Wine warehouse chain Majestic recently ditched their 6 bottle minimum purchase policy, which was itself dropped from 12 about five years ago. You may think “so what? That’s the most uninteresting thing I’ve heard all week”. You’re probably right, but it’s important nonetheless.
Cue the roundabout introduction…
When Majestic bought Naked Wines, the innovative online wine business, for a cool £70m this past April, it raised a few industry eyebrows. And almost certainly widespread pangs of jealously too. After all, that’s a big number. Like, really big. Plus there’s the little matter of: how do you value a company that, word has it, continues to find profitability as elusive as red trousers in Shoreditch? Hmmmm…
You could almost visualise the Power Point presentation extolling the bounteous synergies of a combined entity. Majestic’s website is rubbish (“hello, kettle? This is pot. You’re black”); Naked’s has street cred. Two distinct customer segments with virtually no overlap… yeah, we can convert a sizeable minority from each onto the other as well. Cannibalisation? Noooooooo sir. Did I mention shared services rationalisation?… You get the picture.
Call me a cynic, but I don’t see how those two together will work. But maybe that wasn’t the point. The acquisition announcement also mentioned that Majestic was appointing Naked’s founder and CEO to be Majestic’s new CEO, having dumped the previous guy not long before. So that’s £70m for a new CEO? Surely there are cheaper ways to get good talent, right? All depends on what you consider “good value”.
You see, Majestic was a wildly successful business — at least in the context of the wine trade — having grown to a few hundred sites in two or three decades. They became publicly listed. The City loved Majestic. But the business model that propelled them there was all about being a wine warehouse. That means largish site, stack ’em high, parking outside, no frills. The dozen minimum purchase policy started out as a licensing requirement (I won’t bore you with the details) but it served them well commercially too. You’ll never get uber-rich selling single bottles. Flipside, warehouse = wholesale = good deal, at least when we’ve all got our consumer hat on. If you’re into your wine, and you like a good deal, Majestic was an obvious choice. Indeed, the only choice.
But there are only so many people willing to buy in bulk, and the competition for those sales has become fierce with the growth of online-only sites (no rent or rates to speak of) and the proliferation of good independent retailers. And the supermarkets too, to be fair (their ranges had got a lot better about ten years ago). On top of that, there are only so many properties in target neighbourhoods that meet the warehouse requirements (especially parking) so Majestic necessarily started to compromise the kinds of outlets they acquired, to the detriment of margins. And there are only so many neighbourhoods that are, quite honestly, wealthy enough for Majestic to go into.
Add that all up, and somewhere around 200 sites Majestic started to sputter. They had to do something, and they jumped into the online thing like everyone else. But that never really worked for them, at least not in terms of providing a solid growth platform to compensate for the growth challenges elsewhere. You then saw Majestic playing around with “fine wines” and commercial sales (i.e., selling to restaurants and the like). That’s when I started looking for the short-sell button.
You see, fine wine and commercial sales are areas where Majestic’s strengths just don’t apply. Bulk buying doesn’t really help in the smaller production and very relationship-driven business of Grand Cru Classe Bordeaux, for instance. When selling to restaurants you either become a trusted, outsourced wine director-slash-sommelier, or you’ve got the best prices. The former is nowhere in Majestic’s DNA; the latter is done much, much better by the large importer-distributors who’ll buy a wine list with a five figure check, no second thoughts.
Remember that comment earlier about being publicly listed? I think we all know how markets feel about a company with crappy growth prospects. Majestic’s Board of Directors, being a Board of Directors, did what Board of Directors do. Legacy CEO got the boot. And then, quick, let’s do something — anything! Just make it look like we’re dealing with the problem. These pesky online guys have been part of our problem, and everyone’s talking about online as the future. Let’s buy an online business! Business strategy by committee. Makes me cry.
Which brings me to Majestic’s recent ditching of their minimum purchase policy. Majestic needs growth. They’re desperate for it. They just spent £70m on a new CEO! Now he’s got to do something, anything! Majestic’s current policy ain’t working no mo’ and you know he’s noticed the stunning success of the independent sector which – lo and behold – doesn’t have a minimum purchase policy. I’m sure Majestic’s consultants and bankers produced cool-looking spreadsheets (probably with a “vlookup” function or two) to demonstrate oh-so-conclusively that this tweak will work. Who knows.
I hope it works for them. We all want to see Majestic do okay (not great, just okay). But if that’s the ace up their sleeve, that £70m would’ve been better spent on tacky bunting. Majestic’s problems are much deeper than a minimum purchase policy. Online is part of the solution, but they’ve got to make themselves relevant with the new generation of wine drinkers. The wines they choose to sell need a major overhaul, and the stuff Naked sells… well… they mean well. How Majestic communicates with their customers is woefully 90s and needlessly, excessively mass market. More critically, how they reach and engage with new/potential customers is completely lacking in imagination.
Majestic has a lot going for it, but there’s clearly a lot of inertia too. If the new crew settles for acquisitions and token adjustments, then, as Bill Paxton’s character in Alien says: “Game over man. GAME OVER!”
On the other hand, if you want to know exactly what to do… no problem. £80m first please. 😉
– Stephen Finch