This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
Quick overview of $WINE
Naked Wine ($WINE) is a well-known subscription-based Direct-to-Consumer (DTC) wine platform that links wine drinkers with independent vintners through an online marketplace
$WINE was launched in the UK in 2008 and in 2015 was purchased by Majestic Wines, a bricks-and-mortar wine merchant
In 2019, the company underwent a restructuring and sold the Majestic Brand (200 stores/1,000 staff) to private equity; allowing them to focus on Naked Wine solely
Nowadays, the UK is not even their biggest revenue base with a split of 50%/40%/10% for US, UK & Australia
Their business model is especially advantageous in the US which has a three-tier distribution system in alcohol, shown below, which $WINE bypasses to be classified as a “vineyard” they cut out the middleman
Why bother with a wine business?
Generally, I do not focus on UK companies because there is a finite universe of things you can look at and my focus is on a) ASX small to mid-caps and b) US large caps (partially cloning Super Investor’s 13Fs)
However, the two reasons $WINE piqued my interest is that I have used this product as a customer and it has attracted small investments from Baupost, Punchcard Capital and Nick Sleep of Nomad Capital
In terms of my thoughts as a consumer - yes there are better wines out there but they generally attract a higher price point or bigger subscription level
Another thing that makes it appealing financially is $WINE its users pay a “monthly subscription” which creates plenty of float/working capital whereby the company can leverage better terms with wine producers
*Risk warning for this one*
Before we start out it is worth getting a few things clear about $WINE
With a £250m market capitalisation (£200m EV) it is a small company and more dependent upon the US/UK consumer; Aus is potentially less key
$WINE is currently reporting a loss & like a lot of marketplace type businesses (RedBubble/iSelect etc); often they give a lot of their margin away to Google Ads
Shipping costs do move the dial on $WINE because they sell heavier lower cost items
Whilst it is hard to guess future NPAT margins because the Majestic sale only recently happened, it is generally a low margin business (perhaps 8% EBIT margin)
Surely $WINE is overearning from COVID-19?
The company greatly benefited from COVID-19 changes in consumer behaviour; as you can see the cancellation rate for Angels their primary renewal program is and as you can
However, as concerning as this “over-earning” is; the share price has come down to a point that is quite appealing
$WINE is currently trading on 0.9x Sales/9x Standalone EBIT however it is still not expected to make meaningful net cash flows until 2024 (with 2023 being neutral)
What about their market share?
Truth be told, despite its small market cap - $WINE's DTC share is significant in US (as shown below). The issue is that a lot of wine is still not sold DTC and the wider wine merchant market is closely aligned with the big supermarkets (WM/COST/KR)
To put this into context - the company now has 947k users (Angels) 240 winemakers and 1,500 wineson the platform and c.350 employees
What drove these winemakers to join Naked
In terms of why the winemaker should be interested in $WINE
$WINE can use the cash float to fund the winemakers' business
You have a captive purchaser of wines
It eliminates the requirements of running an operating business because $WINE has the marketing platform
Where $WINE has an exclusive arrangement; the pricing is opaque (e.g. you cannot buy this wine cheaper at Costco) and the margins can be quite healthy
$WINE is rolling out projects ("Never Miss Out") whereby customers can get new vintages of wines they previously liked
Ok, so what about the financials?
Naked Wines reports Standstill EBIT KPI (excluding marketing investments to grow its customer base). This figure is meant to give an impression of the profitability of the current customer base and disregards investments in growth.
Standalone EBIT, is useful to see sales lost due to customer churn and replenishment spend however customer acquisition costs for NEW customers is excluded.
Looking ahead, I would say its fair to assume
Revenue growth is targeted at c.20% level
Churn is c.15% & Existing clients making 30% GM and new clients losing (15%)
After the contribution margin, there is a lot that washes through the P&L
Replenishment costs; a small % (5-10% of existing customer GM%)
Fixed costs are currently GBP30m; growing at c.5% p.a.
Marketing is GBP50m; which tends to rise/fall depending upon the successful of marketing campaign
A summary of their financials (admittedly pinched from another source) gives you a steer on the unit economics
As you can see - If you only focus on the GM% of the existing customers it is easy to get excited but the (15)% GM% of new clients, big marketing costs and fixed costs means that Customer Acquisition Costs is the biggest elephant in room for this company
What about the management team?
Nick Devlin, Naked CEO, previously COO of US business, has mentioned his vision of having featured wines as rotating content with a somewhat Netflix like dynamic
Whilst he seems very compelling, my thoughts are that the Board is:
Generally quite young & shorter in tenure (less of an issue post-Majestic)
Senior Management - Ave 41yrs/4yr Tenure
Board - 53yrs/3yrs
Generally having a good incentive scheme for capital allocation
Lacking in shareholder alignment with very little equity holding (more of an issue) however they are trying to change that at the CEO/CFO level
Watching a few interviews with Nick Delvin (CEO) he hase some compelling points
They use direct response advertising aimed at driving immediate response
They do alot of testing before spending big on marketing (noting they spend GBP40-50m on marketing)
Ultimately they hope to increase LTV via low churn which comes through smart marketing, lower friction experiences, increasing product relevance early in the Angel journey
Any other operational insights
Adverse factors
They need to improve their AI: Wine Genie is not yet working well & the AI to pick out wines for customers is a key focus for managment
Stock issues in seasonal period: The company continues to face stock supply issues during peak periods outside of the major harvesting cycles (Aug in US, Mar in Aus)
Don't expect old wine: Naked cannot really afford to sell old wine; given the hold costs. As such generally they do not attract these higher/vintage conscious drinkers
Pricing point: Despite having a big market share in the sub $20 bottle range, it does not aim to sell below $10 since the quality of the wine decreases materially. The ideal range is somewhere between $10 and $30, however, with a lock of more expensive wines means people "graduate from Naked Wines" and sometimes move to more pricey wine believing its better
Favourable factors
Alcohol is still bricks & mortar: Alcohol in the US had a relatively low e-commerce penetration compared to other verticals (~5% prior to the pandemic)
The winemakers story matters: Feedback shows that Naked customers love to hear about the "story" of the winemaker just as much as having good wine
Fragmentation helps Naked: 97% of all US wineries producing less than 50,000 cases annually (where almost all of Nakeds 250 vineyards operate) so there is a huge TAM
Beer/scotch might shorten cash burn: Whilst the move into Scotch/Beer on 5 Jul'21 is interesting; it is still not a big driver
Shipping costs: In the first half of fiscal 2021, U.S. fulfilment costs per order dropped 22% to $31 per order but this is a big overall cost.There is also an opportunity to build higher service levels and offer two-hour delivery windows, especially great for U.S. deliveries that require a signature.
LTV is growing: the average mature Angel spends 35% more today vs. six years ago (~5% annualized).All things considered, 12 to 15% growth in the Angel base coupled with 5 to 6% growth in spend per mature Angel provides a very attractive 17 to 21% growth rate.
Conclusion
The way I see $WINE is quite simple; it is an early stage version of the "scale economies shared" model however with >2yrs to meaningful CF production - I would say it is a high-risk investment
I think any of the following factors would kill the business model
Unsustainable ballooning of fulfilment costs or customer acquisition costs
Burning wine producers in the pursuits of good margin hurting their reputation (e.g. Uber burning drivers)
Loss of market share in the $10-$30 wine space because they focus too heavily on the new product lines (e.g. luxury lines or beer/scotch)
Even though their cash burn is high on new customers; the LTV of existing customers is very compelling because
Overall, I think there will consolidation in the DTC wine space and $WINE will very likely be the long term winner. My concern is that they will burn alot of $ wining this battle, the market will continue to be fragmented at higher price point wine & shipping/GoogeAd costs can blow this business' financials during the growth phase
As such, I am not buying $WINE until the runway to positive CF has shortened and whilst this may indeed result in me paying a higher price it is a less risky path to take given the marketig/SG&A costs.
Finally - I welcome any counterarguments as I do not profess to be an expert in the DTC wine space.
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