Monday, November 26, 2018

Does Majestic Wine Have The Right Business Strategy For Brexit And Beyond?

Majestic Wine, the UK wine retailer has announced a £200,000 loss in its half-year results, down from a profit of over £3 million for the same period last year. It attributes its loss to tough times in the UK retail market and the investment it has made in preparing for the turbulent times ahead, post Brexit.

Majestic Wine CEO Rowan GormleyGabrielle Clinkard / WikiCommons

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Majestic's annual report, ‘Making Headway Despite Headwinds’ has a very apt title. The UK has been very challenging market for Majestic but it has maintained its plan to retain existing customers by cementing relationships between store staff and customers. The company thinks this will see them through 2019, because even though revenue has increased by 4.8% to £229.1 million, the future looks tough. The good news was that repeat customer sales retention was up and stood at 92.7%. Majestic attributes its dip in profit on fixed costs, where it has invested in the structure of the business to make it more efficient. It’s cash flow is strong and its debt is reduced. It has heavily spent on marketing, which hopefully will work in the upcoming Christmas market, although there are fears by analysts that it hasn’t started its Christmas early enough and faces stiff competition from budget supermarkets such as Aldi and Lidl. CEO Rowan Gormley said in a statement,

We were planning for tough times and we’re investing through tough times because we know that’s the route to a more profitable future. As a result, we now have a business that is almost 45% online and over 20% international with both the option, and intention, to invest further in order to drive returns.

The UK is a challenging wine market at the momentScott Warman / Unsplash

Its results were very positive in relation to its investment in Naked Wines. Majestic Wine acquired Naked Wines in 2015 for £70 million. Naked is a wine startup which has ‘Angel’ customers, who each pay £20 per month to fund independent wine growers to produce wine. Most of the fee is passed onto the wine producers and the customers are able to buy wines that otherwise couldn’t be found elsewhere and at wholesale prices (25% off the retail price). It’s a business model that appears to be working. While Majestic remains entirely independent, its goal has been to increase Naked’s customer base in the areas where it operates, notably South Africa but also in the UK, New Zealand, Australia and California in the US. Majestic wine is a listed company and posted half-year profits of £6.8 million in 2017. This figure was due in no small part to Naked Wines’ growth, which announced earnings before interest and tax of £4.72 million the same year. The US has a wine market which is 8 times the size of the UK and in Majestic’s results this week, it appears that for the first time, the US has overtaken the UK part of Naked’s business. It’s a good result for the company whose strategy was to spend £14 million in 2016/17 to grow the US business. Naked has since expanded into craft beer with the same business model and has its eyes on craft gin.

With rising household costs, wine is becoming more difficult to affordZachariah Hagy / Unsplash

Analysts reported that Majestic’s results are following key trends expected in the drinks industry; larger bottles, more fortified wines, an increase in demand for craft beer and English sparkling wine. Majestic needs to build on its customer relationships to help sell and make the most of the Christmas period, where it says it is on track to meet its sales targets. At present, customers are spending the same amount per visit but are buying fewer bottles but better quality wine. With Brexit on the horizon but with the possibility of Britain leaving the EU under a no-deal scenario, Majestic has spent £5-8 million stockpiling European bottles of wine in case of supply chain issues. Gormley is optimistic however, citing Naked as an example of how customer retention can still grow business in tough times. He says

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We founded Naked Wines during the financial crisis of 2008 and proved that investing in acquiring customers and generating loyalty through great products and service, will drive profitable growth even in a tough market.

With the rising cost of food and other daily essentials, such as fuel, wine is being pushed out of the weekly shop and Brexit concerns are also having an impact on Majestic and other retailers with the weakening of the pound. Only time will tell if Majestic has the right strategy to deal with Brexit and the changes in British alcohol consumption.

Majestic needs to have a fruitful Christmas sales periodArun Kuchibhotla / Unsplash



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