What does scale mean for Naked Wines? A talk with CEO Nick Devlin

With Nick Devlin, the CEO of Naked Wines, I had the pleasure to discuss the developments and prospects of the wine e-commerce company. Here you can find the full video:

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Here you can find the transcript of the video:

[00:00:00] Tilman: Hello, Nick. Great to have you here. How are you doing?

[00:00:42] Nick Devlin: Hi, Tilman. It’s a pleasure to finally get this in the schedule. It’s good to be here.

[00:00:47] Tilman: Finally is a good word because we had some back and forth with this appointment. I think after the interview I did with Rowan in October, we moved it twice and finally doing the interview today. What has happened to your schedule? I want to give you some time to think about the last month because I think they were pretty packed for you.

I’ll give you a break to think about it and show the disclaimer for a second that we are sure on the legal side and you can get back with the answer after I show the disclaimer. Here we go. You will find the disclaimer also linked below.

It says always do your own work. What we are doing here as a qualified talk. We want to help you get information about the securities and companies discussed, but it’s no advice and no recommendation. Please do your own work. I also have to disclose here as I did in the first video with the former CEO, Rowan that I’m holding stocks of Naked Wines. I’m a shareholder and also biased through this. Please read my questions and this talk also biased through this lens and always be critical. Thank you very much.

What has kept Nick Devlin busy recently?

Now, back to our conversation. Nick, what has happened and why did you reschedule that often?

[00:02:11] Nick Devlin: Well, a lot’s happened for Naked Wines during the period since October but actually, the last couple of things have been a little closer to home. I’ve got two young kids for me. I’ve got a two-and-a-half-year-old daughter and a six-month-old son.

[00:02:28] Tilman: Congrats.

[00:02:28] Nick Devlin: We’ve been having some entertaining times trying to work out their childcare this year. You may actually hear them in the background because they’re home today. Unfortunately, a COVID case with one of their teachers of their daycare. It’s been a bit of family stuff has caused the diary to be juggled over the last couple of months.

[00:02:46] Tilman: First, congrats to the newborn son in the last year.

[00:02:53] Nick Devlin: It’s been quite the year. I think–

[00:02:56] Tilman: It surely is.

[00:02:56] Nick Devlin: Naked Wines has seemed like the easy child.

The impact of growth on Naked’s business

[00:03:01] Tilman: That’s a good point to hear. What has happened to Naked in the last month? What I could observe and what I tended to observe is that you did grow a lot. Maybe you can walk us a bit through the impact of growth for Naked and what this means. What is the positive impact of growth?

[00:03:24] Nick Devlin: Absolutely, Tilman. I think from the very first day we founded Naked as a business and Rowan and the team back in 2008, we’ve always known that to maximize the possible impact of the business, we needed to attain scale. We’ve always believed that there should be a business that changes the way the wine industry works.

We’re passionate about creating a fairer deal and a better platform for talented winemakers, small producers, and connecting them to as many customers as possible.

We’re passionate about creating a fairer deal and a better platform for talented winemakers, small producers, and connecting them to as many customers as possible. At a small scale, we can have an impact. We can change the lives of some of our winemakers. We need to attain a real big meaningful share of the market if we want to really fulfill that. I’d love to see us be a business that changes not just how we work with winemakers, but actually, change how the whole industry works.

I guess I’d start with saying for us, scale has always been important. Not to grow for the sake of it, but because we think it’s intrinsic to fulfilling our mission as a company.

I think the biggest change we’ve seen, and probably most apparent here in the US market where I’m based, has been just this eye-opening amongst consumers that there’s a whole world of options to buy wine online and that that’s a really normal thing. A really legitimate thing.

I think the last 12 months really, it’s been a step change or we use the term inflection point. I think the biggest change we’ve seen, and probably most apparent here in the US market where I’m based, has been just this eye-opening amongst consumers that there’s a whole world of options to buy wine online and that that’s a really normal thing. A really legitimate thing.

Wine E-Commerce - Nick Devlin

Customers are now coming and looking at the business with a lot more trust in the category and therefore, it’s a lot easier for us to tell our story and help people understand how and why we’re different as opposed to just having to reassure people about is it even legal and okay to buy wine over the internet?

Nick’s move to the USA

[00:05:09] Tilman: To understand this, you move to the US to support Naked’s growth there? Am I getting this right?

[00:05:16] Nick Devlin: Yes, that’s right. My story at Naked and I guess the Majestic Group before that, I joined a little over five years ago. I should remember. I joined three weeks before my wedding day. I think I probably joined on August the 17th 2015, if I can do the math quickly in my head. Initially, I had the privilege of working with Rowan, our founder in the UK. It was the beginning of 2017 I moved out to the US. We’d had some conversations. I’ve been doing quite a lot of work with him looking actually at the returns profile of a lot of our investments.

I remember actually very much coming back from lunch one day and I looked at my phone. I had three missed calls from the chief executive. I thought, “Okay. What’s going on?” Rowan said, “Look, Nick, you seem like a smart guy. You’ve done all this good work. How do you feel about maybe going out to the US and seeing if you can’t do a little bit better?” That was the conversation, the spark. I went home that night. I had a conversation with my wife and January 2017, we were in Napa.

[00:06:28] Tilman: Interesting. California it is.

[00:06:30] Nick Devlin: Yes, indeed. Actually, I turned up and got a lot of teasing from the team because I turned up. If you look it up, January 2017 was the point where California finally broke its five-year drought and it rained every one of the first 13 days that I turned up at the Naked Wines office in Maine, California. We weren’t in a very fancy office in those days. There was water coming through the meeting room ceiling. I thought, “Well, what have I got myself into?” There’ve been more sunny days, both in weather are metaphorically since.

Scale

[00:07:05] Tilman: You made it very British. [chuckles] You already mentioned the word scale and I find this an interesting point to focus on. What does scale and the growth you had that led to scale mean for your business? What is the positive impact of scale and how does it make your business better?

[00:07:29] Nick Devlin: I think this is one of the parts of the Naked Wines story that sometimes people have been a little slower to latch onto. At its heart, we’re a physical product business. We’re involved in the production and distribution and sale of wine. That’s intrinsically a very scalable activity. There are two big types of scale economies that we see. One is on that logistics distribution side.

At its heart, we’re a physical product business. We’re involved in the production and distribution and sale of wine. That’s intrinsically a very scalable activity.

In particular, in Australia, in the USA, we’re moving a big bulky product over long distances through multiple warehouse sites. The more volume you drive and the more scale, on a per-unit basis you’re driving down those costs. That’s my favorite type of efficiency because we’re driving out costs that benefit no one. We’re driving up lifetime value of our customers because our profit margins are becoming higher. For the customer, all they’re seeing is actually a better experience. We’re able to operate our sites more efficiently, build higher service levels, and support more differentiated delivery propositions. It’s a real win-win.

I think the other area where there’s absolutely scale benefits and it comes back to us always thinking about two participants in the business, the consumer and the winemaker. On the winemaker side, as I see the business growing, we’ll absolutely add more wines and more winemakers, but we intend to grow revenue faster than we grow the range. We’re driving volume per SKU. For winemakers, that means we’re helping improve their economics. We’re reducing their cost to produce per bottle.

We’re helping them be able to buy more fruit and get in a better fruit pricing and input cost pricing and we’re helping them fill up their wineries, which means better utilization of their fixed assets. All of that means they get more efficient businesses and we’re able to share in that. That one’s going to take longer to come through because inevitably, we’re selling wine that was made normally 12, 24 months previously. That’s another area in which scale tends very nicely to enhance economics over the long term in a way that’s favorable to us, but also favorable to our winemakers.

Scale and Social Media

[00:09:34] Tilman: What does scale or what is the advantage of scale in the digital economy? Because you want to get customers on Facebook, on different digital platforms.

[00:09:48] Nick Devlin: Look, I think one of the reasons that Facebook became so popular as a place for creating your new DTC company was that in some ways, it democratized customer acquisition. They have a bunch of good out-of-the-box tools. You needed an idea and a very simple integration and you could go and acquire customers. I do think there are still some benefits of scale in acquisition more broadly.

For us, really, it’s around the way we think about investment that supports our customer acquisition activity. The way I put is this, as a company, we’re agnostic as to where we invest money. If we can see an opportunity to deploy capital and get a good, predictable, and measurable return that exceeds what we see as a reasonable threshold, then we’ll take it. One of the biggest benefits of scale is actually that it makes it more rational for you to go and invest in capability and invest through your operating cost base.

If we can see an opportunity to deploy capital and get a good, predictable, and measurable return that exceeds what we see as a reasonable threshold, then we’ll take it.

To take an example, if I’m thinking about creating a new digital product team to maybe enhance the customer experience for new customers, maybe give more curation and personalization in that experience, if I’m investing at twice the scale and have twice as many visits to the site in a year, I could only need to deliver half as much upside per session to meet my return threshold on that investment. I think that’s one of the opportunities we do have and one of the things that the last 12 months have brought closer.

The ability to go and rationally make investments in capability that our competitors do not have the scale to do. I think that’s very exciting.

The competitive advantage of scale

[00:11:32] Tilman: Is there anything else that allows you this scale to invest in others can’t afford?

[00:11:40] Nick Devlin: I think, to my mind, the biggest source of differentiation between Naked, and, if you like, maybe some of the companies that have tried to replicate aspects of our model, and I think people mentioned a different kind of competitive sets. In particular, in the US, it’s probably businesses like Winc or FirstLeaf, Bright Sellers other companies who like us are regulated wineries selling direct to consumers.

It’s the extent to which we have always, as a founding belief, believed in being very closely integrated with our production and our supply chain and I think it’s an indirect benefit of scale, but it gives you the ability to commit and extend those time horizons, to commit to longer contracts with producers, and a confidence and an ability to sign moving from three-year grape contracts to five-year grape contracts. I think some of those things are really important because ultimately, that’s how you can drive high-quality wine.

I think it’s an indirect benefit of scale, but it gives you the ability to commit and extend those time horizons, to commit to longer contracts with producers, and a confidence and an ability to sign moving from three-year grape contracts to five-year grape contracts. I think some of those things are really important because ultimately, that’s how you can drive high-quality wine.

We talk a lot about wanting to give consumers better wine for less money. Really that’s the heart of everything we do. You can put a lot of different elements around it. I’m slightly an old-fashioned retail guy, Tilman. I believe that you can’t have a differentiated business that wins in the long term unless your core product that you sell is advantaged. The way I believe you do that best is by helping the people who really understand how to make high-quality wine, make their businesses better or more efficient.

They can’t do that without certainty, and they can’t do that without being able to plan over a multiple-year time horizon. Things like working with the same supplier, the same vineyards, the same grapes, year over year. Then you add the secret sauce from Naked which is where else do you get to sell your wine and get direct feedback from hundreds of thousands of customers to help you make the product better? That’s the magic formula, but it only works, and this is really important, it only works when you allow your suppliers to use consistent sourcing and you give them that multi-year commitment time horizon.

Scale and customers

[00:13:54] Tilman: You already mentioned that in a half-sentence, but maybe let’s go on the positive impact of scale for customers a bit more in detail. You mentioned that better selection and better price and maybe also better delivery. What to add?

[00:14:10] Nick Devlin: I think the things that our customer should look forward to in the years ahead, absolutely, I think the first one, again, it’s all about the product, to some extent. It’s going to enable us to support more winemakers, and that is going to mean a wider breadth of assortments. It’s also going to enable us to continue to raise the bar on the producers we work with. We want to be home to the very best winemakers on planet earth. That’s the goal. The reason scale helps there is two things. One, the proposition to a new winemaker just becomes that much stronger.

We want to be home to the very best winemakers on planet earth. That’s the goal.

Without us taking any greater risk, another way I think about risk is what percentage of your total buy or commitments on wine does any winemaker represent? With taking no more risk on a new winemaker, you can offer them much more volume initially. That means you make their economics that much more efficient and you can afford to compensate them that much more. Obviously, that makes the pitch more exciting for a winemaker. More breadth of assortments, even higher quality of new winemakers coming onto the platform.

I think also an opportunity to broaden the range, not just in terms of the number of products or the countries they’re from, but stylistically an opportunity for us to add more richness and excitement to our assortment. We’ve got a ton of amazing wines and I’m proud to tell of the wine we sell, but I think we can do more. I know this is a business that’s tragically overused in terms of analogy, but I think there is an example to be drawn here with the way Netflix thinks about content.

The benefit Netflix has as the largest creator of unique content in digital streaming is that it can go and invest in high-quality production in areas that are relatively niche because in absolute terms, it still has enough customers to consume that content. I think we’ve got an opportunity to build to the kind of scale where we can do the same thing in wine where whilst we’re always going to make more Cabernets than we are Amhora-Aged, Skin Contact Pinot Gris from Georgia say, we actually, will have a group of customers who we know are interested in a more obscure product.

That means we’re able to have the confidence to go and find and work with some winemakers a little more off the beaten track. I’m really excited about the potential for scale to open up stylistic diversity as well. I think they’re the wine benefits. We’ve always been a company that believes as we improve our economics and our winemakers’ economics, that gives us the ability to share that back and provide outstanding value to customers. I think that’s a given, we will always provide that to customers, and they will benefit from that as we scale.

We’ve always been a company that believes as we improve our economics and our winemakers’ economics, that gives us the ability to share that back and provide outstanding value to customers.

Then the third category really is around the improvement to the digital customer experience that I think we can drive. That comes back to, as we scale, it’s more rational for us to invest in our capability, our cost base that can drive an improvement of the customer proposition. It could be unlocking a two-hour time slot delivery window which will be great for customers here in the USA where you need a signature for your wine. It could be improving the way we surface our recommendation switch. We’ve got great recommendation capability based off I think 29 million customer ratings we’ve taken since we started. I think we could come up with better ways to surface those to customers and help explain them and credential them.

It could mean us finding better ways to move customers, who it’s right for, into new digital products like our Wine Genie product, which does the shopping for you because we know that for every one person who loves shopping for wine, there’s a bunch of people out there who find the shopping a bit of a pain but love drinking the wine.

Improvements on the website

[00:18:08] Tilman: Do we also see improvements on the website? I want to use the opportunity to show the website here as well, the US website. Is there anything in the pipeline?

[00:18:21] Nick Devlin: Absolutely. I think a lot of where that comes to life, those improvements– I’m talking about the digital customer experience we deliver, it comes in enabling us to give a more personal and a more curated feel to the website. Actually, I think what you’re seeing here is a lot of the work we’ve done in the course of the last year where we’ve created, this is the content the new customers see.

We’ve created a lot of things that help explain to customers why the Naked model is able to deliver better quality wine for less and help customers understand a little bit more the type of wines we see as benchmarks for some of our product.

We’ve created a lot of things that help explain to customers why the Naked model is able to deliver better quality wine for less and help customers understand a little bit more the type of wines we see as benchmarks for some of our products. I think we’ve got one of my favorite winemakers, actually, a great Argonian, Scott Kelley, we’re talking about some of his wines on here. You scroll down a little bit. We did a little bit of a comparison. We’ve got Matt Parish, and here we go, we’ve got Scott.

This is at the heart, I guess of another thing that’s dear to Naked. We believe passionately in all parts of our business in measurement. One of the questions that I get asked a lot is, “Given you’re the exclusive seller of all your wines, how do you work out what the fair price of those wines are?” You can see a little bit here how we do that. You’ve got Scott Kelley’s Willamette Pinot which we sell for $20. How do we work out a $30 market price? We look at some wines that have got externally, similar ratings on a platform like Vivino, and what are they selling for in the market.

This is some new content. You’ll see lots more new content. I think also for our existing angels, there’s an opportunity to drive a more diverse customer experience that’s more related to their own purchase behavior and preferences.

Pains of growth

[00:20:09] Tilman: Let’s go away from the website and also talk to you again as a father because, with kids, there’s also a certain pain in growth. If you get your teeth, they’re crying, and sometimes also in the later stages of growth, they have pain. What pain does Naked Wine feel as it is growing?

[00:20:32] Nick Devlin: I think like any business, we were not configured expecting the scale and the rate of growth that we saw this year. I always had a very strong conviction that over time, we would see the migration of spending online that we’ve seen this year, but the pace of that acceleration absolutely like everyone else, we were surprised by that. I think that’s meant that some of the biggest challenges have been operational in the past 12 months.

I always had a very strong conviction that over time, we would see the migration of spend online that we’ve seen this year, but the pace of that acceleration absolutely like everyone else, we were surprised by that.

On the one hand, you’ve had to create an entirely new operating model. We’ve got something like 200 customer service agents. We call them our customer happiness teams. They’ve got to be keeping more customers than ever happy, but everyone’s been working remotely from home for the last, I don’t know, now 10 months. That was a big challenge.

You’ve also got in terms of the core infrastructure of the business. You’d not be doing a very good or responsible job as a management team if you’re sitting around in all your markets with enough surplus capacity to deliver whatever the first half-year 80% growth and for that to happen so quickly. We’ve had to respond and work very closely with our partners to expand our operational capacity, in particular fulfillment, so the pick, pack, and dispatch to customers have been one of our pain points. Then we’ve had to work quickly to work in partnership with our winemakers to expand production.

The first challenge immediately was, how do we pack boxes, and how do we get back to customers, and how do we deal with more questions than we’ve ever been asked? I think wave two becomes how do we work with our winemakers and with new winemakers to make sure we’ve got enough wine to go in the boxes? That becomes the second challenge on the horizon.

Absolutely, people ask me a lot, is there a limit to the number of winemakers we can work with or the amount of good wine out there? There’s not at all. The reality is it’s a real organic product, so there is a lag. They’ve been probably the two biggest challenges we face with the growth this year.

Giving customers membership flexibility

[00:22:56] Tilman: Making customer happy is one topic you already mentioned as a challenge of growth. As this is a format we are producing for YouTube, I also invite you to react on to comments I did get on YouTube. You see them here from Carlo and from Angry Asian Dad. You can read through them because they were critical on Naked Wines. I want to invite you to reply to these comments as the CEO.

[00:23:27] Nick Devlin: Yes, I’m very happy too. The way the Naked Wines model works is that customers buy an introductory offer, a couple of different types of offers. Some of them are an enrolment into a membership, and ongoing, you pay $40 a month in the USA. It’s £20 in the UK. It’s A$40 for our customers down under. We make it very, very clear how that works. You’ll receive I think something like seven emails before first payment is taken. We try and reach out to customers who don’t engage with us.

All that money remains in your own account as a member and can be immediately refunded back to you at the point of contacting the business, whether you want to contact– so I don’t know if you can contact us on YouTube, but whether you want to contact us on our Facebook page, or whether you want to send us an email, or whether you want to call us up. We make that incredibly simple because there’s no benefit whatsoever to us of holding on to money from people who don’t want to be customers.

To get the technical accounting side, all it’s doing is sitting as a liability on our balance sheet. We’re not booking that as revenue. It’s of zero benefits to the company. I think if you compare Naked to other wine subscriptions or other subscription models out there, I’m incredibly proud of the flexibility we give to customers. There are very few models that say, “If you’ve made these subscriptions but you don’t use them, you can have all of the money back at any time.”

I think if you compare Naked to other wine subscriptions or other subscription models out there, I’m incredibly proud of the flexibility we give to customers. There are very few models that say, “If you’ve made these subscriptions but you don’t use them, you can have all of the money back at any time.”

Actually, in March this year, we wrote to all of our customers– sorry, March last year, it feels like the year hasn’t really changed, we wrote to all our customers-

[00:25:04] Tilman: I know this feeling.

[00:25:05] Nick Devlin: -and said, “Hey, this pandemic’s happening, we don’t know what’s going on in your life, but it might be a time of uncertainty. Can we do anything to help? Would you like all the money refunded from your account? Just let us know.” I feel very proud of the way we treat customers. In any walk of life, I think you’ll always have a few people who are disgruntled. I feel very comfortable about the way we operate that and the amount of transparency we provide.

[00:25:33] Tilman: Thank you for your reply. I will post it under the comments that people can react or see it as well.

[00:25:42] Nick Devlin: I think in your comment, please include our address for our customer happiness team, which is . If anyone feels like they’ve got any unresolved issues, we’re happy to hear them. We want to make sure that Angry Dad is Happy Dad. As a new dad, I feel his pain anyway, so let’s try and sort this problem out.

Naked’s presence on YouTube

[00:26:06] Tilman: That’s great. I want to also use this for a question about the general strategy because I also searched for Naked on YouTube and friends also pointed out that there might be a lack of your presence on YouTube as well as on Instagram. For me, it was interesting to see that these comments came under this video and that they found their way– I think my content is okay, but it’s not the best brightest content. I was a bit surprised that it came this way.

It leads me to the question, what is your strategy for YouTube and Instagram, for instance? Do you want to be more present on these platforms? Do you want to work with influencers to get your message across? Because there is a certain, you can name it enlightenment I think process, where you want to help customers to understand your model. Is this something you want to do in the future better?

[00:27:04] Nick Devlin: Look, I think in general, it’s worth saying that there’s an opportunity for us to increase the number of channels in which we’re driving– There’s a couple of things. Some people talk about brand awareness. I think we are a brand that’s still got an awareness opportunity, but really it’s the quality of awareness. Not just have you ever heard of Naked Wines, but can you tell me something about the business? What do we stand for? What’s our point of difference? I think you’ve talked about this with Rowan.

You talked a lot about our acquisition economics and the return on investment model, no secret. I think one of our greatest strengths as a company that we’ve got a very strong performance marketing heritage, direct marketing heritage. We’ve got real capabilities in things like lifetime value measurement and attribution, which means we’ve tended to be very focused on acquiring customers through really clearly measurable activity. I think there is an opportunity to broaden out from that.

We’ve got real capabilities in things like lifetime value measurement and attribution, which means we’ve tended to be very focused on acquiring customers through really clearly measurable activity. I think there is an opportunity to broaden out from that.

There comes a point in all brands’ growth journeys that become real scale and well-known that they have a broader marketing mix. I think the opportunity is definitely there, whether it’s YouTube, or whether we do OTT video streaming, or whether it’s somewhere else, or whether you see us on TV, much more agnostic to that. Definitely, one of the things we’re looking to do is explore those different ways of getting our brand messages out there.

It’s one of the reasons that as a company, one of the things I set up and we did from last year, and I certainly intend to continue is having what we called a marketing R&D fund (R&D for research and development). The idea being that we commit a portion of our spend each year to exploring new ways to reach and communicate with customers.

“Angry customers”

[00:28:54] Tilman: Is there also project plan to lower the rate of potentially angry customers? Because I tracked a bit of your reviews on different sites like Trustpilot and it’s going down in the last month. There were at a certain time some customers that didn’t get your model, were frustrated, and pointed that out on the platform. Do you have a data-driven approach maybe to lower this rate?

[00:29:22] Nick Devlin: Yes. Look, I think the first thing to say is that there’s an extent to which the number of people who can leave some of those reviews is a little bit of a function of absolute scale. As I say, we try very hard, but one of the big drivers of that is you get a percentage of people who place an order with you and choose to use a made-up email address, and then it becomes very hard to get back in touch with those people. It tends to be the biggest driver when you look into some of those reviews. Absolute scale drives those.

Maybe we’re guilty of not being cynical enough sometimes on things like Trustpilot. You can pay Trustpilot a bunch of money and you then send reviews from your happy customers. Look, maybe that’s something we should just do. Overall, whether we track it internally or whether we do market research with third-parties, we consistently see a net promoter score for Naked in the 60s, which I’m incredibly proud of.

Overall, whether we track it internally or whether we do market research with third-parties, we consistently see a net promoter score for Naked in the 60s, which I’m incredibly proud of.

I think it’s the fairest reflection of the quality of experience we give and the quality of service we provide. At the end of the day, I’m always going to spend more time worrying about making sure that the members we’ve got, we’re treating them absolutely as well as we can and we’re giving them a great experience. I don’t want anyone to feel like they’ve had a bad experience with Naked. We’re always looking at ways to– Can we make that disclosure even more transparent?

What can we see in terms of behavior that maybe suggests someone hasn’t read or picked up on stuff, and how can we anticipate an issue before it happens? That’s in our DNA, so we’ll always keep trying. I very much focus on making sure that the experience is delivering on the core tenets of the proposition for our members.

Who is the target customer?

[00:31:13] Tilman: I want to go a bit more into details about the target group you are having. We had a very interesting debate on Twitter with some of the investors who’s also long on Naked. It’s Bill Brewster, and he mentioned the quality of wine and compared you to wineaccess.com. “It’s incredible, unlike anything I’ve had from Naked yet, but it cost four times the average bottle on Naked and took five weeks to get there, compared to one to two days you have at Naked.”

What is also coming from this observation? What is the target group you’re targeting? Are you targeting more the urban distinct wine lovers and who are willing to pay a higher price, or is it more Naked is going for the mom-and-pops who want to have an easier wine experience who don’t want to be treated from above? How are you building this?

[00:32:16] Nick Devlin: Look, wine quality is a very interesting debate to get into. We can probably have some fun here. Maybe when the pandemic’s over, Bill and I can share a couple of bottles of wine and we can chat.

[00:32:31] Tilman: I think he’s happy about that option.

[00:32:34] Nick Devlin: Let’s start with the market. In particular, if you think about the addressable market for Naked in the USA, we see the business having approximately a $20 billion addressable market. The way we think about that, there’s a $40 billion dollar market that’s all wine sold off-trade in the USA. Some of that we don’t think is addressable. The bits we don’t think are addressable are six states where currently we are not allowed to ship to, pretty obvious.

The wine then is sold for under $10 a bottle at retail because we don’t want to be in the cheap commodity wine business. We are not the lowest cost producer at scale. It’s not a game we’re going to win, we don’t want to compete with Gallo. Then there’s wine that’s consumed by infrequent drinkers. Simply put, if you’re not buying wine multiple times a month, we don’t think you’re likely to be a good long-term subscription wine customer.

That’s quite a lot of people but actually a relatively small percentage of the total bottles consumed in the market. That’s three things we take out. The fourth one we take out is more subjective. We’ve got to it through research. There are some consumers who meet our three other tests. They buy wine regularly, they spend over $10 a bottle, we can ship to them. When you ask them if they fundamentally see wine as a commodity, they’re just inherently disinterested in it. “Yes, I drink it. It comes in a bottle.”

We think that kind of people, the proposition at Naked and learning more and hearing the stories and the passion behind people who made it, that’s probably never going to be for them. If you take those four adjustments, you go from a $40 billion market to $20 billion. I promise I’m getting to your question. From that $20 billion markets, you’ve got about 16 or so, 16 to 17 is, at retail price, $30 and under a bottle, and 3-4 billion is, at retail price, $30+ wine.

Unashamedly, we think the most important market for us to serve is that market under $30 a bottle.

Unashamedly, we think the most important market for us to serve in that market under $30 a bottle. That doesn’t mean we’re disinterested in the market at $40, $50, $60 a bottle. We can talk more about that. I actually think Naked’s model delivers exceptional value at those higher prices. Definitely, in terms of the primary focus of the business, in where we spend most of our investment dollars optimizing the experience, it’s around providing unbeatable value and a great, simple, easy-to-navigate experience for consumers who, on average, are spending $15, $20, $25 in their grocery store or liquor store and can buy wines of the same quality for $10, $15 or $20 at Naked.

Where Naked’s US customers come from

[00:35:28] Tilman: Is there, geographically speaking, in your customer group, a certain focus that you say it’s more the center of the US? It’s more the West Coast, the East Coast? How does this go about? What are the age demographics of your main customer accords?

[00:35:46] Nick Devlin: We’re a very national brand. Actually, we do well in red states, we do well in blue states. We’ve got lots of customers on the Coast. I think New York City is our biggest DMA, but we do very well in rural counties in the middle of the country. Maybe Naked Wines is one of the few things Americans can agree on.

In terms of focus on age and demographic, it tends to be an affluent customer base, in line with overall wine consumption. But certainly, if you’re thinking about the current consumer environment has positioned the business very well. In terms of life stage, our best customers we find either at the family at home or post family at home. I think there’s a little bit of the just growing up experience in wine, where you get to a certain stage and you think, “Oh, you know what? I enjoy having a glass of wine before my dinner or with my food. I’d love to learn a little bit more about it.”

A lot of people feel this sense of insecurity. I have it all the time. I meet other executives who got these amazing high-powered jobs and you think maybe the most confident ever. Then you hand them a wine list and suddenly they feel really nervous. A lot of people have this experience at a certain stage in life and they think, “You know what? I’d really like to feel much more confident.”

At Naked, we take pride in taking the quality of our product incredibly seriously. We’re very passionate about it. We’re passionate, but we don’t try and take it too seriously, I think maybe it’s the right way to put it. We believe wine should be enjoyed, we believe it should be fun. We really believe that the easiest way for most people to get into what I think is an amazing product and an amazing world is through the stories of the people who made it.

We believe wine should be enjoyed, we believe it should be fun. We really believe that the easiest way for most people to get into what I think is an amazing product and an amazing world is through the stories of the people who made it.

It’s a lot easier. More people can engage and get benefit from the story of Bill and Claudia Small, who’ve been able to set up their own grape-growing business. You’ve got your Claudia working in the vineyard out in Marlborough and you’ve got Bill making the wines. Their story is a lot easier to engage with than a bunch of technical descriptors about whether or not the wine tastes of gooseberry or lemongrass or exactly what the relative acidity level is.

That’s how we think about the business and how we think about communicating to people. I think it resonates with a lot of people who think, frankly, at times, the wine industry can be a little up its own posterior. Some people call me a wine snob. Who wants to read email after email about what clonal variety of pinot noir something is? I’d much rather know how’s it going to feel, what’s it going to be good to drink with and tell me something about why this person made it.

The impact of climate change

[00:38:32] Tilman: After talking about the customers, I also want to switch to the producers’ side and look at the long-term trajectories your producers are in. One topic there is climate change. I want to show some pictures I took in the summer. Some people know that I like walking in the vineyards because in my backyard, there they are. This is the loveliest view I have here in Stuttgart. Here’s the headquarters of Daimler. It’s quite interesting to see this.

This is all wine region. This summer, it was dry again. We saw this kind of soil, drought in the soil. Climate change is a challenge for the wine soils here. You have to plant new soils as some of the vineyard owners are doing here. This is a challenge for productivity.

Also, if you look at this dry soil, go back in here, if there are heavy downpours, which might get bigger with climate change, they might cause soil erosion, which also might have a negative effect on the wine. There are also heavy storms, which also might damage grapes. How is climate change for your producers a topic? What is Naked Wines doing about this topic and wants to help producers with this issue?

[00:39:59] Nick Devlin: I think I feel this one very personally. In the four years since I’ve moved to Napa, California, we’ve had extreme fire seasons, each of those four years. It’s impacted people personally in the business. We’ve had people who’ve lost relatives in fires, we’ve had communities that people have grown up in very heavily impacted.

I think everyone in the business has probably been evacuated from their house at some point. You see the same for our Australian colleagues, it was a record fire season back in, ’19 into spring, summer ’20. It’s definitely something that feels personal. It’s definitely a real issue and I think if you work in an industry that’s got its foundation in agriculture, it’s got to be something you take seriously, you care about.

As a business, there are a bunch of different things we’ve done, and I pretty break them down into different areas. We spend a lot of time thinking about how we can help with recovery and support. Probably one of the things I’m proudest of, I think Rowan talked about the $800,000 we raised in response to the 2017 fires.

Actually, one of the things that’s been delayed by COVID, but I’m due to go out to the ANOVA Foundation. It’s a school in Santa Rosa, which was the community most devastated by those fires, and $500,000 of that went to an organization that runs a school for autistic children. They’re actually about to be able to break ground on their new sites, and I want to go and see the construction.

That’s one of the things we did, it’s been an ongoing commitment in the business. I think we raised around $150,000 to support some of our winemakers who’ve been directly impacted by the Australian fires last summer and actually got some good bonus points for my daughter. We handed over a check for about $128,000 to the Kenwood Volunteer Firefighters Association just earlier on this year. In return, I did get a photo of myself with a big fire engine, which got me a lot of bonus points.

We do a lot of stuff on the recovery side. I think we also think about the ways in which our business can help and the way in which we can minimize the environmental impact of our business and help our producers with theirs.

One of the things that we look at the way in which we transport wine around the world and actually we do a lot of wine that we ship in container, in what’s called a flexitank. You can massively reduce the emissions footprint of the wine by doing that and bottling it close to source. It also retains freshness and flavor. People have done here in the master wine world have really geeked out on comparing New Zealand Sauvignon Blanc that’s bottled in the UK versus bottled in New Zealand.

You get a fresher, more vibrant zippier wine as well. That’s one of the big things we do. Now, we’re also working to lay out at the moment a baseline for the end-to-end environmental impacts of every bottle we sell. I’d love to see us over the coming year sustainably drive that down as we grow and look at the ways in which we can continue to offer support to our winemakers to make investments in their businesses.

Whether that’s helping them with defensibility or response to climate change, for example, you can educate different ways in which you can trellis your vineyards, use the canopy to manage more sun exposure, think about resistance to drought, things like that. Or whether it’s helping them with initiatives that are looking at maybe building more sustainability into their wineries.

I was at one of our biggest wine partners, the Lange family in Lodi in California a couple of months ago and they’ve been able to move to over something 50% of their power generated now by solar power. There are lots of opportunities and I think probably as an industry, we have not been as progressive as we could be. There are notable exceptions, Familia Torres have been massive pioneers in the wine industry in driving the conversation on sustainability but I think as an industry, we can and should do more.

Is Naked’s way of doing wine more efficient?

[00:44:24] Tilman: You’ve also seen the capital markets day of HelloFresh and I think their part on the sustainable reporting was quite interesting. They showed how they’re reducing waste into production and how they are creating efficiencies in production. Is Naked’s model something that could do the same like for the easier plan ability? You have less waste, less resource consumption because you know what your customers want, at a certain point, data-driven? Is there a trend for Naked as well?

[00:45:02] Nick Devlin: I think that’s an interesting question. The one benefit we don’t have is I don’t think we can argue that customers traditionally waste 25% of their wine, certainly not Brits anyway. [chuckles] I think we haven’t got exactly the same opportunity but you’re right, that we have some assets. I think we have a capability, which is an ability to engage customers in the conversation and a culture that always believes in engaging customers in making decisions and being part of a solution.

One of the things that we pioneered, and I think it was a controversial topic in our marketing team, but in our big Christmas case, in the UK, we put in for the first time, a boxed wine. It was three bottles of one of our favorite Portuguese reserved blends Montaria Reserva. It’s a beautiful wine from Alentejo made by a guy called Luis Vieira.

We talked to customers and we said, “Well, actually, do you know what? For the same cost, we could give you this box, which is three bottles of wine as opposed to two. We can actually upgrade the wine from his Entry Level Montaria to his Reserva.” The feedback we got on that was amazing and we were a little unsure because this is a case that people are enjoying at a celebratory period of time and how will people feel about that?

I think we’ve seen off the back of that though a lot of customers saying, “Yes, we’re up for working collaboratively with you. How can we change our consumption patterns or behavior so that we can reduce the overall impact?” The reason I picked that as an example is that your choice of packaging format is a big driver of your end-to-end emissions. I think that could be an area where we could have some innovation.

We’ve talked quite a lot about our ‘never miss out’ feature. We’ve got I think now 250,000 people signed up to an auto recurring subscription of at least one product with Naked, one of their favorite wines. You could easily imagine a world in the future where maybe an option becomes on that, “Well, how would you like to receive that?” If you chose maybe instead of taking six bottles, to take maybe two boxes of a wine, the technology has really improved a lot, preservation and quality is good. It’s not a format for long-term aging but most people are not aging their wines for a long time. Actually, a whole bunch of wines that are best for their fruit is vibrant and fresh, and they’ve just been released.

That could be a great option and maybe down the line, there’s even an opportunity where we say, “Well, if you do that, maybe there’s some cost reduction for us and we could put that towards some of the work we’re doing in general as a business to try and drive sustainability.” That’s the kind of idea that I’m excited by because I think it’s aligned to the way we’ve always thought about the Naked ecosystem. How can we work closely in partnership with winemakers and customers to change a bunch of things that people have just assumed is the way wine has to be done? I think there are real opportunities there.

How can we work closely in partnership with winemakers and customers to change a bunch of things that people have just assumed is the way wine has to be done? I think there are real opportunities there.

Shipping and bottles

[00:47:56] Tilman: One topic you already mentioned, this is no wine. Sadly, I ran out of wine, we’re in a pandemic and so [laughs] I don’t have any wine anymore but this is-

[00:48:04] Nick Devlin: I wonder whether you were toasting our share price performance from 2020 there, Tilman?

[00:48:12] Tilman: Maybe, but I want to make a point about the heavy bottle you’re having here. You already mentioned this in another talk I was hearing from you. These bottles are quite heavy to ship and there’s some correlation between a heavy bottle and a good wine. Is that something you could unlock?

[00:48:33] Nick Devlin: Yes, well, when I was in college, I was actually a member of a debating society so I’d get this all the time. You’re right, there’s correlation but there’s no causation. Lots of great wines have got heavy bottles, but obviously, a heavy bottle, to say the obvious, doesn’t make the wine any better, doesn’t make it keep any better, doesn’t make it taste any better.

I think this is a reason why communication and customer involvement is really key to driving sustainability because, we found this and I don’t know if Rowan talked about this, but when we first moved Naked to the USA, initially we just said, “Okay, we should obviously only spend money on things that absolutely are the liquids the customers are tasting. Therefore, let’s have the cheapest bottles we can find that are lightweight. Let’s enclose the bottle with a screw cap. It’s a great preservative and it’s cost-efficient.”

The consequence was we were able to sell at amazing prices and lots of people were, “Well, this can’t be any good.” Almost, we’re not even willing to taste the product. The other side of this story when we had a tasting room in Napa, one of the things we used to do was hand people a glass of wine when they came in. You’d give it to someone and they’d be testing it and you’d ask them what they thought. They’d say, “Oh, it’s great. I really like it. It’s spicy. Quite complex. Yes, I really like it.” We say, “Would you be interested in buying?”

They’d say, “Absolutely.” Then we told him, it was actually one of our Alentejo Portuguese blends, and at the time I think we were selling it for $7 a bottle, or something. We say, “Okay, great. Well, it’s only $7 a bottle.” Then they’d say something like, “Oh, well, actually, did it have a bit of a short finish?” “Actually, I don’t know if it was that complex.” People’s entire perception was changed by you telling them that it was amazing value for money. Maybe that’s just an insight into the male psyche, I don’t know.

The reason I tell these stories, absolutely, there is a challenge around breaking down some hardwired perceptions amongst wine consumers, and in particular, I think probably they’re most acute among American wine consumers, which are that you get what you pay for and that there are certain things which you automatically expect or associate with quality. I think if you want to challenge the thing on the format and the bottles, I think what we’ve learned is that you can’t just put your wine in lighter bottles.

You need to take customers on a journey, you need to involve them, you need to explain why you’re doing it, and you need to help them understand that doesn’t mean that this is now a wine of high quality. I think what’s helpful for us right now is that we’re in a much better place in our journey to do that. When you’re working with a winemaker like Jesse Katz or Daniel Baron, you’ve got a very clear and easy to understand thing to communicate to customers.

These are amazing winemakers who’ve made iconic wines, and they’re putting forward a wine that they’re incredibly excited and proud about. If we maybe choose to package that in a different way, then that’s easier to understand. That’s certainly one of the benefits of growing output. Back to my conversation with Bill, we got a bunch of wine in the US that is from some of the most prestigious vineyards in Napa and will stack up to anything. Ultimately, I believe we could sell some of it for $80, $90 to $100 a bottle. Maybe in the short term, that would be the easy thing to do.

I think the bigger opportunity for Naked is being the company that does help dispel some of these myths for American wine consumers. If you can get that ‘aha’ moment, “You mean there’s a bunch of stuff that I’m paying for that I can’t taste?

I think the bigger opportunity for Naked is being the company that does help dispel some of these myths for American wine consumers. If you can get that ‘aha’ moment, “You mean there’s a bunch of stuff that I’m paying for that I can’t taste? Look up a company like, what’s a good example? Not many private small-traded wine businesses but Willamette Valley Vineyards is one you can go and look up. By the way, not an investor in them, they make nice Pinot Noir. I don’t want to say anything disparaging about them.

Look at their accounts. Their cost of goods relative to their SGNA line tells you everything you need to know about the economics of most medium-sized wineries in the US. They’re spending more money on things that aren’t the product. We want to be the business that changes those perceptions, and I think that’s the real, exciting opportunity as opposed to just going along with them.

Hello Fresh and Naked Wines

[00:52:55] Tilman: Last two minutes of our conversation, I want to get a box because there are other Europeans trying to conquer America with products people like. I wanted to ask you about HelloFresh a bit because you’re both thinking out of the box and both coming from Europe, trying to conquer the American customer market. Is there anything you can think of already in talks where you are co-operating with HelloFresh or is it just inspiration the model that HelloFresh gives you?

[00:53:27] Nick Devlin: HelloFresh is a close marketing partner of us in all three of our geographies. In absolute terms, the partnership is largest in the US because that’s now their biggest customer footprint but we work with them in all three markets. We find there’s a good affinity and overlap between the customer bases. If you offer an introductory offer or discount either to a Naked customer for a HelloFresh or to a Hello Fresh customer for Naked, we see a really good response. Yes, we work closely with them on customer acquisition today.

[00:53:59] Tilman: Is there in future something planned like a HelloNaked where you also get wine and good food together?

[00:54:06] Nick Devlin: Not going to get drawn on what the partnership might look like in the future, but there’s definitely a good synergy or overlap between the kind of target customer audiences. As a business, we’re always interested in working collaboratively and creatively with businesses that we think are well-run, have good quality product, and have got similar customer bases.

[00:54:30] Tilman: Thank you very much for your interview. We’re just on time with your schedule, it’s always busy. Thank you very much for taking the time and being here for the interview and being so open to answering every question in an interesting way. Thank you.

[00:54:44] Nick: It’s a pleasure, Tilman. It’s been great talking to you and I’m sure we’ll get to do it again at some point.

[00:54:49] Tilman: That would be great, thank you. Bye-bye to our audience. 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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