Rowan Gormley, is Naked Wines a mousetrap for the wine market?

I had the pleasure to chat with the former CEO of Naked Wines, Rowan Gormley. Here you can find the video of our conversation. Below I have created a transcript for you.

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Important: Rowan has retired from Naked Wines and his only relationship with the company is as a shareholder. When he refers to Naked as “we” that is just an old habit!)

[00:00:00] Tilman Versch: Hello, audience, I’m happy to have you back on my YouTube channel. Today, I’m having a great guest, and we’re recording as he is currently in Italy on vacation, I think. He will tell us more on that in a second. There was no live stream possible, but I’m happy record this interview Rowan Gormley of Naked Wines. Happy to have you here, Rowan.

[00:00:28] Rowan Gormley: Very good to be here, thank you.

[00:00:31] Tilman Versch: Thank you for coming, especially so spontaneous– I think we texted on Monday, and today, we’re having the interview. It’s one of the quickest interview confirmations I had.

[00:00:43] Rowan: That’s the great thing about being retired, you have time. [chuckles]

[00:00:46] Tilman Versch: That’s great. We have two similarities in life. I have also grown up– Or you have a relationship to a town that’s called Boksburg in South Africa, and I grew up in a town that’s called Boxberg in Germany. The towns sound similar. It’s quite funny. I looked it up, Boksburg in South Africa, it’s named after one of the founding fathers. It’s a quite interesting story. Did you grow up there?

[00:01:20] Rowan: [unintelligible 00:01:20] Boxberg is much better than our Boksburg, because the place where I grew up is a shithole. [laughs]

[00:01:28] Tilman Versch: Yes, I was in Joburg, and it looked like one of the industrial suburbs.

[00:01:34] Rowan: Gritty mining town.

[00:01:36] Tilman Versch: Yes. The region I grew up, Boxberg, it’s also a wine region. We have some vineyards there, and they produce wine in this region. It’s in Franconia near to Würzburg, and they also have this Bocksbeutel to fill in wine. Another points that’s related to “our boxes”. The other similarity we both have is that we are shareholders of Naked Wines-

[00:02:01] Rowan: Very good.

[00:02:02] Tilman Versch: So, I want to disclose this at this point and also show you the disclaimer that we make sure that we have things settled on the legal side and everything is clear for you. You find the disclaimer also below on this website. It shows you everything we do here, is knowledge-building and no recommendation, especially if I hold shares. It is also no recommendation for you to do anything. We’re just having a qualified talk and giving you background information so you can do your own work in an easier way. But you still have to do your own work. So, thank you very much for listening to the disclaimer.

Why did he retire?

Let us ste into our talk. You retired in 2019 as Chairman or CEO but you’re still involved in the company. What reason was the reason for you to retire?

I think many startup CEOs don’t make good CEOs of mature companies. The qualities that make you good at getting a company going in the first place can become an obstacle when the company becomes mature, and you need a different style of leadership.

[00:03:06] Rowan: I think many startup CEOs don’t make good CEOs of mature companies. The qualities that make you good at getting a company going in the first place can become an obstacle when the company becomes mature, and you need a different style of leadership. Somebody said to me, a good CEO should be like a good football coach. They don’t run onto the field and score all the goals for the team. They hire the right people, give them a system, and then they get off the field and shout at the ref from the side. It is in my nature to be on the field, and I just– I came to the conclusion that for the next phase of the company’s development, it needed a different set of skills, and that really means a different person, because this leopard wasn’t going to change their spots.

How retirement changed his life

[00:04:00] Tilman Versch: How did your life change since then?

[00:04:04] Rowan: Very dramatically. Again, very good advice I got from somebody was, number one, make sure you have a superstar CEO to take over from you so you’re not worrying about what’s going on, which I did, his name is Nick Devlin. I’ll tell you more about him later. The second thing is, have a project. Have a project that you can absolutely throw yourself into. My project is called PoléPolé. She’s a 40-foot long catamaran actually sitting in Grenada at the moment.

The minute I stepped out of the CEO office, we flew to the Caribbean and we went sailing for six months. Because I didn’t really know how to sail very well, the learning curve is very steep, and that just means all my attention was focused on staying alive, and not on what was going on at Naked Wines. It was very good to have that very involving project to give you an absolute clean break from one to the other.

Amusingly, when we had the first results call since I left, and the guys were talking me through the numbers, and they were saying, “Well, of course, you remember what this number is,” and I was thinking, “I don’t. [chuckles] I can’t remember what that number is.” I think that’s a very good thing because I just don’t worry about it because I just don’t need to because it’s in good hands.

Rowan Gormley‘s Naked Wines stocks

[00:05:26] Tilman Versch: That’s great to have found this kind of successor for the job you did for a long time. You’re still holding around 5% of the outstanding shares, is there any reason or plan to change that?

[00:05:47] Rowan Gormley: Look, I have tax bills to pay, and there are various personal financial issues I have to deal with, but when I look around at places to invest today, especially post-COVID, the Naked investment universe has expanded in a COVID world, and for many other companies, it has shrunk, and so– No, I think that it remains a good long-term investment for me.

Which businesspeople does he admire?

[00:06:25] Tilman Versch: You already mentioned in other interviews, I’m linking them here above because there are many great interviews or some great interviews with you out there that are great to watch, and I don’t want to talk about the same things that are already mentioned here, so you can find them above-linked to have a look at them. You named in this interview that Richard Branson was one of the people who shaped you and your life, are there other business stars or entrepreneurs you admire and that also influenced you?

[00:06:55] Rowan: Yes, absolutely. Very early on in my career at Virgin Money which was a startup Virgin did together with what is now called Aviva, I was very lucky to meet a person called Jayne-Anne Guardia, who is a very smart and able woman, but also had an understanding of emotional intelligence that, having grown as an accountant and then worked in private equity, I just had no concept of. I think understanding– I learned a lot more about people and motivating people and understanding people from Jayne-Anne than I ever would have learned going to business school.

I think before then, working in private equity, I worked for a guy who was an old-fashioned private equity guy, in that someone would be invited to lunch, we would drink two bottles of claret, eat a great big chunk of roast beef, some glasses of port and brandy, a cigar. The deal would be written on the back of the menu, and the entire transaction was two sides of paper. That’s how he did business, and he was massively successful. His name was Michael Stoddart. I think what both Michael and Richard Branson had in common is that they were great believers in their gut feel, and great believers in finding the right person and backing them, as opposed to just endless analysis and more and more data and supporting information.

I think that’s a very good– In an entrepreneurial startup environment, eventually, having the confidence to trust your gut while testing it at the same time is an important characteristic.

I think that’s a very good– In an entrepreneurial startup environment, eventually, having the confidence to trust your gut while testing it at the same time is an important characteristic. Yes, those are the people who have helped me along the way, but of course, most of the help has actually come from the people I’ve worked with directly rather than people I’ve worked for, and the Naked team today is– There are an awful lot of the same people who started the company 12 years ago. That’s something I’m very pleased with.

How long people keep working at Naked Wines

[00:09:18] Tilman Versch: Do you have a rough or gut number of the people who are still in the company from the beginning?

[00:09:25] Rowan Gormley: Of the 17 people who launched the company on day one, I think there are 10 still there after 12 years, so that’s a good length of time.

Digital business leaders Rowan Gormley admires

[00:09:34] Tilman Versch: It is. To narrow my second last question a bit down, were there also people from– That run internet businesses, that run digital businesses that influenced you, and where you said, “Oh, that’s good. We should maybe copy this, what he’s doing, or her is doing.”

[00:09:56] Rowan: When you say digital businesses, I think business more broadly. I think part of the philosophy of Naked Wines, we started as a small company, but one of the things we worked out very quickly was that if we priced our product like we were a small company, we would always be a small company. At the time, I happened to read a book written by Michael O’Leary*, who’s the guy who built Ryanair into what it is today, and he just said exactly the same thing. He said, “We decided to price the seats on Ryanair like the plane was full, and therefore, the plane became full. If we priced like the plane was empty, which it was, the plane would remain empty.”

I think those kind of– they’re not digital businesses necessarily, but looking at people outside of that I think has been a big influence for me. I think in terms of authors and books, probably the most influential is Predictable Irrationality* by– I think it’s Dan Ariely. It’s really a book about how people behave in a way that they can’t necessarily control in response to certain triggers. I think anyone who’s wanting to build a business and figure out a model, or anyone who’s wanting to recruit customers, should really read that book. It helps you understand why people respond to certain things and not to others, and most of all, I think it helps you understand the power of authenticity, which is in a marketing world an underappreciated quantity, I think.

Naked Wines’ definition of Authenticity

[00:11:41] Tilman Versch: I heard this word, authenticity, often in your talks. How would you define it, or describe it, because maybe it’s hard to define?

Well, certainly in the world of wine, an awful lot of the world of wine is bullshit.

[00:11:51] Rowan Gormley: Well, certainly in the world of wine, an awful lot of the world of wine is bullshit. It is people trying to take what is just in the end a fermented grape juice, and make it into some magical thing in order to be able to charge a premium for it, or increase demand, or whatever. For me, authenticity was really two things. One is just telling the truth, but the second thing was constructing the business in such a way that what was good for the customers was good for the staff, and was good for the suppliers, and good for the shareholders.

Authenticity normally falls apart when people go, “Well, we can either do what’s good for the shareholders, or we can do what’s good for the customers.” I really wanted to have a business where it was AND. That forced us, especially in 2008, into really focusing on a business model which was completely different to what anyone had done before, which involved us crowdfunding winemakers and solving their biggest problem at the time, which was they couldn’t get loans from banks. That was our solution to, how do we construct a business where we get good wine at a great price which we can pass on to the customer, but in a way that the winemaker is happy to do it, and it was by constructing this crowdfunding model.

To me, authenticity starts from having a business which actually permits you and encourages you to be authentic. As soon as you have a business which requires you to tell lies to somebody, it’s very hard to keep authenticity together.

To me, authenticity starts from having a business which actually permits you and encourages you to be authentic. As soon as you have a business which requires you to tell lies to somebody, it’s very hard to keep authenticity together.

The flaws of the wine market

[00:13:34] Tilman Versch: Sure, it does. You already built with your answer the bridge to the topic I want to cover next, it’s the wine market. Where do you see flaws of the wine market, and when you say, “They are really doing this till today in 2020, why?” [laughs]

The global flaw is that a lot of people in the wine business are still trying to make it very complicated.

[00:13:54] Rowan Gormley: I think most– First of all, there’s a global flaw in the wine market, and secondly, there’s a very US-based flaw. The global flaw is that a lot of people in the wine business are still trying to make it very complicated, and trying to make it into something that it’s not, and I think it’s– I can only speculate as the reasons, my personal feeling is that it’s a kind of refuge for people because it enables them to sound grand, when actually, they’re just selling liquid.

I think what people don’t realize is that it actually puts customers off, it actually drives people away from the market. That’s absolutely not the same thing as dumbing down. There is magic in wine, but the magic often comes from the fact that some human being has had to sacrifice the enormous amount to make this product. They’ve had to work their nuts off to get it exactly the way they want it. They probably had to refinance their house and borrow on their credit cards to get it exactly right, and all these kinds of things, and it’s an artisanal product that you can have delivered to your door.

There is magic there, but the magic doesn’t come from the words the wine industry uses. I think that’s a worldwide flaw, and it’s a great opportunity for Naked Wines because, by simply telling the truth about wine, we immediately make ourselves different to all the competition, and by talking to customers in the way customers actually talk and think, they can see we are much more like them whereas the rest of the industry look, frankly, up their own asses. I’m using ‘we’ here, but that’s ‘we’ in the past tense just for clarity. I think the US thing in particular [crosstalk]–

[00:15:46] Tilman Versch: You’re still an owner, so it’s okay to use ‘we’. That’s very welcome. That’s how shareholders should be.

[00:15:53] Rowan: [chuckles] I think the US thing, in particular, is that there’s a great perception in the US that you get what you pay for, and that a $100 wine is twice as good as a $50 wine, and four times as good as a $25 wine, and that’s really not true. When last I looked, if you bought a $100 of Napa Cabernet in a store in New York, there’s $16 of Napa Cabernet in there, and there’s $94 of stuff you can’t taste. You absolutely do not get what you paid for, especially in America where most of the money is going to middlemen, commission, wholesalers, distribution, inventory, all kinds of things that add nothing to the flavor of the wine.

You absolutely do not get what you paid for, especially in America where most of the money is going to middlemen, commission, wholesalers, distribution, inventory, all kinds of things that add nothing to the flavor of the wine.

We encourage our customers to experiment, and Naked Wines has a non-conditional money-back guarantee. A lot of people say, “Don’t customers abuse this?” The answer is, “No, they don’t.” It’s very important to have it there so that when we go, “Here is a bottle of a grape you’ve never heard of, made by a person you’ve never heard of, in a place you’ve never heard of, but it tastes just as good as a $100 bottle of Napa Cab, give it a go.” Customers are going, “I’ll try it.” If they agree, and ninety-nine-point-something percent of them do, they don’t claim– If they don’t agree, we haven’t lost a customer.

I think the American market is the biggest opportunity for Naked Wines in two ways. One is it’s the biggest and fastest-growing. The second is the relationship between price and quality is so poor, and your ability to be able to deliver much better wine for the money is better in America than it is anywhere else on the planet.

I think the American market is the biggest opportunity for Naked Wines in two ways. One is it’s the biggest and fastest-growing. The second is the relationship between price and quality is so poor, and your ability to be able to deliver much better wine for the money is better in America than it is anywhere else on the planet

Rowan Gormley
Rowan Gormley at work

“Your margin is my opportunity” in the wine market

[00:17:43] Tilman Versch: You would say Naked is a bit like Jeff Bezos in this point. Like, your margin is my opportunity to a certain degree, and maybe– If it’s so, where do you see also opportunities in this market to use the saying, “Your margin is my opportunity.”?

[00:18:02] Rowan Gormley: I’m sorry, I’m not really sure I understand that question. I’m sorry.

[00:18:06] Tilman Versch: Jeff Bezos is famous for the quote, “Your margin is my opportunity.” I think it’s also reflected in the way Naked wants to do business, because there are many opportunities in this market to improve, and–

[00:18:18] Rowan Gormley: Yes. Sorry, I beg your pardon. I think the easiest opportunity is the ability to reduce price. I think the flip side of that opportunity that, hopefully, Naked customers see but many people outside of the wine industry don’t is that a relatively small amount of money invested into the product can produce a significantly better quality product. I’m not sure if Jeff Bezos ever calls up his suppliers and says, “Look, if I was to pay you 25% more, what could you do for us in quality?” That is a conversation Naked has with its suppliers.

The result is that we have a number of wines which over the years have got better and better and better because, by investing in quality, the winemaker is able to– Relatively small amounts of money that add like $0.50 or $1 to the selling price, you can get an absolute step change in quality in the underlying product. I think the third area for Naked is that in a post-COVID world, there are– The number of winemakers whose traditional route to market had been completely disrupted is high.

When all the restaurants were shut, a lot of restaurants were not just not buying wine, they were sending wine back and saying, “A, we can’t pay you for the wine we’ve already sold, and B, we want a credit for this.” That’s left a lot of people in a cash squeeze, and so I think Naked’s ability to pick up A-list winemakers and help them out of a situation not of their making is better today than had COVID had not come along. That’s where I see the opportunities.

Getting A-List winemakers

[00:20:10] Tilman Versch: How did this process speed up of having the chance to get A-list winemakers? Like how was it before COVID, was it hard to get these A-list winemakers on your platform, or how do you do that?

[00:20:23] Rowan Gormley: 12 years ago when we launched the business, there was no chance. Winemakers are conservative people as a rule, and the business has run the same way for the last 2,000 years, which is, you don’t sell to the public, you sell to somebody who sells to somebody, who sells to somebody, who sells to the public. Everybody was used to this system, and they complained about it, but because it’s the devil they know, no one ever challenged it or changed it. When we first approached winemakers, highly successful A-list winemakers just frankly weren’t interested. We managed to get very good winemakers, but they tended to be people who’d run into a problem of one sort or another and needed a hand.

What’s changed over time is that a number of those A-list winemakers have said to themselves, “You know what? I hate spending my life on an airplane, going to some restaurant in New York and handselling two cases of my wine to a 21-year-old sommelier who thinks that they know something about wine because they did a three-week course. I would much rather be in my cellar or in my vineyard doing what I love, making the product taste amazing,” and so Naked’s pitch to them has been, “Well, do that. Do your wine through us.

What’s changed over time is that a number of those A-list winemakers have said to themselves, “You know what? I hate spending my life on an airplane, going to some restaurant in New York and handselling two cases of my wine to a 21-year-old sommelier who thinks that they know something about wine because they did a three-week course. I would much rather be in my cellar or in my vineyard doing what I love, making the product taste amazing,” and so Naked’s pitch to them has been, “Well, do that. Do your wine through us. You will make the same or better money, but you will get six months of your year back that you don’t have to spend on the road selling. All you have to do is talk to our customers who are the people funding your wine, and the people who are actually drinking your wine.”

It’s a significant lifestyle improvement for a lot of winemakers, and this has been successful for a number of years in increasing the caliber of the winemaker pool of Naked. What COVID has done is, all of a sudden, there are a number of winemakers who maybe they were thinking about it before, but now they’ve got an added economic incentive because they’ve got a cashflow squeeze because their traditional suppliers aren’t taking the product.

[00:22:33] Tilman Versch: That’s interesting. To help me with the time frame, when did it start you get these A-list winemakers on, and how much years is it from here, like six years ago or?

[00:22:48] Rowan Gormley: No, it isn’t a before and after. What happened is, in year one, we probably got one A-list winemaker, in year two we maybe got three, and then we got 10. It’s just all that’s happened is the velocity has increased, but there was never a before and an after. COVID may turn out to be a pre-COVID, post-COVID world.

What happened is, in year one, we probably got one A-list winemaker, in year two we maybe got three, and then we got 10

The US wine market

[00:23:13] Tilman Versch: I want to go deeper into this topic also. We’ll focus on the customers a bit later, but now, I want to use the chance to go back to the wine market level because you already mentioned the US, and the US is, as you said, a huge opportunity for Naked Wines. In the US wine market, you have a special structure. I think it’s called a three-tier structure. Can you maybe explain it a bit for the people who don’t know it?

[00:23:39] Rowan Gormley: Yes. The three-tier structure dates back to prohibition in 1929. One of our investors described it as the love child of the mafia and the puritans because, on the one hand, the mafia were the people who had distribution at the end of prohibition, and the puritans were the people who wanted to restrict the sale of alcohol. What the three-tier system says is that there are three tiers, the winemaker, a wholesaler, and a retailer, and you can only ever be one of those three things. The idea was to stop wineries from controlling retailers and locking people out.

What the three-tier system says is that there are three tiers, the winemaker, a wholesaler, and a retailer, and you can only ever be one of those three things. The idea was to stop wineries from controlling retailers and locking people out.

The system has been completely abused by wholesalers to create mini monopolies or duopolies, and right now, there are a very small number of very large wholesalers who control an enormous amount of the market, charge very healthy margins, do very little selling on their own right. The winemaker still has to go and do all the selling, but they take a big commission, they hold on to their cash for 180 days or even longer, and these companies are making billions in profit.

They’re the reason wine in America costs twice as much money as it should do. Americans pay, probably in comparison to Germany, two and a half or three times as much as they should, because German consumers get an amazingly good deal.

They’re the reason wine in America costs twice as much money as it should do. Americans pay, probably in comparison to Germany, two and a half or three times as much as they should, because German consumers get an amazingly good deal. You have this weird industry with its three tiers which hasn’t changed in nearly 100 years. It has been chipped away, but it hasn’t changed. Now, since maybe 15 years, the market is very slowly opening up and going direct. Now, it’s difficult for most companies to penetrate this market to operate as a retailer. It operates only as a winemaker. Whereas all the legislation is designed to protect winemakers and to stop retailers and wholesalers from abusing, because Naked is a winemaker, it’s in a very privileged position.

The fact that this market is completely out of balance and anti-capitalist is interesting. The exciting thing for Naked is the Naked model happens to fit exactly into the legislation, and allows Naked to sell a wide number of wines in– I think it was something like 92% in the US wine-drinking population, can be reached in 48 hours. Whereas the competition can either sell a very narrow range of wines, or a broad range of wines, but at a higher price. Naked is the only people who can have range, price, and easy access, all three of those.

Naked is the only people who can have range, price, and easy access, all three of those.

Hurdles in some US states

[00:26:37] Tilman Versch: In my research, I also read that you have some blockages in some states because you can only ship to a certain level there, is that true?

[00:26:46] Rowan Gormley: That is true. There are a number of states that you can’t ship to at all, like Arkansas, but Arkansas’ share of the total US wine market is so small, it doesn’t matter. Alaska and Hawaii, the logistics are complicated, but the great thing about America is that 92% of 300 million people is still a hell of a lot of people. It would be nice to have 100%, but better to have 92% of 300 million people than 100% of the UK’s 65.

Can regulation change?

[00:27:17] Tilman Versch: Are you fearing a problem with your position in the niche, that you have these abilities to process on a different level than the others do? That you might get some setbacks because there’s lobbying from the other wine sellers that say, “We have to change legislation.” If this happens, how [crosstalk]– Maybe go ahead with the first question. I’ll ask another one then.

[00:27:43] Rowan: Okay, and just to emphasize, and this is my view as a shareholder, and this is– I’m not speaking on behalf of the company. I think it is inevitable. America does business, does competition through lawyers, so it is inevitable that incumbents will look to their lawyers and regulators to see what they can do to limit Naked Wines. I think the key thing is though, that the way the legislation is structured, is it’s not negative legislation. In other words, it isn’t legislation which fails to ban something. It’s legislation that positively allows something, so it’s positive legislation rather than negative legislation.

America does business, does competition through lawyers, so it is inevitable that incumbents will look to their lawyers and regulators to see what they can do to limit Naked Wines.

What that means is that, actually, the legislators intended for wineries to be able to ship direct to consumers, and that’s what we are. We’re a winery shipping direct to consumers. I think for them to unpick that would mean such a fundamental reworking of the whole American alcohol system, more than has happened in the last 100 years. It seems to me to be a pretty remote possibility.

The sale of the retail business

[00:28:59] Tilman Versch: Okay. That’s a clear stance as a shareholder, that point. You had a retail business, physical stores, and an online business. You decided to sell this retail business. Why did you do so, and did this omnichannel approach fail, or what was the reason to sell the retail business?

[00:29:23] Rowan Gormley: First of all, just to be clear, we didn’t design the business to be omnichannel. It became an omnichannel business because a company called Majestic Wine bought Naked. Majestic was 85% physical retail, and only 15% online, it was 100% UK. Majestic bought Naked because, in one stroke, it meant it was rebalanced online/offline, and it was rebalanced international, versus UK only.

We worked hard to improve the performance of the offline stores, and actually, after say– Like-for-like sales had gone backwards for four or five years before, we got like-for-like sales up by 19% over the succeeding four years. In fact, we had some success, but what I could feel like was that the energy required to make that work, if we could put that same energy into Naked, and specifically Naked US, the payback was going to be so much bigger.

We considered a number of options around restructuring or reorganizing, but in the end, we felt like the simplest, clearest option would be the best because that could allow a small management team to focus on the specific– The biggest opportunity, which was Naked Wines US. It wasn’t that we looked at the Majestic business and said, “That’s a bad business.” It was more that we looked at the Naked US opportunity and said, “That is so big, we can’t afford not to go after that. Therefore, that’s where the energies need to go,” so we ended up giving up the business.

It was more that we looked at the Naked US opportunity and said, “That is so big, we can’t afford not to go after that. Therefore, that’s where the energies need to go,” so we ended up giving up the business.

Data-driven approach vs gut feeling

[00:31:07] Tilman Versch: In your other interviews, you said you have on the one side, a data-driven approach, on the other side, the gut feeling also plays a role. What was data-driven in this decision, and what was the gut feeling?

[00:31:19] Rowan Gormley: The data was very clear, consumers are moving to all drink from home. In a COVID world, I thank God we made that decision we made, because running 300 stores post-COVID world is a tough proposition. The data about the long-term pattern for online versus offline was clear. The gut-feel piece of it was that we could reorganize the company to make better use of that, but the energy required to do that was unlikely to give us the payback that we would get from the US.

Now, I’m a great fan for testing, for having gut-feel and then testing it. The sad thing about some of the biggest decisions you ever make is you can’t test them, because you can’t sell a company on a trial basis, and then take it back again if it doesn’t work. In the end, you had to go with your gut on this one, but I think the data was sufficiently clear that we knew that if we were to succeed with the Majestic business, we would have to beat the odds. To succeed with the Naked business, we could go with the flow.

The customer and the producer at Naked Wines

[00:32:42] Tilman Versch: That’s interesting. Let’s go deeper into your business and look at the customer side, and also the producer, the winemaker side. What is Naked for both of them, for the customer and the winemaker?

[00:32:59] Rowan Gormley: I hope that Naked is the company that does all the boring shit in the middle. Rather than being the retailer, the customer is buying from the winemaker, but there’s a piece of the transaction – well, there are two parts to that transaction. One is, the winemaker needs funding, that comes from the customer. The second is the customer needs wine that comes from the winemaker, but there’s some boring bits in the middle like shipping, handling, customer service, regulation, cash flow, all these kinds of things. Someone needs to look after all of those in a way that interferes with customers and winemakers as little as possible. That’s Naked’s role.

One is, the winemaker needs funding, that comes from the customer. The second is the customer needs wine that comes from the winemaker, but there’s some boring bits in the middle like shipping, handling, customer service, regulation, cash flow, all these kinds of things. Someone needs to look after all of those in a way that interferes with customers and winemakers as little as possible. That’s Naked’s role.

For many of our winemakers, the reason to come to Naked was a lifestyle improvement rather than a financial change. A number of them will have ended up making more money as a result of coming to Naked, but they have better lives because most winemakers are a bit like– There’s a saying, “Good winemakers are bad salesmen, and good salesmen are bad winemakers,” and most of the winemakers– All the winemakers we talk to are good winemakers, most of them actually really don’t like selling, not massively good at it. They also don’t particularly like administration, and handling cash, and dealing with all this sort of stuff. By doing all of that for them, the winemaker can focus on what they do best, which is making good wine.

Naked Wines – a wine bank? A community? A social network?

[00:34:32] Tilman Versch: Is Naked a kind of wine bank, and how much is it a community or a social network?

[00:34:41] Rowan Gormley: It’s all of those things. Wine Banker was one of the names we thought about, but it seemed a bit dull. There is a very active community, but we don’t want people to feel like you have to participate in the community to participate in Naked, although something like 70% of our customers do participate in the community. The number of customers who rate wines and give feedback on the wine is much, much higher than in a traditional digital business.

It is all of those things, but I think most of all, the expression we used in Naked was it’s a virtual circle where the better the job we do for the customer, the better the job for the winemaker, the better the job for the people inside the company as well. A little story if I may. We had an exercise a while ago where we said we needed to define our values and all the rest of it. I’m always slightly skeptical of these things because, generally, what happens, everyone gets in a room and comes up with motherhood and apple pie, and it gets laminated and stuck on a wall and gathers dust, but the behavior doesn’t change.

One of the values was we treat our winemakers with dignity and respect, and everyone was very proud of this. My challenge was two things. Firstly, why should we be proud of treating our winemakers with dignity and respect? Surely, that’s a given. We should be embarrassed if we ever fail to do that. Ashamed if we ever failed to do that. Secondly, has anybody asked the winemakers what they want? So we did, and of course, what the winemakers said is, “Yes, we want dignity and respect, absolutely, but mainly, we want sales. Mainly we want growth, so please, please, please, the best job you can do for us as winemakers is grow your company.” “All right. Okay. That’s a nice, simple agenda.”

“Yes, we want dignity and respect, absolutely, but mainly, we want sales. Mainly we want growth, so please, please, please, the best job you can do for us as winemakers is grow your company.”

Rowan Gormley on customer engagement

[00:36:45] Tilman Versch: Do they have any data on the engagement of your wine community?

[00:36:51] Rowan Gormley: Yes, 7 out of every 10 people have rated a wine, or followed a winemaker, or commented on a wine. My stats are out of date now, and I’m sure the company has issued updated ones, but as far as I know, there was something like 7 million customer ratings on the wines, which is a bigger body of wine knowledge on a pure wine basis than anyone else I know. You’ll have wines with 50-60,000 ratings, but you’d really have to struggle to find a product on Amazon with 50,000 ratings.

It is a highly-engaged community, but like I said, we never wanted it to be a kind of club that you had to be a member of the community to participate. There are a lot of customers who like the fact that there are other customers who’re talking to winemakers and giving their opinion and everything else, but are very happy to just buy the wine and drink it, and that’s all they want to do.

Making producer and customer happy

[00:37:55] Tilman Versch: I have somehow the feeling that your mission is also to make both sides happy. What are other ways you’re making your customers, your winemakers happy?

[00:38:08] Rowan Gormley: Well, one of the key things for our customers has been– An interesting thing about how people feel about wine is that the same people who maybe earn a $50,000 salary, and would spend $3,000 on a holiday, and $25,000 on a car, and $200,000 on a house, you put them into a restaurant and give them the wine list, and they worry about spending $30 on a bottle of wine. There is this weird thing about wine that people regard it as something you’re supposed to know about, and most people think, “I should know more about it than I do, and I’m slightly embarrassed that I don’t.”

A big part of what we’ve tried to do with wine and how we communicated is to reveal the truth about wine and the magic of wine without making it pompous and wanky. That I think helps customers to feel like, “Okay, I don’t have to go and order the most expensive bottle of wine in the restaurant to demonstrate that I’m a macho man.” [chuckles] It’s not all about price. Discovering something that’s off the beaten track that other people haven’t found is actually more satisfying than finding out which wine has Robert Parker rated 100 points and paying too much money for it. There’s a good liquid for the money fundamentals part of the proposition, but the other part of it is, no longer feeling silly about the wine you buy. Feeling good about the wine you buy.

For our winemakers, I think that it’s twofold. One is going from a situation of perpetual financial uncertainty to one where, actually, your life is very predictable, and you can plan because you have a much greater degree of financial certainty. Secondly, this rebalancing of your life away from, “I really want to make wine, but I have to spend most of my time and energy selling in order to do that,” to “Now, I can just make wine.” Getting that lifestyle balance right.

Then I think for our staff, for the third part of the equation, it’s about trying to create an environment where you can grow as a person. I’m very proud that you look today and you see people in senior positions around the company who came from the unemployment center 10 years ago. They may have been a trombone player, or an actor, or a dancer, or something like that. A talented person, but in a field where employment is hard to find, who came and started with us in a very junior role, but we’ve created an environment where talented people can shine and rise. All over the company, there are people who’ve proven that to be true.

A talented person, but in a field where employment is hard to find, who came and started with us in a very junior role, but we’ve created an environment where talented people can shine and rise. All over the company, there are people who’ve proven that to be true.

Education/enlightenment of the customer

[00:41:14] Tilman Versch: I think for my personal stance, what I observe, your employees also have the mission to educate people, or your product needs education. How much education does it need, and also, is there– Maybe, let’s go with this first question, how much education is needed?

[00:41:36] Rowan: We actually use the word enlightenment rather than education, because education almost implies you have to [crosstalk], you have to get a textbook, and it’s work. Whereas enlightenment is more like a, “Really? Is that– Ah, that’s fantastic. Good to know.” A simple little thing might be, lots of people know Burgundy, red Burgundy to be a great wine. It is. What a lot of people don’t know is that it’s just Pinot Noir. It’s Pinot Noir, which happens to be grown in a lovely place by people who are able to invest in it because it gets a premium price.

Well, Pinot Noir also grows in the Russian River in California, it grows in Otago in New Zealand, it grows in the Elgin District in South Africa, it grows in lots of different places. The missing ingredient is not the soil or the climate or something like that. The missing ingredient is money. What Naked does is it produces the money that enables a producer in these areas to make the wine as good as it can be. Therefore, you can produce Burgundy-like quality for a fraction of Burgundy-like price. That’s enlightenment.

Telling somebody, “This wine tastes of strawberries, rose petals, and bicycle saddles,” that’s obfuscation. That’s trying to make something that is– Trying to make it more complicated than it is. That, to me is the crucial difference. I should be making the product feel to people like– They should go, “I get that, that’s really simple,” as opposed to, “Oh, God, that’s really hard. I’m never going to learn this.”

They should go, “I get that, that’s really simple,” as opposed to, “Oh, God, that’s really hard. I’m never going to learn this.”

The similarity of Naked’s concept and the concept of Value Investing

[00:43:10] Tilman Versch: Enlightenment might also link a bit to our viewers because here, many value investors– Value investing is also a concept that you might get at a certain point, you might never get. This is also something that happens with Naked, that some of your customers don’t get the concept, and they are just not your customers then?

[00:43:34] Rowan Gormley: That’s right. Likewise, some investors do get the concept and some don’t. I’ve sat in front of highly intelligent capable investors with great investing track records who say, “But you’re not making any money.” The more I explain, at any point, we can choose to make money, but because the payback on investment to new customer acquisition is so strong, instead, we choose to do that. If Naked was a traditional retailer, that would all be going through the balance sheet, not through the P&L. The company would be wildly profitable and growing, and you would get a super premium rating. Because it goes through the P&L at Naked, it looks like we’re making some kind of mistake.

If Naked was a traditional retailer, that would all be going through the balance sheet, not through the P&L. The company would be wildly profitable and growing, and you would get a super premium rating.

There are no brick and mortar– There can’t be none, but there are very few brick and mortar retailers who earn $4 for every dollar they invest in opening their stores. Naked earns $4 for every dollar invested in new customer acquisition. It doesn’t matter if it goes through the P&L or the balance sheet, the money is the money. That’s it, some people get it, some people don’t.

The customer reviews

[00:44:50] Tilman Versch: One point of critique that was also mentioned were the bad customer reviews in reference to Naked Wines. What is the explanation for this, also, maybe linked to the things we already discussed because it might be also a phenomenon– Like it was coming up this year, especially in the US, that there were many bad customer reviews that rose critique.

If you look at Naked’s customer reviews, they are absolutely bipolar. They’re either very good or very bad.

[00:45:13] Rowan Gormley: If you look at Naked’s customer reviews, they are absolutely bipolar. They’re either very good or very bad. The very good come from people who have been customers, who are customers. The very bad came from people who found a Naked Wines voucher somewhere and came along and– If for instance, you open a parcel in America and you find a $100 wine voucher, it says very clearly, “This entitles you to buy a $160 case of wine for $60, saving $100,” but there are a number of people who go, “I would just like $100 of free wine please.” When you say, “No, read the voucher,” they then leave a bad review.

Maybe there’s a better way of recruiting customers which doesn’t generate these bad reviews, but what you don’t find is significant numbers of bad reviews about quality, price, any of those things. It all tends to be obsessively focused on this, “I got a voucher, I wanted my $100 of free wine, and I didn’t get it.”

The other thing is, “I didn’t realize I was signing up to a subscription,” even though it says in about five places in the customer journey, “You’re going to be putting in $60 a month, or whatever the number is.” You get a confirmation email, it’s explained over and over and over, but some people don’t see it. Then when they discover that money has come out of their account, even though the money is automatically refunded to them if they want it, they leave a bad review, so I think– Take a look at the reviews, look at [crosstalk], and you’ll see they’re very different in tone.

The “bad customer reviews”

[00:47:07] Tilman Versch: I will link a collection of reviews [1] [2] in the text and in the show notes. How is your policy of reacting to these kind of reviews?

[00:47:19] Rowan Gormley: Look, when an existing customer says, “I didn’t like this wine,” we will very often proactively refund them for the wine. Whether someone reviews us or not, if the wine isn’t delivered on time, we will refund them for the delivery. If the wine gets lost along the way, we’ll just reorder another case and ship it out. Our policy is always, solve the problem right upfront, whether the customer complains or not, don’t wait for a complaint.

As far as customers who complain because they haven’t read the voucher, I’m not sure there’s anything we can do about it. We put it in really big writing, we put it on both sides of the voucher, we put it on the web page. I’m not sure what more there is you can do.

Not selling is the best strategy

[00:48:13] Tilman Versch: You once said that not selling is the best strategy, can you maybe tell a bit more about this? What does it mean, and how do you live this concept?

[00:48:25] Rowan Gormley: Yes, we’re a company– I keep using the expression ‘we’. Naked is a company that believes in evidence-based decision-making, and tests everything it possibly can, and that’s a very good strategy. What a lot of direct marketing companies that test things do is they test things in the short term, not in the long term, so they will run two strategies, for example. One is to say, “This is a great wine,” and the other is to say, “This is a great wine with free steak knives.” Guess what, free steak knives beats great wine, so they go, “All right, well, let’s do two free steak knives, maybe three, let’s do six. Let’s do steak knives, and champagne glasses, and a saber.” Eventually, the company loses the plot. It becomes about something else other than the product we’re selling.

We found Naked in danger of disappearing down this circle because marketing teams everywhere were trying to do the best they possibly can because it means to increase sales in the short term, why not take it? In the end, we said, “Look we need to really prove conclusively– This feels wrong. The data says in the short term it’s right, we need to prove conclusively in the long term it’s wrong.”

What we did was we took the communication strategy, we split it to two streams, we called one love, and one sales. The sales stream was heavily about, “Buy now, buy now. Here’s a deal,” and the love was about, “This is great wine. Here’s the person who made it, listen to their story.” We expected that sales would win in the short term, and we hoped that love would win in the long term. Love won in the short term, and the medium term, and the long term.

What we did was we took the communication strategy, we split it to two streams, we called one love, and one sales. The sales stream was heavily about, “Buy now, buy now. Here’s a deal,” and the love was about, “This is great wine. Here’s the person who made it, listen to their story.” We expected that sales would win in the short term, and we hoped that love would win in the long term. Love won in the short term, and the medium term, and the long term, but it required courage to step away from things that on the day look like they’re working, and instead, focus on going, “No, here are some principles that have just proven to be true, and we’re going to stick to them.”

Another example would be, one of the best-performing emails of all time at Naked, the subject line was an apology from Naked Wines. It was in the very early days, we had a wine which was one of our original favorites, and customers loved it, and we had one batch that was bad. We couldn’t tell exactly which wines were bad and which ones weren’t because they were all mingled up together. All we knew was that a wine that had consistently fantastic ratings suddenly had very bad ratings.

In the end, we just wrote to every customer that had the wine and said, “We owe you an apology. There is a bad batch. We don’t know if you got good wine or bad wine, so don’t send it back to us. Just drink it. If it tastes bad, chuck it in the sink. If it tastes good, good luck. In the meantime, we’ve refunded your money, we have the new vintage in stock. It’s sensational, it’s all good. Please reorder, see what you think.” One of our best-performing emails of all time. It could have been a customer disaster, turned out to be a customer success.

The employees

[00:51:45] Tilman Versch: Sometimes this happens. Maybe with the end of our time, I want to focus on an important part of the business, the employees. You already mentioned that for many employees, Naked has a chance to make a good living and grow with the company. What other role has Naked for the employees?

I hope Naked has been a very good university for a number of employees. What I mean by that is, we evolved a number of ways of working, the goal of which was to decentralize power and to put more people into positions where they could possibly drive the company forward, and in doing that, fulfill their career and their prospects and everything else.

[00:52:09] Rowan Gormley: I hope Naked has been a very good university for a number of employees. What I mean by that is, we evolved a number of ways of working, the goal of which was to decentralize power and to put more people into positions where they could possibly drive the company forward, and in doing that, fulfill their career and their prospects and everything else. We did it by building a very robust problem-solving culture based on test and learn, where the principle was if someone has an idea, if all you have is an idea, we’re not very interested. If you have an idea you can prototype, then we’re interested. If you can have an idea and you can prototype and test it and show us some data that says it works, we’re really, really interested about it.

There are people all over the company who’ve come up with ideas, prototyped them, tested them, produced the data, and that’s become part of the mainstream of the business. That kind of very disciplined test and learn culture actually enables people to be more creative. A lot of companies think you can be either creative or analytical. Actually, if you are really robustly analytical, you can be very creative, because you can test crazy shit. You can test it on a small base, you’re not going to break the company if it goes wrong, but if it goes right, you really knocked the ball out of the park.

Actually, if you are really robustly analytical, you can be very creative, because you can test crazy shit. You can test it on a small base, you’re not going to break the company if it goes wrong, but if it goes right, you really knocked the ball out of the park.

When you have this robust testing culture, people can experiment more, and what I think happens, if I want to know to happen, is instead of– In companies where everything is decided by debates and committees, where no one really knows if it’s the right answer or not, in a company like Naked where if you think green and I think blue, we do both. If green wins, that’s what we’re going with. People get to find out when they’re right and when they’re wrong, and so they get to build their own instincts, and build confidence in what they know they’re good at, and learn to stay away from the things that they know they’re actually not very good at.

What I hope is that there are a number of people who have come into Naked that have learned the way of doing business which will be good for them wherever they work, but hopefully, at Naked.

The mission of doing good

[00:54:31] Tilman Versch: You also mentioned the mission of doing good or some phrase like that. Maybe can you explain it a bit as well and add more color to it?

[00:54:40] Rowan Gormley: Yes. First of all, Naked, like a number of other companies, has a social program, and I think they’re all fantastic, and I think that it is great that– For example, we feed 3,000 school children in a tough place in Cape Town in South Africa through one of our winemakers there, and that’s fantastic, but I think it’s fundamentally different to a big oil company saying, “We’re going to do a lot of harm to the planet, but we’re going to give a whole lot of money to an art gallery to buy respectability,” to instead have the concept of doing good at the heart of the business model.

To me, the concept of doing good at the heart of the business model is not just about squeezing what you can out of your suppliers, and your employees, and your customers. It is about constructing the model in such a way that the faster the company grows, the better it is for all those people, that I think enables you– To go back to your very original question, to maintain authenticity.

To me, the concept of doing good at the heart of the business model is not just about squeezing what you can out of your suppliers, and your employees, and your customers. It is about constructing the model in such a way that the faster the company grows, the better it is for all those people, that I think enables you– To go back to your very original question, to maintain authenticity.

The churn rates of producers

[00:55:45] Tilman Versch: That’s an interesting answer. The last question, I want to ask you about the churn rates you have for customers, producers, and also employees. How would you describe them?

[00:56:02] Rowan: I think that’s probably getting into the realms of company-level information, and the management of the company should speak to that. It is a number that’s been consistently reported in Naked’s data for years, and is stable and good as far as customers are concerned. As far as winemakers are concerned, the level of involuntary churn is so low, it’s hard to measure.

[00:56:31] Tilman Versch: For employees?

[00:56:35] Rowan Gormley: My data would be slightly out of date, but the fact that 10 out of the original 17 people who started the company are still there tells you something.

[00:56:48] Tilman Versch: It’s a culture that’s built for the long term [crosstalk]–

[00:56:52] Rowan: We wanted to build a company where people didn’t have to leave to grow.

We wanted to build a company where people didn’t have to leave to grow.

[00:56:56] Tilman Versch: That’s a very good and interesting impression for the end of our interview. Thank you very much for taking the time here. It was great to have you on. I still have a lot of questions. I think we should discuss how we answer them, and which setup, because I think you also showed that you have a clear role now as a retiree, and maybe we’ll find another setup to discuss the questions where you will be very happy about.

I also want to give an invite to the viewers, if they have more questions, send me an email, or write me on Twitter, post them below on the comments, so I can get them and collect them, and we’ll find a setup where we answer them. For now, I want to say a big thank you for taking the time, and enjoy your holidays in Italy.

[00:57:49] Rowan Gormley: Thank you so much. Cheers to you.

[00:57:50] Tilman Versch: Thank you.

[00:57:51] Rowan: Bye-bye.

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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