £342million in full-year 2022.

A focus on maximising growth means that Naked will post a modest loss in the current year before crossing the Rubicon into profitability at the underlying earnings level, according to Liberum.

The share price has more than doubled since the start of the pandemic, reflecting the company’s stellar operational performance in the last seven months or so.

Still, at 464p they are undervalued, according to some of the brokers covering the business.

N+1 Singer, for example, reckons there is further upside of around 100p from current levels, while Investec is even more bullish with a price target of 623p.

For CEO Devlin and his Naked Wines team, the fixation is less with the share price and more on capitalising on what looks to be a perfect storm for the business.

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‘For me, the measure of success is much more harnessing the platform we’ve got – the community of wine lovers and winemakers and really changing the structure of the way the wine industry works,’ he explains.

‘If we take care of that, I think the valuation side of things will take care of itself just fine.’ We can help with that.’

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