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Analysis: Majestic's acquisition of Naked Wines

Majestic Wines' acquisition of Naked Wines, and the appointment of Rowan Gormley as its new chief executive will see the launch of a new international multi-channel wine retailing group.  

The deal, which Majestic chairman Phil Wrigley described as "transformational" will enable the newly enlarged Majestic to leverage the strengths of both companies - Naked's strong e-commerce and international reach and Majestic's UK network of more than 200 stores - to boost growth.

Fiona Cincotta, a senior market analyst at www.finspreads.com, said: "At face value this transaction appears to be a strategic win win situation for both parties. Naked wine, an on-line retailer will bring its on-line and e-commerce strengths and experience to the table whilst Majestic wine, which has more than 200 stores will bring the store network to the combined group. The result, if managed correctly could be an extremely exciting wine retailer, providing its customers with a unique experience that wouldn't be found in the supermarkets."

Despite the potential positive synergies between the two companies Cincotta said the market's reaction was mixed. "Majestic wines shares dropped this morning on news that the firm is buying Naked Wines in a £70 million deal," she said.

Leadership

A statement confirmed that both companies will continue to operate as independent brands with their own dedicated management team, and that the senior management team at Naked will stay in place, with the addition of an overarching operating board made up of key directors from both companies.

An injection of Naked Wine's entrepreneurial streak will also go a long way to help rejuvenate Majestic which is coming out of what it said was a "particularly challenging" 10-week Christmas period with like-for-like sales up just 1.1% and although since then sales have improved since the trading up - store sales were up 4.1% and like-for-likes up 1.5%, and pre-tax profit for the year are now expected to be approximately £21m.

Jonathan Buxton, partner at Cavendish Corporate Finance, a mid-market mergers and acquisition firm which advised on the sale of Naked Wines, noted the enlarged group would benefit from new CEO Rowan Gormley's "outstanding experience and industry expertise".

"It will help the business capitalise on supportive trends in the wine sector and the fast-growing e-commerce industry, both of which offer excellent growth opportunities," he said. "The combination of Naked Wines' robust growth track record and Majestic's market leading positioning make this transaction an excellent strategic fit for both companies."

Online

E-commerce is the fastest expanding channel for retail markets, and one of the key strengths Naked brings to the table with its strong online offering and e-commerce capabilities. While Naked has built a strong online following and has more than 300,000 'Angel' investors, Majestic has struggled to grow its online presence. In a statement Chairman Phil Wrigley noted the acquisition would "significantly accelerate" the planned development of Majestic's online capabilities whilst providing Naked Wines with a nationwide store network to allow a Click and Collect delivery service for its customers.

Naked will be able to capitalise on Majestic's current logistics and with access to over 200 bricks and mortar Majestic stores across the UK, this will lower costs on shipping and delivery. To date, Naked Wines has had some challenges finding the right delivery partners but the merger will allow it to provide more delivery options to its customers.

This model may prove a model for other strategic tie-ins, Buxton said."With consumer trends in e-commerce is continuing to evolve, most recently with the increase in mobile shopping and 'click and collect' services, we expect to see increased M&A activity as companies competing in this arena look for strategic acquisitions to expand and enhance their operations and market positioning."

International reach

For Majestic the deal is an incredible opportunity to expand into international markets and Wrigley said it could increase the company's potential customer reach eightfold, and it could tap into the strong growth in the international direct to consumer market. Naked Wines currently has offices in both Australia and the US, providing Majestic the potential to open stores within those markets. The US wine market in particular is an attractive market due its sheer size as well as the willingness of younger consumer to explore wines - and pay more for them, Buxton notes.

Supplier relations

The move might also go some way to restore Majestic's strained relationship with its suppliers. This was dented last year after the retailer asked suppliers to contribute a 4p per bottle retrospective payment to help fund its new warehouse in Hemel Hempstead. At the time, Gormley offered an open invitation to small Majestic suppliers that did not want to fund Majestic's capital expenditure budget, telling Harpers: "We will happily help fund their capital expenditure budget instead".

Naked Wines' business model, he stressed, was transparent about the cost of supply and suppliers and they would not be asked for extra payments for listing fees, promotions, adverts in magazines or other hidden costs.

Perhaps it was Gormley's forthright opinion that helped him clinch the deal - his comments this morning show he wants the new Majestic to stand out from the rest of the market.

"The combination of Naked Wines and Majestic provides the very exciting opportunity to build a world class wine retailers, serving customers who are looking for inspiration that the supermarkets cannot provide. This is great news for the customers, staff and suppliers of both businesses and will ultimately create significant shareholder value."

Rowan Gormley

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