Nick Devlin, how does Naked Wines show strength in turbulent times?

It was a great pleasure to bring Nick Devlin of Naked Wines back for a follow-up on the company’s progress since last year.


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[00:00:36] Tilman Versch: Hello, audience. Hello, Nick. It’s great to have you back at Good Investing Talks. I can now say, it’s great to have you back because you’ve been here last year and I think I will also show the video of last year above, so people can have a look. It’s great to have you back. You’re in the morning in California.

[00:00:53] Nick Devlin: Yeah. I’m worried Tilman, because now I’m going to wonder how much I’ve aged since we did the video last year, but it’s good to be back.

[00:01:01] Tilman Versch: I think you have more kids as we see in the background. It’s some nice kids’ pictures. That’s great. Congratulations again.

[00:01:09] Nick Devlin: Yeah, three and a half and one and a half. So, they definitely going to keep me busy when Naked’s not keeping me fully occupied. 

Naked Wines’ growth framework

[00:01:16] Tilman Versch: But maybe let’s move to Naked now, before we get too deep into the family stories, which also should be interesting, but they are something for a glass of wine someday. Last year, we also talked about growth. Let’s start with this topic again this year, because many investors were interested in this topic. Let’s start with the basics. What is your capital allocation framework towards growth like, what kind of price are you willing to pay, and how you’re thinking about growth in terms of capital allocation to lay the foundation?

[00:01:53] Nick Devlin: I think one of the hallmarks of Naked and one of the things that we pride ourselves on has been taking a real first-principles approach to how we allocate capital. And that very much comes when we think about allocating capital to growth investment. A reminder for those who are new to Naked, when we talk about investing in growth, we’re talking about the combination of money that we deploy through media advertising in different channels and in some of our markets, provision of a subsidy, effectively a loss-making first order to encourage members to try our wines and in total, that’s what we think of as our growth marketing budget.

And the framework we use to make those decisions really comes back to thinking about the IRR or the real rate of return we’re generating out of investing in a set of cohorts. And that hasn’t changed over the years. We can talk, maybe, about some of the complexities of working through that in the course of the last 12-18 months, in which there’s been more volatility in lots of ways than there has been normal.

But from our point of view, we start by saying, every investment we make should be added to the intrinsic value of the company. And that means when we’re investing to acquire a customer, we’ve got to be really confident based on the information we have; our 13 years’ worth of data which contributes to a set of machine learning-driven models that value our customers, the stream of cash flows they’re going to generate over the course of five years is going to mean, we’re going to generate an attractive rate of return. And attractive for this purpose means, you’re making a rate of return substantially in excess of your cost of capital, even after you allocate everything including your overhead. So that’s the first principle bit. We can talk more about some of the new ones. But that hasn’t really changed. I don’t really see that changing because you can have a lot of change in sentiment, change in fashion, in terms of what people want to invest in. I think the best protection against that is to be really convinced that what you’re doing is building something of real intrinsic value. 

Every investment we make should be adding to the intrinsic value of the company.

What’s the staff-to-growth ratio, Nick Devlin?

[00:03:58] Tilman Versch: You mentioned the complexities and I think my questions are a bit of both, complexity bingo. So, if you’re British, you might like a form of bingo. So if I don’t hit all the words, you can add some after I finish the questions. But let’s move on, try and see if I have the complexity bingo right. If you talk about growth, one of the basics also for you, is labor. So, again a fundamental question, like, if you say you grow 100%, as you did close to it last year, what does it mean in the staff you need, the additional staff. Is there a ratio? 100% growth means 20% more staff or something like this.

[00:04:39] Nick Devlin: We think about the business in terms of two types of labor or two types of roles, right? You have some roles where volume is a factor, and you have some roles with volumes, not a factor if you want to really simplify. So, sending a set of marketing communications or a trading plan to 10,000 customers, 100,000 customers, or 500,000 customers. Actually, you’ve got the same amount of work, it’s not volume-driven. Whereas, if you think about some of our operational requirements, as you go from 1000 cases to 10,000 cases to half a million cases, you do need additional labor. Then some parts of our business, the volume drivers can be a little different.

So, if you think about our American business, where we have a large planning and wine production group; there, the unique driver is the number of SKUs in the range, the number of unique different bottlings we’re producing is driving the work. So that’s how we start to conform to our planning assumptions and understand how is the cost base going to scale as you grow. Overall, that means that we tend to have an opportunity when we grow faster to see efficiency and leverage and you saw that in a reduction in our SG&A base, as a percentage of sales in the year FY21 as we grew the business really quickly.

I think the second thing is there’s also a choice between

  1. overhead: you have to add because you require more people to service a larger business
  2. discretionary Investments: choices you’re making.

And one of the areas we have been investing more in, over the course of the last 18 months, is our product and technology teams. And the reason is we see the likelihood of generating value from that investment, a real return on that investment. All things being equal increases as you scale the business. Because the amount of benefit you need to get from improvement on a customer level in terms of performance, from say, developing a new feature, adding more functionality to your website, adding a new type of subscription, just improving the UX, whatever it might be. Actually, that becomes lower. You need a smaller improvement per member to generate an absolute return on investing through additional capability and additional people. So, it’s worth separating those two things out.

So I’d say all things being equal, you don’t need to scale that many parts of the business that aggressively, just because of the volume. But as the business has grown, we’ve seen the opportunity to double down and invest back in improving parts of the customer experience.

You need a smaller improvement per member to generate an absolute return on investing through additional capability and additional people.

Where is the biggest challenge to finding new people?

[00:07:30] Nick Devlin: I think we’re getting close to the first buzzword and we’re going to do inflation soon.

[00:07:33] Tilman Versch: It’s on the list. It’s bingo.

[00:07:36] Nick Devlin: I thought so. I think we’ve been in a privileged position. Finding labor has not been that difficult. Ultimately, I think a lot of people want to come and work for a mission-driven company in the wine industry that’s changing the way wine is made and the way it reaches people who are passionate about drinking it. So, ultimately, I think that gives us a strong source of competitive advantage. We’ve got an inspiring mission and we’ve got a great culture.

But it’s certainly true that there have been places where we’ve seen the market rate for labor change materially, and that does feed through, like any business, into our cost base and our economics. I think the areas probably that have been most apparent have been the parts of the business, where you’ve got a most commoditized labor pool. And so, if you think about primarily, our physical operations, warehousing, distribution, logistics. We’ve seen a pretty substantial labor rate inflation there. We’ve also been making sure that we’re fairly moving rewards for our teams on the front line who are talking to our customers every day. We call them our customer happiness teams because their job is to keep customers happy. That’s another area where we’ve made sure we’ve moved wages to reflect changes in the overall labor market.

A lot of people want to come and work for a mission-driven company in the wine industry that’s changing the way wine is made and the way it reaches people who are passionate about drinking it.

Community Exclusive: Wine availability and becoming a great partner

[00:08:53] Tilman Versch: Growth also needs more wine. So, how do you think about the wine availability also, we don’t want to get too deep into the winemaker side, but also like the option to become a better partner for winemakers in this journey, and maybe you also have a rough share, percentages you are the partner for the winemakers. Like, are you from 10 to 100 percent in some of the winemaker categories, the main partner, or how much this year share there?

Hey, Tilman here! I’m sure you’re curious about the answer to this question. But this answer is exclusive to the members of my community, Good Investing Plus.

Good Investing Plus is a place where we help each other day by day to get better as investors. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus. I’m waiting for your application.

Without further ado, let’s go back to the conversation.

Grading Naked Wines in terms of their performance in marketing

[00:10:07] Tilman Versch: One of the services or partner offers you make for winemakers is awesome marketing; to be a great marketing channel for them, to address wine lovers, you call them angels. But for this, you also have to be a great marketer to yourself as a platform, and maybe if you think about the whole space of food e-commerce and think of other players in this space, if you would give yourself, like Naked Wines, a grade compared to the others, what kind of grade would you give yourself in the marketing capabilities?

[00:10:44] Nick Devlin: I think, historically, marketing has always been a core competence of a business. And, marketing, in my word, is sometimes a fancy word for the human thing of storytelling and that was an insight very early on from our founder Rowan. That lots of people can produce great wine and Naked’s got a model. That means we can do that more efficiently and we can allow talented people to create their own brands that are personally invested in, which is differentiated. And we can bring that wine to market direct-to-consumer, so more efficiently again. But other people may be able to do that at points in time.

So, building that personal connection between wine drinkers and winemakers has always been at the heart of everything we do. And that comes down to telling stories, right? Because if you talk about flavor compounds and phenolics and tanning profiles, there’s a very limited number of people for whom that’s interesting. If you talk about people, what do they dream about? What are they passionate about? What are they excited by? Those stories about people tend to be universal. So, there’s always been a core competence in the heart of the business.

I think one of the things we have worked more on, more consciously on in the course of the last year or two, has been thinking about how we market ourselves to an audience of winemakers. And we ran a big effort when Covid first happened to reach out to winemakers outside of the Naked family and offer support. We put up five million dollars and worked with over 45 different winemakers around the world. That was a great way to get the message about Naked out.

We’ve also, in the course of the last year, spent a lot more time and energy entering the wines we produce into big international competitions. Things like the Decanter World Wine Awards, and IWSC showcase the quality of wine we’re making and I think we’ve realized that it’s important to show to the industry, the kind of quality of the product you can make with Naked as a partner. That’s been really important in driving a little bit of reappraisal; people saying, “Wow. I knew that Naked was a fast-growing company. It was doing something different online. I didn’t realize it was a platform where I could go make world-class wine and win gold medals top awards and things like that.”

And I looked at one of the winemakers we just brought on, who is gonna be working exclusively for Naked in the US. It’s a guy called Rudy von Strasser. An amazing character, the founding father of an AVA in Napa called Diamond Mountain. And he’s bringing his brand across, which has won all sorts of accolades over the course of the years, and is going to be exclusively making and distributing that at Naked. I think that’s the type of conversation and opportunity that we wouldn’t have had access to a couple of years ago and the result is, that we’ve changed some minds and done some good marketing of ourselves in the industry.

A building that personal connection between wine drinkers and winemakers has always been at the heart of everything we do.

Nick Devlin on areas to improve

[00:13:41] Tilman Versch: That’s a great achievement, congrats. Let’s also look again at the customer-facing side you’re also offering the winemakers access to. Where do you want to get better, in terms of your internet platform or a tech platform in this way in marketing? You think about performance marketing, different forms in the online world, and work a bit differently. What are your projects to improve on this side over time?

[00:14:09] Nick Devlin: I think one of the things we’re always looking at is where can we invest to get the maximum return? If you come back to that framework at the beginning, right? Naked’s a fantastic business. I love all the fun parts of the wine industry, that’s where the passion and the energy of our teams come from. But if you wanted to be unromantic about it, you could think about it purely as a financial machine, you’re putting down cash flow upfront to acquire something, the customer or a cohort of customers, in the expectation of a stream of cash flows coming from those cohorts.

And we spend a lot of time looking at, what’s the performance of the machine? What’s the efficiency? Or to put it the other way around, where are the inefficiencies? And that leads to some of the things that we’re really focused on at the moment. There are two areas that really jump out. This came from us taking a step back and looking at the overall shape of the business, having just doubled it. It was a good time to reappraise, where do we deploy resources and where we don’t. And two things stood out.

The first one was that we were spending a lot more money acquiring traffic. Growth marketing teams looking to develop partnerships or, work with digital platforms, affiliate networks, etc. then we were spending money on improving the process by which we converted that traffic. And we think our balance was not quite right. So, one of the areas we’re investing in at the moment is building the size of our conversion rate optimization team and giving us the capability to bring through more iteration, and more testing there. In particular, looking at further changing the experience for different types of traffic and different types of customers, leveraging our personalization capabilities more for new customers. Frankly, just makes the shopping experience easier and slicker. One of the things on the roadmap is integrating, for example, things like Apple Pay, more payment devices, and types of mobile devices. So that’s one area that jumps out.

The second area is then, thinking about the financial disclosures we make. We have a very satisfied customer base. We’ve built the world’s largest direct consumer wine business, just shy of 1 million members globally, and it’s a very high retention business right now. Typically, we see the retention of revenue from that base at around 83% year over year. However, there is an opportunity for us in the gap between the first order and then getting customers into that regular stream of purchasing. So that conversion from the first case to the second case. And again, when we stepped back, we said actually, we don’t have a meaningful dedicated resource to that challenge. It’s a part of lots of people’s jobs, but it’s not the only thing that many people wake up in the morning, obsessing about. And again, when you thought about Naked dispassionately, this machine of turning an upfront investment into a stream of cash flows, this is an area where a lot of stuff is falling off our production line and I think we can improve it.

So, to do those two things; one, create a clear group of people within the business with dedicated responsibility and accountability for that early part of the life cycle. I think that’s really important because if you think about the customer challenges, they’re meaningfully different in the first few months than they become later on in your life. Because you’ve arrived, you’ve tried some great wine. But all of a sudden now, you’ve got hundreds of products from winemakers you’ve never heard of, brands you don’t know. And that can be quite intimidating. You’ve gone from a first purchase, where we’ve made things very simple and curated a selection of wines for you to try, to a much broader shopping experience. And we think we can do more to quickly help you understand the benefits and features of Naked. But also, more through our products and UX to assist you to navigate through that second shop and working out what you should be buying and why. So, that’s a big area of focus for us, an area that we think we can improve materially.

We think we can do more to quickly help you understand the benefits and features of Naked through our products and UX to assist you to navigate through that second shop.

Areas to stabilize before investing in further growth

[00:18:18] Tilman Versch: As you were describing this, the picture of a house came into my head, like you already have now two floors or three floors. And the plan is to make it a high-rise, but you need some underground digging to stabilize everything to allow stronger growth. Are there any other topics you do underground digging? It might be interesting to understand to allow you to grow stronger and faster and more stable in the future. 

[00:18:46] Nick Devlin: You’re being very good and you’re holding out on your inflation, but I think the other area of focus for us and actually Tilman, an area that I’ve reflected I don’t think we’ve communicated as well as we could as a business. Make sure that we have our contribution economics set up exactly right in each of our three markets, the UK, the USA, and Australia, to allow us to grow the business at an appropriate rate with really good consistent rates of return. So, I think in the time I’ve been in at Naked, we’ve operated in, let’s be honest, a fairly benign environment up until the course of the last 12 months or so. That’s meant that we have been able to drive substantial contribution margin leverage if you look at a group level. And it was in our disclosure at the half-year through two things.

One, some like-for-like improvement within the market as we leverage more volume to drive down the cost of production for our winemaking partners and we’re able to take some of that benefit for ourselves and share some of it with customers, and winemakers. Two, we’ve seen at a group level was the US has grown to be the largest part of our business and that’s got a favorable mix benefit for the group’s overall contribution margin and I’m talking to our repeat contribution margin, the rate at which we translate sales to our members into that stream of cash flows that pays back on the investments we’ve made.

The third big project for us this year is to make sure that we are ensuring that those margins are fit for the future. I don’t know where we’re going to take this analogy. But we’re making sure we’ve got all the waterproofing, and kind of damp proofing right on the house so that it’s going to last a long time. And that’s something that I think is really important. I think it’s an area that we believe is very much within our control, but I don’t know if we’ve done as good a job, in articulating why we believe that, as we could. So maybe it’s interesting to talk a little bit more about that now. 

The kind of things we’re going to be looking at to offset the inflation we’re seeing, both in terms of the cost-effective of getting a case to a customer through our supply chain, and some of the inflation in raw materials, in particular, things like glass, and international freight transport are probably the two areas where there’s the biggest pressure in terms of the cost of production. We’re going to be looking at making sure, through our pricing approach and through the way we look at recouping some of the cost of shipping in some of our markets, that we are continuing to offer great value to customers. But we’re just making sure that the balance of how we share that surplus, that our model creates between customer and margin, is right and appropriate for the long term. I think that means we’ve got an opportunity to not just rebuild margin that we’ve seen erode over the course of the last 6-12 months, but actually we’ve got an opportunity to grow that over the course of the next two to three years.

It’s one of the things we’ll be laying out in more detail when we get through and do our next set of results, but it’s an area that I think is really important. And, is probably one that we just haven’t communicated as explicitly about, because the environments have been very different over the course of the last five years. And some people have taken that as saying, “Do I have to accept margin erosion in the business if I want growth?” I don’t think that’s true at all. You can look to our Australian division where, actually even in the course of the last year, we’ve materially improved margins, but that’s a part of the story that we need to do a better job of articulating.

We’re just making sure that the balance of how we share that surplus, that our model creates between customer and margin, is right and appropriate for the long term.

Inflation & price increases

[00:22:32] Tilman Versch: So, maybe a more basic question if you already switched to the topic of inflation. You have some industries, I talked to producers in steel, we also saw these high gas prices in the last weeks that the producers took more margin and used the opportunity if the prices are high and the raw material goes down. Is there also a chance for you, if there’s a general inflationary setup to give certain structural price increases further and to contribute margins through it because there’s more acceptance of price increases in an inflationary setup?

[00:23:06] Nick Devlin: I think there are a couple of things. Firstly, it is a benefit of Naked’s business model that we make an exclusive product. And so, in any environment when you’re talking about price, that’s useful. I learned in my early days as a consultant working with a ton of businesses that when you’re in a world where you’re selling the same product as a bunch of other people, then your pricing strategy becomes less within your own control. So, that’s a benefit that Naked has.

I think in terms of overall philosophy, I think about it just subtly differently, which is actually because we’ve got an efficient model that helps winemakers make high-quality wine at lower cost and strips out a bunch of steps along the way of getting that wine to the consumer that doesn’t add value around distribution and retail and reduces the number of margins from 3 to 1. That means we’ve got an opportunity in an inflationary environment to both, recoup costs and maybe even make some additional margin, whilst at the same time, if anything, increasing the amount of additional value or surplus we provide to consumers because our model is actually well set up to deal with that type of inflationary pressure.

And it’s why, whenever we’re approaching pricing decisions, we don’t just look at our costs, we don’t just look at what’s happening to input costs and the cost of getting a case to customers. But we also look at the data we’re getting back from our consumers in terms of repurchase rates and the benchmarking studies we do in all our markets, to look at the relative performance of our products against comparable products in the market, to make sure that whilst we’re getting the margin structure we want, we’re also guaranteeing our members the value, and the superior value to similar quality wines elsewhere they’d expect. So, I think a little bit differently, but I do think that there is opportunity in this type of phase of the market for Naked. And I think we can do that in a way that’s consistent with our values and carries on delivering great results for both customer and winemaker.

Taking market share

[00:25:10] Tilman Versch: And we can also try to describe inflation as a change and reshuffling of markets because there are different pricing dynamics and things come into play in a different way. Is this like, share to take market share in this market, if you do the studies that you see, that Naked takes market share because of the inflationary pressure?

[00:25:35] Nick Devlin: We’ve been taking market share pretty consistently in our markets for a number of years now, but I definitely agree with the point. You see a lot of times where slightly tougher consumer environments cause people to reappraise their purchasing decisions, right? I filled up my Mini the other day and it was a 70-dollar tank of gas. And I remember when I first came to the US, I think I could fill that up for 25-30 bucks. So, that’s a real impact that people are feeling and seeing day to day and, in my experience has always been that feeds through into people re-evaluating their purchase decisions.

Especially in wine, in general, as a category, it tends to be that people maintain the volume of consumption. And they look at the brands or the retailers they’re picking. So, to my mind, I think that is an exciting time for a business when you’ve got a model that we have, which is able to produce quality at a lower cost. That’s a great chance to get people to try something new and understand when they try that actually, they’re amazed at what they can get. So, we’ll definitely be carrying on looking for opportunities to invest, looking for opportunities to amplify that message. Because I definitely think it’s a time when people are likely to be receptive.

Models that are losing market share

[00:26:50] Tilman Versch: You don’t have to finger point at competitors, but in your studies, who is in relation losing market share in such an environment or which models get less attractive, compared to yours?

[00:27:03] Nick Devlin: I think that the long-term trend that we’re seeing very consistently, and the US has probably been slowest to move in this. But it is a movement away from traditional purchasing, either in independent liquor and chain liquor or physical grocery, moving into a number of different online models. The comparison of late 2021-22 on 2021 is a little difficult, right? Because you’ve got businesses that went up very steeply and some of them have struggled to combat a little bit. But I think if you zoom out, that’s the main trend.

In particular, there’s just a big value advantage in the direct consumer model versus that traditional three-tier system. And that, I think, is going to be the long-term trend and that’s an area that’s going to see the greatest kind of pressure or the greatest impetus for customers to reconsider their behavior. Because there’s a lot of people who are buying wine that way. It’s just that they’ve always bought wine that way. That’s how their parents bought wine. It’s not because they particularly love the experience, or they get great service or discover new products they enjoy, it’s just familiar. And reappraising or questioning some of those purchasing habits is just going to lead to the acceleration of a move online. I think it’ll be favorable for a number of different online models, obviously including our own.

Reappraising or questioning some of those purchasing habits is just going to lead to the acceleration of a move online.

Reacting to inflation & thoughts on sustainability

[00:28:36] Tilman Versch: Your model seems to be well-positioned for an inflationary setup. But are there any elements or certain parts of your business where you think you should reconfigure this to stand better in an inflationary setup? Last time, we talked about the glass bottles and their weight which is a heavy factor by shipping and also in production. Maybe this is an example.

[00:29:07] Nick Devlin: Actually, one area that we’ve been looking really actively at, which is both the way of mitigating inflation, but also a way of driving our group sustainability agenda, is the ways we can reduce the carbon footprint of our supply chain. And in particular, you highlighted glass, and our benchmarking shows that the life cycle emissions associated with glass production are one of the biggest sources of emissions in the wine business. Our UK MD James Crawford was interviewed recently and was talking about the steps that we’ve taken to lightweight a number of our molds in the UK market we’ve also taken some similar actions in the US and are able to make some real material progress. Also, it’s an opportunity of showing what you can do under the direct model to take customers with you on the journey.

For example, we have a sustainability group in the UK. Luke is our sustainability lead and he chats directly to customers and gets their feedback. And what we see time and time again, is that actually when you talk to growers and winemakers, they’re incredibly receptive to the sustainability agenda. The thing that is holding it back in the industry is the perceptions of traditional brand owners and big corporations. They’re the ones that are driving the choices for glass molds that are a workout in and of themselves, if you go pick up a bottle of Napa Cab on the shelf, you don’t need to go to the gym again that day. But when you have a model like ours, which lets consumers talk directly to winemakers, it’s a lot easier to progress a conversation and make rapid progress in areas like that. So that’s one good example, where ultimately, good sustainability often tends to be good business and we’ll be looking at more areas like that if there are chances to strip out the cost that ultimately doesn’t add anything to the end product, doesn’t add anything to the taste and experience for the customer, then I think that’s a great area to focus on. 

[00:31:05] Tilman Versch: There’s also a certain education happening through the Naked platform…

[00:31:11] Nick Devlin: Exactly. Because I think it’s a microcosm for what we’re looking to do every day and how we communicate to customers. We want to help customers understand and recognize a lot of the ceremony, the cost built into the wine industry is sometimes an elaborate game of smoke and mirrors to distract and encourage and support some inefficient business models and some high prices. And we want customers to recognize that if they go direct to high-quality talented producers making stuff they’re passionate about, you can enjoy great wine, and it can be affordable at the same time.

And the glass bottle is just an illustration of that, right? When you think about it, obviously, you don’t need a really heavy bottle to make a great bottle of wine, but a lot of times because consumers don’t feel that confident, we default to things that are simple rules of thumb to help us. That’s why people talk about “Never order the second cheapest wine on the wine list” or “Go for something with a label that looks like this” or a reassuringly heavy bottle or my favorite one, you ask people what type of wine do you like? “I normally drink 20-30 dollar bottles of wine.” If you think about it, that doesn’t mean anything. But our job as a business is to help our own consumers with some of the information, the confidence to go, and then start making some better buying decisions. When you get people questioning, “why does something cost that?” then they can do the last part of the work for them, they work out very quickly that actually, there is a better way of doing that. That’s the model that we’ve got.

A lot of the ceremony, the cost built into the wine industry is sometimes an elaborate game of smoke and mirrors to distract and to support inefficient business models and high prices.

Improving the customer experience

[00:32:52] Tilman Versch: Maybe let’s now jump a bit more to the customer side again. If you have a new customer who’s first entering the Naked Universe, you do have to do some education work, but you also have to offer a great experience. Compared to one or two years ago, how have you gotten better in offering a great experience and what have you improved? 

[00:33:21] Nick Devlin: I think there are a few different things that go into that experience. The first area, the area that we have consistently improved year over year in the time I’ve been in the business, is the breadth and quality of the range have never been stronger. Across those 225 winemakers, we’re working with, people making outstanding wines everywhere from the Western Cape in South Africa, to the Barossa Valley in Australia, back through the Russian River in California, and even some great sparkling wine from the hills of Kent in England. So, the quality of that range has never been better and that means customers are getting access to a great diversity of wine styles and amazing products first up. And we are starting now to work through some of the things we’ve been testing for a while to get a little bit more variety into those first cases as well, to let customers give us some information about what they enjoy and start to tailor that back to them. So, I think that’s an area that we are doing well. We can continue to be better and we can continue to make that first case more and more relevant. But I’m very excited and passionate about that.

I think the second part of the experience, you want to have a simple effortless shopping experience with nothing going wrong. And you want to meet expectations is really important in the first part of the experience. We’ve done a really good job consistently at shortening the amount of time it takes us to get products to consumers, in particular in the US, where our model operates four different fulfillment centers across the country and gives us a big speed to customer advantage in lots of areas versus some of our competitors.

I think it’s worth acknowledging that in the UK, probably at Christmas this year, we didn’t do as well as we would have liked in terms of getting the basics of getting a product to you on time in line with your expectations. We didn’t deliver that as well as we would have hoped, we could make excuses, the volume of orders we saw was in excess of what we anticipated, but ultimately, they’re just excuses, right? And we need to make sure we deliver on those basics of service and that’s a big focus for us at the moment, making sure that we have the redundancy and resiliency in our supply chain and fulfillment operations. Especially at a time when the labor market is tight, it’s harder to get, and make sure you’ve got continuity of labor and hourly paid occupations. To make sure that even when something goes wrong, it doesn’t affect the end customer experience.


[00:36:01] Tilman Versch: How is WineGenie doing in this experience? Are there any metrics you can share with us?

[00:36:09] Nick Devlin: There are a couple of things that we can share. The most exciting thing for us is that we now have WineGenie consumers who’ve been on the service for over a year. And for those of you who are new to Naked, WineGenie is our platform powered by our proprietary data recommendations, which suggest you wines that you’re going to love, you’re in control, you pick the cadence of shipment, the price point, the split between red, white, different styles of wine. Having taken customers now through the course of a year on that, what we see is that actually there’s very good feedback and rating, I think, we have something like 90% rating when we do the user research and how did you find the product to use. And up from when we first launched into the market, we were getting a 7/10 score. So, ease-of-use has been enhanced a lot, we’ve given a lot more opportunity to customize and skip orders and tailor things to your personal choices. We’ve seen that customers stay on the WineGenie and that contributes to incremental revenue. So, it’s working for customers and it’s working for Naked, the contribution economics of WineGenie makes sense.

We’ve also seen that it appears to be especially relevant or of interest to customers earlier on in their life cycle and seeing if we can really step change the rate of adoption is one of the hypotheses that the team, that’s going to be working on helping customers navigate from their first case to their second case, is going to look at. Because our adoption data to date suggests that it’s of most interest when you’re trying to get to know Naked, you want to discover new products and a little bit more uptake from younger consumers.

The “Netflix” metaphor

[00:37:56] Tilman Versch: Naked is often compared to the Netflix of wine. And there was also this quite interesting video on CNBC, where it was presented like this. How is your niche selection strategy going and what are you building there over time? 

[00:38:15] Nick Devlin: Yeah, this is one of the things that probably like developing great shows and content, it takes time. So, we have been working very hard for 18 months now to build out the diversity of wine styles on the platform. And I think I’ve told you this before Tilman, there’s kind of two different strands which have got a different level of emphasis or importance depending on which market we’re talking about between our two big markets. In the US, there’s been a real focus on building out our luxury range. So, we describe that as wines over a 25-dollar price point. A secondary focus is giving us a breadth of range and experience, if you like the classic old-world wine regions, and more wines from Spain, Italy, and France.

If I move to the UK, I’d flip that emphasis slightly, where there’s a big opportunity for us to add breadth to the range through different styles of wine and that older world profile, which is a little bit less about big bold, primary, ripe fruit. And you get a little bit more of the earthy characteristics, a little bit more tanning, a little bit more acidity in the wines. The secondary opportunity from a UK perspective is stretching the price architecture and having some of those trade-up options. The way we like to work is to find producers that we think we can work with over a long period of time and build a relationship between them and our customers. And that means we don’t approach this in a retail mentality. So, it’s not a case of going to a wine fair, picking some products off the shelf, and just filling the gaps. So, it has taken some time.

But to give you one illustration of that starting to have an impact, if I looked at the sales through our holiday quarter in the US, we had sales of wine by volume over $25 a bottle or up about 200%. As we now start to see the benefit of decisions we made and wines we produced out of the 2019 vintage coming through into our range and that’s translating through into great consumer uptake, we feel very good about that. It’s something that you’ll continue to see progressively roll out and see more of, in terms of the customer experience, over the course of the next year. It should be one of the initiatives we hope will drive a classic e-commerce world, revenue per member per month. We see it through our disclosures, we think that’s an initiative that’s going to help support our sales retention.

The way we like to work is to find producers that we think we can work with over a long period of time and build a relationship between them and our customers.

Selling premium vs. non-premium wine

[00:40:42] Tilman Versch: Thinking about working capital, if we are under this thought concept, if you have the higher quality wines, they might need more time in the barrels. So, do you have more capital bound if you’re selling more high-quality wines, or is the turnover as fast as the non-premium space?

[00:41:04] Nick Devlin: No, your dynamic is correct, right? So, even if you might have a really quick sell-through, even if your stock turn on finished case goods might be the same, you’ve got a longer production cycle, right? So, you are deploying some of your capital to produce that product further in advance of the sale than you are on a quick turnover. Your most extreme in the world would be to imagine early-season Rosé or something that might be being pressed in September, or October and you could be selling it in February. That’s why wineries love Rosé, it’s great for the cash flow versus barrel-aged Napa Cab that we might release three years after the vintage. They do clearly have different characteristics.

I think the way we have thought about that is making sure that in our pricing approach, as we’ve started to sell more of these wines, we’ve had to re-examine how we think about pricing products and make sure that we are accounting for the cost of capital when we think about the appropriate price to set. Ultimately, the time value of money is a real cost to the business, even if it doesn’t show up classically on the cost of goods. So, that’s been an important step for us as we started to develop that luxury wine strategy; we need to have a pricing strategy that’s consistent and recognizes that. So that the overall shape of our P&I and balance sheet continues to make sense and it is genuinely accretive to see customers trade up into those products.

Managing volume

[00:42:35] Tilman Versch: Yeah, there will be a shift in the way you manage inventory, but there was also a shift in the way you manage inventory to serve new customers and that you have more quality wines on hand to make a great experience. Do you think the second shift for the new customers will get back to the level it was in 2019 or do you think it will hold a more structural buffer to be able to have a great experience?

[00:43:16] Nick Devlin: I think it’s probably back to the first question you asked me. To be boring and give you the same answer again, Tilman, on how do we think about growth? Ultimately, I don’t think it’s very helpful or very actionable to think about. Hey, this is a year where we will recruit x hundred thousand new members or one million or whatever it might be. Because that gets you very much into a set of decision-making and cascades all the way down through your operation, where people are very focused on volume. And when you get very focused on volume, you find people are losing sight of, ultimately, the metrics that we know and understand compound to create real intrinsic value over time.

So, in terms of operational metrics, we live and breathe in the business. We try to have people very focused, all the way through, for example, our growth marketing teams or what’s the rate of return, we talk about our payback ratio between lifetime value and cost of acquisition. And then how much can you redeploy in different marketing initiatives subject to a minimum threshold on that ratio. So, to be boring, that’s how we operate the business. 

Ultimately, you work as hard as you can to try and maximize that. You deploy strategic initiatives like the ones I’ve talked about in terms of optimizing conversion rate and trying to improve that conversion from the first case to the second case. And when you have success there, you structurally improve your economics and it means you can go back and flow through the calculation again, and the cost of acquisition that’s consistent with a payback ratio you’re targeting goes up and that makes it easier for you to deploy more capital. But we try and avoid solving to, here’s a set number or here’s a set top-line growth rate, because in our experience, whenever we’ve seen parts of our business tend more towards that mindset, it looks good for a small period of time and then it doesn’t look good. 

Marketing strategies in different countries

[00:45:12] Tilman Versch: You already explained a bit of the difference you’re having or different strategies you have in different markets. Let me boil it down to a question coming back to marketing. Are you marketing differently in the US as in the UK or in Australia?

[00:45:28] Nick Devlin: We believe it’s really important to have a core body of our marketing capability located in the market. And yeah, absolutely, we’ll be marketing differently. So, what’s common is if you think about it, maybe take another analogy; the chassis is common. For all our markets, we’ve got a proposition which is about offering two different things to customers. Rational differentiation, because we have an efficient model that reduces winemakers’ production costs and connects them directly to consumers, means they can enjoy a higher quality of wine at a lower cost. And we have this emotional differentiation because you can have a personal connection to the winemaker. You can understand their motivation, and their story and you can hear it directly from them. And that’s going to be common across all our markets. It means that a lot of the principles of our marketing will be consistent.

But to give you a couple of ideas that where you have really important kind of local autonomy to make that relevant. In Australia, we wouldn’t talk about having the world’s best winemakers. We talk about having Australia and New Zealand’s best winemakers and our research shows us there’s an incredibly strong Buy Local movement, which means that we place a real emphasis on that. And the second thing that our research shows really consistently is this idea of giving a fair deal is really important in Australia and resonates really well. So, a lot of our marketing communication will emphasize the way in which our model gives a fair deal to the little guy, a fair deal for small growers, and small producers, and gives them and contrasts that to the type of deal they’re offered by the duopoly, Coles, and Woolies, who owned most of the liquor business out in Australia.

That would be different from the narrative that we would operate in the UK. It would be different, again, if I go to the US where actually, with the structure of the market in the three-tier system, the focus becomes more on helping customers understand, just actually how wine gets from the vineyard to their door and helping them understand that they’re the third person to buy that bottle of wine and there’s been a big slug taken out of it by the distributor and the retailer along the way. So, if they can go directly to the producer, they can access greater value. So, a common set of principles for the way that’s brought to life and then all the way down to the tone of voice and language, that’s something that we own and bespoke in the market.

The 3 tier system in the US

[00:47:58] Tilman Versch: We have 4-5 minutes left. So, maybe we can do three quick questions if you have a quick answer for them. I’ve heard there might be rumors about a political change in the tier distribution system in the US. Is there anything to worry about? 

[00:48:15] Nick Devlin: I’m not going to make any kind of promises or proclamations about what the legal or regulatory landscape in the US would look like. I can say that the core of the three-tier system is very well established and is very well supported and not least by 400 million dollars a year of campaign contributions made by distributors when you look to the last set of data. As far as I can tell, the areas that are getting the most focus are around challenges from retailers and retailers lobbying to gain access to cross-border direct shipping. And that’s status at the moment is ambiguous and some states would allow it. In California, where I live, for example, I could order wine from a wine shop in New York and have it shipped to me. But in lots of states, for example in New York, I couldn’t order wine from a wine shop in California and have it shipped to me.

So, retailers have different market access rights to producers like Naked. That’s the area that is getting the most scrutiny and the area that’s most likely to see more court cases decided. That’s something that’s not around challenging the three-tier system., it’s around ultimately adjudicating the rules on the edge of how it works. And our business competes with retailers shipping in California just fine. So, the big debates that I see are not something that causes me undue concern and that’s probably the big trend I’m seeing in terms of regulation, unless there’s anything else on your mind, Tilman. 

Apple’s identifier & its impact on Facebook

[00:50:00] Tilman Versch: For the south of you, there are two big tech companies, Apple and Facebook, and they have some struggles about identifiers and stuff like this and this also impacted your business. When do you think this impact will normalize and it’s easier for you to have the same efficiency in marketing on these platforms again?

[00:50:22] Nick Devlin: I think there are a couple of different things in terms of normalization. One is ultimate that advertisers like ourselves. And I talk to lots of peers, chief marketing officers, there’s a lot of consistency in terms of what I hear back in those conversations. One of the consequences and you see it in Facebook’s latest set of results, is that advertisers are pulling back some spending and that has a degree like in any two-sided marketplace of some self-correction. And you see a period where CPM rates were inflating a lot through most of 2021. That seems to be cooling off and coming a little bit back down. So, that’s one way in which the ecosystem finds a little degree of natural balance.

I think for us then, I’m not focused on speculating as to when things outside of our control are going to change. We’re focused on really looking at what can we do and own to improve the way we communicate our message and to improve the cadence of which we’re testing different types of creativity and content. And therefore, make sure that we are being efficient in the channel, recruiting a good volume of customers, but more importantly, getting the right customers in with the right messages that they really understand. Why Naked’s different and why Naked’s special. We’re generating a benefit beyond just acquiring some customers into a deal. But we’re helping to get out the message that I’m very passionate about, a better way for people to buy wine. So that’s what we’re focused on and, I think we’re seeing some traction, but there’s still more work to do.

Could Naked become listed in the US one day?

[00:51:53] Tilman Versch: Imagine a world where Naked Wines would be listed in the US as their primary listing. When do you think such a world could become real or could such a world become real?

[00:52:08] Nick Devlin: It’s obviously an opportunity that could become real at some point in the future. But I think our job ultimately as a management team is to, first and foremost, focus on the opportunity we’ve got to grow and scale the business. I wake up every day thinking, what are the things we can do to drive, intrinsic value growth for Naked? What are the places we can invest profitably at good rates of return that mean, under any set of circumstances, with any set of valuation metrics or investor sentiment, we’ve built something of real meaningful value?

Then there’s the second set of questions, like, what is the right place for that business to operate? How is it the right place for it to meet the right investors and be fairly valued? But I do think they’re secondary considerations beyond making the business in and of itself in high quality and high value. The reasons you can imagine that world, they’re all the obvious reasons. We have seen a migration of the investor base towards US-focused investors and typically, although no one seems that focused on growth online stocks with a degree of risk in them right now, typically that’s a type of story that has resonated more with more investors here in the US. And obviously, our market opportunity with a 25-billion-dollar town in the US is our largest one. So, if we operate successfully over time, increasingly, the revenue base of the business will move towards the US. So absolutely it’s something that you could imagine in the future, but I can’t give you any breaking news, Tilman, I’m afraid of your headline of the interview. Thank you.

[00:53:50] Tilman Versch: What a pity. But it was a pleasure to talk to you again. It was fun. Thanks for taking the time and thank you to the audience for staying this hour with us, thank you.

[00:54:00] Nick Devlin: No worries. My pleasure, thank you very much for having me.


[00:54:04] Tilman Versch:  Bye-bye. As in every video, also, here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says: Always do your own work. What we’re doing here are no recommendations and no advice. So, please, always do your own work. Thank you very much.

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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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