After leaving his native South Africa, where he qualified as an accountant, Rowan Gormley joined Sir Richard Branson’s Virgin Group in the UK. He was involved in the setting up of both Virgin Rail and Virgin Money before turning his attention to the then-pioneering business of online wine retailing. Naked Wines, his third wine company, has attracted international attention for its highly publicised business model of putting its producers in direct contact with its customers, and its innovative use of social media. On 10 April, 2015, it was announced that Naked Wines had been bought by UK retailer Majestic Wines for £70m ($107m) and that Gormley would become chief executive of both businesses.
MEININGER’S: Seventy-million pounds is a high price for an unprofitable young company. Can you justify it?
GORMLEY: Naked Wines is only a loss-making company because we take into account the costs of quite rapid growth. If we amortised those costs over a number of years, Naked Wines would look like a profitable business. It’s a question of measurement. The businesses are very complementary; they do different things. So I think the question is of what the two companies will look like together.
MEININGER’S: What are your plans for the two brands? Will Naked Wines now get a bricks & mortar presence?
GORMLEY: They will remain as two separate brands, with separate management teams and separate supplier bases. Where we can create synergies is knowledge transfer, not integration. Naked Wines knows how to drive traffic and build loyalty, while Majestic knows how to run 200 stores with 1,000 well-trained staff and a very efficient delivery model. I worked for the Virgin organisation for 13 years. Richard Branson believes in entrepreneurial companies being left to get on with what they do rather than becoming small parts of a huge head office.
MEININGER’S: Majestic is clearly in need of some fresh thinking. Can you talk about the priorities you see for the business?
GORMLEY: Curiously, after two days in the business, I can say everybody already sees the issues; it’s not a question of me turning up with answers. The first priority is to unleash the entrepreneurial spirit which I think has been somewhat lost recently. We need to take Naked’s skills at driving customers to the Majestic stores rather than vice versa, but we can learn from Majestic customers’ appreciation for the personal service they get in the shops. The two brands’ customers are passionate about them for different reasons, even when they shop at both.
MEININGER’S: In 1987, a previous Majestic management embarked on what turned out to be a financially disastrous purchase of the California and Arizona-based LiquorBarn chain. Could Majestic work there now?
GORMLEY: No, there is no plan to take Majestic to the US. Naked is already established in what is a very competitive market with very high margins. But rolling out Majestic shops there is not the way to go.
MEININGER’S: Let’s talk about Naked Wines. What was its background?
GORMLEY: Two-hundred-million bottles, including wine and brandy: 72% wine, 25% brandy, plus some health drinks.
MEININGER’S: In the past, a lot of Chinese wineries used bulk wine from Chile, France and so on. How has that evolved?
GORMLEY: I got booted out of Virgin Wines in June 2008. A bunch of other people said they wanted to leave as well, so we just set up a new wine company, and then the world ended, with financial institutions like Lehman Brothers going bust. It was a very weird time to be starting a company. If you were trying to get people to change their buying habits when the world was collapsing, you had to be radical. We couldn’t just be a slightly better version of Virgin Wines. We couldn’t go and screw suppliers financially any further because they were already fully screwed so we had to do the opposite, which was to help them. What did suppliers need the most in 2008? Money! We didn’t have any money. Who could we get the money from? It had to be our customers.
MEININGER’S: Yes, but you did need outside investment to start the business. And quite a lot of that came from the German direct-sales company Pieroth, didn’t it? How much of Naked Wines did they own before the purchase?
GORMLEY: About two-thirds. That figure has changed over time: more money has come in as the business has grown and with expansion into the US and all the rest of it. So it’s kind of fluctuated along the way.
MEININGER’S: Naked Wines has historically been described as a wine venture capital firm.
GORMLEY: These days we call ourselves the “customer-funded wine retailer”. The biggest fundamental difference is that we crowd-fund independent wine, and in exchange for this we get winemakers of a calibre that we would struggle to get otherwise. By offering them a combination of money and freedom they are delighted to come and make wines for us.
MEININGER’S: How big is your ‘crowd’ – the subscription customers you call ‘angels’.
GORMLEY: There is now a total of 300,000 in the UK, US and Australia.
MEININGER’S: You famously acquire these customers through social media, but you also extensively use traditional direct sales models such as introductory money-off vouchers. Surely this can be an expensive process.
GORMLEY: The actual cost of acquisition is commercially sensitive, but you’re right that they can just buy the first case – on which we make no profit – and leave. We need them to be customers for six months to become profitable.
The length of time they remain as customers varies depending on the partner via whom they were acquired. We target the right partners who’ve got customers who are online and fit the right socio-demographics: partners such as Shutterfly in the US which lets you upload your photographs and get a printed album sent to you. If it’s a good partner, 80% of the people will still be there a year later; a bad partner can be really awful: as low as 50%. Obviously as we get older, the period grows longer. Right now it looks like four-and-a-half to five years is the average lifetime, but the reality is that once someone’s been a customer for a year they’re likely to be there in 10 years time. If people don’t like it they pull out pretty quickly.
MEININGER’S: Can you describe your typical customers?
GORMLEY: In the UK, they probably spend between £7.00 to £12.00 on a bottle of wine. Naked appeals to about 8% of the wine-drinking population – probably less in America, but more in Australia because they’re a more adventurous wine-drinking population. Wine Intelligence reckoned that. [Naked customers] need to shop online, spend more than £6.00 a bottle, prefer trying a new and different bottle to what they know; they’re highly likely to make an involved decision and prefer hearing other people’s opinions to wine critics. The happy news is that that niche is growing, so when the rest of the wine market is shrinking, a growing number of people are saying, “I would prefer to spend a pound more; I want to buy something interesting; I don’t want to have the same thing everyone else has got on the table and I want to know something about this wine and where it comes from.”
MEININGER’S: And their demographics?
GORMLEY: The average age is 43, about 20 years younger than some of our competitors. Thirty seems to be the point where they start entertaining at home and so want to buy wine by the case. The proportion of 30- to 40-year-olds we’re getting is pretty much in line with the general population, but the percentage of 50-and-overs is growing. The breakdown of male to female is about 60/40, compared to 75/25 or more for most of our competitors.
MEININGER’S: Is there a great difference between the UK and US businesses?
GORMLEY: In the States the average price is probably $8.00 to $15.00, but the big difference, when we went into the States, was that we expected it to be like the UK where if the price goes up by a pound, the volume of sales can drop by 50%. In the US, we discovered that even people who are paying $7.00 also want to buy $50.00 wines. In the UK, subscribers pay £20.00 per month; in the US it’s $40.00 and Americans spend around 60% more than the British.
MEININGER’S: How many suppliers are there and how do you choose them?
GORMLEY: Globally, there are about 165. Some are finding us. A lot come through our other winemakers. But we’ve now got a team of people who know the winemakers they are excited about.
MEININGER’S: But don’t the social media aspects of your business call for a particular kind of supplier?
GORMLEY: Yes, we’ve had some winemakers that have just said, “I can’t be bothered to talk to people spending £6.00 on a bottle”. And communicating with our customers [through our website] is part of what they have to do. Even if it’s not the winemakers themselves. One of our New Zealand winemakers, Bill Small, is the most taciturn person you ever came across and his wife is the most talkative, so you can guess who does the talking there.
MEININGER’S: Can you quantify the difference, in effect, of how much they talk?
GORMLEY: Absolutely, and it’s on the website for the winemakers to see how they score against the others in terms of sales, interaction with customers, sales at their price point … So as a winemaker you can look on the website and go, I’m in the second quartile of sales for my country and my price point, why is that? And we can say, “Well take a look at your quality ratings, at your interaction ratings. There’s a good correlation.” There’s no point contractually saying to winemakers “you have to reply to our customers”, because they’ll follow the contract and that’s all. But when they see there’s a direct correlation between be-nice and get-sales, they do it.
MEININGER’S: In terms of social media, Naked has always been very active in responding to positive and negative comments by customers; how many people do you have working on that?
GORMLEY: There’s no one person who does social media. There are half a dozen who have the Naked Twitter feed set up on their computers.
MEININGER’S: Your suppliers seem to be a mixture of tiny producers who rely on you totally, high-profile winemakers who produce your wine as a side line, and big-volume producers like Luca Botter, one of the biggest suppliers to Tesco.
GORMLEY: If you look on Botter’s description on our website it says “these guys are big by Naked standards but frankly this is the best Pinot Grigio you can find”, and we’re just candid about it. I mean we try to keep a mixture of young people coming in who no one’s ever heard of, but we think have got talent for the future.
MEININGER’S: And you expect your producers to take part in your road shows?
GORMLEY: All our experiences show that getting winemakers in front of customers is good for both. We do two wine tours in the UK and in California every year. What it does is build loyalty and allow people who turn up at our tastings to meet a winemaker they’ve been chatting with online…
MEININGER’S: Some of these smaller producers have benefited from the Naked MarketPlace. How does that work?
GORMLEY: From time to time, there’s a producer who needs financial help. So we say, “let’s get a bunch of people together and help this particular venture”, and it’s different to the norm because normally the wines turn up in nine months or two years. If you just stuck it on the website it wouldn’t get the attention. So we put it in the MarketPlace, turn it into a campaign… Most famously, when vandals emptied Languedoc producer Katie Jones’s vats in 2013, 2,500 angels paid enough money to get her back on her feet. And today she’s still one of our most popular producers.
MEININGER’S: How does it work commercially?
GORMLEY: We take 10% of the sum that is raised. The inventory is owned by a trust company so to an extent there is money in stock.
MEININGER’S: How many SKUs are there in each of your markets?
GORMLEY: In the UK at any one time there would be about 200 on the site, in the US it’s probably more like 120.
MEININGER’S: And how many US states are you in?
GORMLEY: I think 42, serviced through two warehouses. California is our biggest state but actually two-thirds of our sales are east of the Mississippi. There’s 220m people within a 48 hour delivery radius.
MEININGER’S: How big an overlap is there on the range?
GORMLEY: Not a lot. International wines make up about 40% of what we sell in the States, for example, and only about 10% of what we sell in Australia.
MEININGER’S: How much different are your margins from your competitors?
GORMLEY: They are about half that of Direct Wines, which makes something over 50%.
MEININGER’S: But surely most of your costs are pretty similar to theirs.
GORMLEY: No. The huge difference is customer loyalty. Our ongoing cost of sales is lower. We spend our marketing cost once to acquire a customer. When [Direct Wines] send out an envelope it costs them a pound, if they get a 5% response rate that’s £20.00 an order. That’s an awful lot of costs we don’t need to carry.
MEININGER’S: Your move to Majestic involves competing with supermarkets and handling an impatient stock market. How do you envisage that double challenge?
GORMLEY: Aldi and Lidl have shown UK supermarkets what discounting is really about and the supermarkets are behaving like wounded beasts. Britain could end up looking like Germany, with supermarkets and discounters fighting to sell at the lowest prices, but would that leave a place for Naked/Majestic? Yes, because Germany has a very healthy middle market that doesn’t compete with supermarkets. Customers, for many of whom wine is a cause of anxiety, want inspiration – supermarkets are bad at offering that, and it’s hard to think of better company to give them what they need than Majestic. Do the discounters really offer what they want to drink? Research shows that people who have wanted to experiment have spent twice as much on bottles and been disappointed by what they’ve bought. At Naked, we refund anything our customers haven’t enjoyed and we show clearly on the website the kinds of wines they are and aren’t likely to like. Majestic does that through its well-trained staff. Are other retailers really going to spend 20 years building up that kind of quality of staff? Because that’s what they’d need to do.
