Analysis: Majestic’s shock change of tack

The announcement that Majestic Wine is throwing its lot behind its online wine subscription business, Naked Wines and will divest some (if not all?) of its UK retail business has raised more questions than it has answered. db looks at some of the issues raised by today’s announcement.

Rowan Gormley, CEO of Majestic Wines

Why are they changing tack?

Many analysts have been shocked by the unforeseen change in tack in the company’s strategy announced this morning, in which UK specialist retailer Majestic Wine announced it will close stores and rebrand as Naked Wine as it concentrates on its online and international business. Bearing in mind CEO Gormley still insists the recently transformed Majestic business had “the potential to be a long-term winner”, some argue the latest move smacks of “throwing the baby out with the bathwater”.

Equity Research Analyst at Liberum Wayne Brown said there was no doubt retail was challenging on the high street and there was always likely to be an estate rationalisation strategy at some point, but he questioned why the group would completely reshape the business, when only three and a half years ago, it thought it was an excellent idea to put these two businesses together.

“Why was it a good idea then and why is it a bad idea today?” he asked.

The difference, he pointed out to db was that having merged the two businesses, Naked Wines has benefited from the cash flow from Majestic.

“As the statement clearly says, you can’t maximise the value of Naked wines now with Majestic in the same group, you can’t invest behind Naked Wines properly so in order to achieve that, they’re closing down as many stores as they can, selling on the business, selling the freeholds and probably using that last bit of value and cash to throw back into Naked Wines.”

Which is somewhat hard luck on Majestic, particularly as it had been loudly trumpeted as having turned itself around amid a difficult backdrop, following major investment in its stores. But as Peel Hunt analyst Jonathan Pritchard points out, “They’ve gone from making nearly £20 million in 2015 to £10 million profit this year, and that doesn’t sound great to me.”

Majestic’s CEO Rowan Gormley today insisted the recently transformed Majestic business had “the potential to be a long-term winner” – but the group “risk[ed] not maximising the potential of Naked if we try to do both.”

Essentially, the focus is too split for both businesses to grow, and the group has chosen to back its Naked Wines business, which has more than doubled in size since it was acquired by Majestic in April 2015 with sales expected to exceed £175 million this year, over the more challenging UK retail arm.

As Pritchard notes, “You could say this has been brewing for four years. Ever since Majestic was taken over by Naked, it’s been the slightly less favoured child in the relationship.”

Which rather raises the question: was this inevitable all along?

Click below to continue our analysis of the new strategy…

How widespread is the disposal?

At the moment, it’s still slightly unclear what exactly will be up for sale. The company statement said it would fund the accelerating growth in Naked by releasing capital from Majestic through a combination of store closures, asset sales and ‘migrating customers and stores to the Naked brand’, but little more detail of how many stores or job losses will be available until June, it said.

Analyst Jonathan Pritchard of Peel Hunt told db the wine retailer’s announcement “hinted that they want as clean a break as they can get” and analysts db has spoken to believe the company will look to sell the whole of the retail division, which netted sales of £264m in 2018, and an operating profit of £13.3m as well as its commercial business, which clocks sales of around £43m, on operative profit of £2.4m, and fine wine business, Lay & Wheeler.

Both Majestic Commercial and Lay & Wheeler were conspicuous by their absence in this morning’s announcement, but it seems highly likely that these two will also be disposed of non-core to the transformed business in addition to the retail estate.

According to Brown at Liberium, Lay & Wheeler may be easier to value and dispose of, due to it being more of a standalone business.

“I think it’s easier to put a value in Lay & Wheeler, there’s an element whereby Majestic Commercial is dependent upon the retail business, they are not mutually exclusive from each other,” he points out.

Click below to continue our analysis of the new strategy…

Who might be interested in buying the retail estate?

Until Majestic unveils the exact number and location of the stores it is likely to dispose of, and those it intends to keep and rebrand as Naked Wines, it’s hard to tell who, if anyone, might be interested in buying all or part of the estate.

The estate currently comprises around 200 retail stores, with approximately 16 in London, a further 23 within the M25, and the rest spread out across most regions of the UK. (According to its website, there are 24 stores in the South East, 34 in the South West, 11 in East Anglia, 26 in the Midlands, 5 in Wales, 31 in the North and 14 in Scotland, the majority located in the central belt).

Shore Capital notes the average lease length is less than 5 years and around 40 of the stores are freehold properties.

So who is in the market for snapping up stores?  As Shore Capital analyst Greg Lawless pointed out in an analyst note this morning, there are already around 100 or so booze stores potentially for sale from the high street’s previous off-license casualty, Oddbins and its sister retail brands, that have yet to be sold out of administration, making it a bit of a buyer’s market.

“It remains to be seen how much appetite there will be in the wider retail market for a chain of approximately 200 wine warehouse stores but we note that Majestic is a well-known brand with a good client base,” he wrote.

With potential buyers on kind of scale thin on the ground, it is more likely the estate will be sold in parcels or through “a hybrid approach by retaining a parcel of stores to trade under the Naked Wine fascia, and then either parcel up packages of stores and close the remainder of the portfolio,” according to Lawless.

Retailers known to be looking to grow their estates include Aldi and Lidl and The Co-op but while many of the warehouse style stores are slightly out of town – locations which might potentially suit an Aldi or Lidl – Pritchard thinks it “staggeringly” unlikely, given the size of Majestic’s stores.

“In terms of another household name retailer, it’s pretty unlikely that anyone would be interested,” he told db. “It may be that Aldi or Lidl will be interested in ten stores, the trouble is everyone wants the same dozen or 20 stores, but are less keen on the other 180.”

A potential buyers could also emerge from the private equity sector, he noted. “It’s not impossible that someone from that part of the market steps in”, he said, adding that Majestic have also said it could sell some stores for conversion to residential.

And as already mentioned, there is also the question of who might buy the Commercial division, and fine wine arm, Lay & Wheeler.

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The strategy is contingent on the viability of the US market working out for them, will this gamble will pay off?

One of the key points made by Peel Hunt’s analyst Pritchard is that the move to realise Naked’s potential relies heavily on the international market, in particular continuation of growth from the US.

To date, the company has highlighted good growth from both the US and Australia markets – in November, it revealed US growth had risen by 19.3% to account for around half of the total Naked business, thereby contributing around 15% of sales to the wider Majestic Group. At the time, group chief financial officer James Crawford said it could see the US as the growth driver of the Naked business and “in time, of the group”.

“When we look at addressable markets, the US has a market around eight times the size of the UK that we can invest into and with very attractive economics as well,” he said in November.

Which bodes well for the new business, if they can pull it off.

“The USA is the big thing, the viable of the whole strategy is contingent on the states working for them,” Pritchard told db. “If that works it will be very interesting for them, if it doesn’t, well, it will be interesting for them in the other direction.”

He points out that after a couple of false starts they seem to have got the formula right.

“This time around they seem to be getting the quality of consumer they’re after,” he said.

But as Naked Wines builds its international business, another name will disappear from the UK high street, leaving the UK consumer with a bit less choice.

As Liberium analyst Brown points out, “There’s no better place than a Majestic wine store to experience wine, it’s a great shopping environment, but a very different customer base to Naked Wine.”

But maybe not for much longer.

For our exclusive interview with CEO Rowan Gormley, following the publication of the analysis, please see here