Majestic Wines’s £70m takeover of Naked is more than just an acquisition - it almost feels like a reverse takeover, with Naked CEO Rowan Gormley leading the combined group.
In Naked, Majestic is buying a fast-growth company with revenues up 40% (to £74m) year on year (even if it isn’t expected to turn a profit until 2016). And crucially, the deal is designed to give Majestic a cultural shot in the arm and shift it from its increasingly dated physical retail offering.
Critics of Majestic believe it has become a generic wine warehouse and strayed from its entrepreneurial roots. Majestic has been opening more stores, but all food and drink retailers are finding the old model of growth through continued store estate expansion is fundamentally broken.
“Majestic hasn’t evolved for the modern world,” says Investec analyst Kate Calvert. “There was already a strategic review underway in terms of how to run the business more aggressively and re-establish its point of differentiation. This deal allows them to get there quicker.”
Since Majestic slashed profit margins to support flagging sales growth over Christmas (sales grew 1.1% in the 10 weeks to 5 January compared with 2.8% growth for Christmas 2013), its shares have slumped by over 20%. Sales and earnings have both remained broadly flat since 2012 and pre-tax profits fell 10% to £8.5m in the six months to September.
This malaise led to the departure of Steve Lewis, but does bolting on Naked necessarily revolutionise Majestic’s retail proposition?
To be fair to Majestic, 11.4% of group sales are online. But they’re only growing at 5.8%. And the attraction for Majestic chairman Phil Wrigley is not only Naked’s crowdsourced online army of 300,000 ‘angels’, but more importantly an online and social media savviness that Majestic has struggled to build organically.
Shifting bottles online is all very well - but as CFO Nigel Alldritt admits Majestic is “light years behind” Naked in terms of its customer relationship management expertise, with the deal enabling it to “leapfrog many years of learning” and rapidly upscale Majestic’s nascent mobile offering and social media abilities.
This cuts to the heart of the deal’s rationale for Majestic - reconfiguring what Majestic offers consumers so it stops being dragged into a fight it cannot win with supermarkets and discounters. “This gives us the opportunity to create a retailer that can really thrive in the mid-market of wine drinkers looking for inspiration,” says Gormley.
“The UK supermarkets are locked in a race to the bottom. We need to appeal to customers looking for something more interesting and different.”
Naked’s model of funding wine producers directly could provide some of this currently missing added value as shoppers are able to pick up bottles in store they cannot find anywhere else. Majestic has also identified this exclusivity as potentially giving a big boost to its B2B business as restaurants don’t want customers to be able to pick up bottles from their wine list at the nearest supermarket.
With former Virgin Money boss Gormley as CEO, one analyst adds: “It looks like Majestic has got a disrupter back in charge”. He also suggests Majestic is likely to move towards a more bespoke store model where managers have more autonomy to tailor their stock to local demographics.
However, the two businesses will continue to be run separately and infusing Naked’s DNA into Majestic while keeping Naked as one of the industry’s key disrupters looks tricky.
Still, after initial scepticism saw Majestic’s shares drop 12% on the deal’s announcement they rebounded 17% by the time The Grocer went to press to hit 376.9p .
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