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UK Retail Briefing - April 2015
Analyst Comment
 
A NEW DEVELOPMENT FOR MAJESTIC
Majestic Wines has made an agreed offer for Naked Wines. But there is more to it than that because the Naked MD, Rowan Gormley is to become the new Majestic MD – filling a gap left by Steve Lewis' sudden departure in February. 

On paper this looks like a good move. Both sides have needs that the other can fulfil. But it is risky as well.

Majestic
Majestic has been looking for a new chief executive. In buying Naked, it is actually buying a man - someone it must have come to respect. After all Rowan Gormley has built up an £80m turnover business in just seven years - no mean feat. That business is still loss making, but only just, and that may reflect the costs of the rapid development. 

Buying a business to buy a man is a risky strategy and does not always work. The contrary example that sticks in our mind is Asda-MFI. A long time ago, but Asda wanted a new MD and picked the MD of MFI. Let’s just say that it wasn’t a great success.

But at least Rowan Gormley is a wine man and Naked itself should provide a new avenue for growth for Majestic. After all, it is already about a third of the size of Majestic. 

Naked
But if Majestic needs Rowan Gormley, then Naked needs Majestic and the funding that it could provide. There were reports recently that Naked was thinking about opening high street stores and that led us to wonder if the business was reaching the limits of growth for its crowd sourcing format. High street stores would give it greater visibility, allow it to develop own brands (after the manner of The Wine Society) but also, perhaps crucially, give it greater visibility. We have often commented that the major drawback of an online-only retailer is the need for a huge marketing effort to ensure that customers are constantly aware of the brand. But Naked is probably also running into the problem that to gear the business up and make the jump to being a much bigger operation, it would need major investment.

What about the consumer?
In research carried out for Mintel’s Specialist Food and Drink Retailers – UK – March 2015, we found:

●	Online drinks retailers are almost as popular as store-based specialists - used by 6% and 8% of internet users respectively
●	30% of the sample said that they use a specialist food or drink retailer for something that is not widely available in supermarkets.

These two statistics underpin Majestic's strategy. Its own online business accounts for under 12% of sales, so bringing Naked into the group increases its exposure to that important channel. Naked's emphasis on helping small producers also plays to the second statistic - wanting something that the supermarkets don't have.

Will it work?
As we said, the deal looks great on paper – potentially a win-win situation. It’s easy to come up with counter examples. The two businesses are very different, but at heart they both aim to provide quality wines at competitive prices to the mass market. They succeed because they have built up customer trust in the quality if the service they provide. One could argue that the small producers built up by Naked could go on to be major suppliers for Majestic, but it may well be that the two businesses will continue to do best if they operate at arms’ length.

We think that this deal does make sense and that the chances of success outweigh the risks involved. It will certainly be interesting to see the two develop.

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