Good Investing Talks - Nick Devlin, how does Naked Wines show strength in turbulent times?

Episode Date: April 26, 2022

It was a great pleasure to bring Nick Devlin of Naked Wines back for a follow-up on the company's progress since last year.

This episode of Good Investing Talks is supported by In Practice. In Practice offers a selection of interviews with high-quality businesses. They focus on doing deep interviews with executives, people around businesses and people who have knowledge about certain industries. So if you want to know more about great businesses and their future and background, please click on the link below this video to get more information about in practice. And now, enjoy my conversation with my guest. Hello, audience.

Hello, Nick. It's great to have you back at good investing talks. I can now say, it's great to have you back because you've been here last year. And I think I will also show the video of last year above so people can have a look. It's great to have you back. You're in the morning in California. Yeah, I'm worried, Tillman, because now, you know, I'm going to wonder how much I've aged since we did the video last year.

But it's good to be back. I think you have more kids, as we see in the background. It's some nice kids pictures. That's great. Concorditions again and like the family father. Three and a half and one and a half. So they definitely kind of keep me busy when naked's not keeping me fully occupied. But maybe let's move to naked now before we get too deep into the family stories,

which also should be interesting. But they are something for a glass with wine, a glass of wine, Sunday. Last year, we also talked about growth. Maybe let's start with this topic again this year, because many investors were interested in this topic. Maybe let's start with the basics. What is your capital allocation framework towards growth? Like, what kind of price are you willing to pay?

How are you thinking about growth in terms of capital allocation to lay the foundation? I think one of the hallmarks of naked and one of the things that we pride ourselves on has been taking a real first principles approach to how we allocate capital. And that very much comes for when we think about allocating capital to growth investment. So a reminder for those who are new to naked, you know, when we talk about investing in growth, we're talking about the combination of money that we deploy through media, advertising in different channels, and in some of our markets provision of a subsidy, effectively a loss-making first order to encourage members to try our wines. And in total, that's what we think of as our growth marketing budget. And the framework

we use to make those decisions really comes back to thinking about the kind of the IRA or the real rate of return we're generating out of investing in a set of cohorts. And, you know, that's something that hasn't changed over the years. We can talk maybe a little bit about some of the complexities of working through that in, you know, the course of the last 12, 18 months, which have definitely been, you know, more, there's been more volatility in lots of ways than there has been normally. But from our point of view, we start from saying every investment we make should be generating, you know, adding to the intrinsic value of the company. And that means when we're investing to acquire a customer, we've got to be really confident based on the information we have,

you know, our 13 years worth of data, which contributes to a set of machine learning driven models that value our customers, that the stream of cash flows they're going to generate over the course of five years is going to mean we're going to generate an attractive rate of return. And attractive for this purpose means, you know, you're making a rate of return substantially in excess of your cost of capital, even after you allocate everything and including your overhead. So that's the first principles bit. We can talk more about some of the nuance. But, you know, that hasn't really changed. I don't really see that changing because, you know, you can have a lot of change in sentiment, change in fashion, in terms of what people

want to invest in. I think the best protection against that is to, you'd be really convinced that what you're doing is building something of real intrinsic value. You mentioned the complexities, and I think my questions are a bit above a complexity bingo. So you're British, you might like a form of bingo. So if I don't hit all the words, you can add some after I finish the questions, but let's move on or try to see if I have the complexity bingo, right. if you talk about growth one of the basics also for you is labor so maybe again a fundamental question like if you say you grow 100% as he did close to it last year what does it mean in the staff

you need the additional staff is there a ratio like 100% growth means 20% more staff or something like this really we think about the business in terms of kind of two types of labor or two types of roles right you have some roles where volume is a factor, and you have some roles where volume is not a factor, if you just want to really simplify. So actually, you know, sending a set of marketing communications or a trading plan to 10,000 customers, 100,000 customers, or 500,000 customers, actually you've got the same amount of work. It's not volume driven. Whereas, if you think about, say, some of our operational requirements, actually, you know, as you go from 1,000 cases to 10,000 cases to half a million,

cases, you know, you do need additional labor. So then some parts of our business, you know, the volume driver is going to be a little bit different. So if you think about our American business where we have a large planning and wine production group, there they really unit driver is the number of skews in the range and the number of unique different bottlings we're producing is driving, driving the work. So that's how we start to kind of form our planning assumptions and understand, well, you know, how is the cost base going to scale as you grow? You know, overall, that means that, you know, we tend to, you know, we have. You know, we have an opportunity when we grow faster to see efficiency and leverage. And you saw that in a reduction

in our SG&A base as a percentage of sales in the year FY21 as we grew the business really quickly. I think then the second thing you come back to saying there's also a choice between, you know, overhead you have to add because you require more people to serve as a larger business and discretionary investments, choices you're making. And one of the areas we have been investing more in over the course the last 18 months is our product and technology teams. And really, the reason there is we see the likelihood of generating value from that investment, a real return on that investment. Actually, all things being equal, increases as you scale the business.

Because, you know, the amount of benefit you need to get from improvement in, on a customer level in terms of performance from, say, developing a new feature, adding more functionality to your website, adding a new type of subscription, just improving the UX, whatever it might be. Actually, that becomes lower. you need a smaller improvement per member to generate an absolute return on investing through an additional capability and additional people.

So it's worth separating those two things out. So I'd say all things being equal, you don't need to scale that many parts of the business that aggressively just because of the volume. But as the business has grown, we've seen opportunity to double down and invest back in improving parts of the customer experience. So if you think about labor,

we also have to look at the labor supply, especially in the US, that might be quite tight. Where is it the hardest to find people? You already mapped all the kind of labor you're looking for. Where is it the hardest in this kind of categories to find people? I think we're getting close to the first buzzword, aren't we? We're going to do inflation soon. It's on the list. It's bingo. I thought so. I think, you know, we've been in a privileged position. Finding labor has not been that difficult. Ultimately, I think a lot of people want to come and work for a mission-driven company in the wine industry that's changing the way wine is made and the way it reaches people who are passionate about drinking it. So,

you know, ultimately, I think that gives us a strong source of competitive advantage. You know, we've got an inspiring mission and we've got a great culture. But it's certainly true that there have been places where we've seen, you know, the market rate for labor changed materially. And that does feed through like any business into, you know, our cost base and our economics. I think the areas probably that have been most apparent have been the parts of the business where you've got a most commoditized labor pool. So if you think about primarily our physical operations, so warehousing distribution logistics, we've seen pretty substantial labor rate inflation there.

And we've also been making sure that we're fairly moving reward for our teams on the front line who are talking to our customers every day. We call them our customer happiness teams because that's their job to keep customers happy. But that's another area where we've made sure we've moved wages to reflect, you know, the changes in the overall labor market. Growth also needs more wine.

So how do you think about the vine availability and also like we don't want to get too deep into the winemaker side, but also like the option to become a better partner for winmakers in this journey? And maybe you also have a rough share in which kind of percentages you are, the partner for the winemakers, like are you from 10 to 100% in some of the winemaker categories, the main partner, or how much is your share there? Hey, Tillman here.

I'm sure you're curious about the answer to this question, but this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investor day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus. Just go to good minusinvesting.net slash plus. You can also find this link into show notes. I'm waiting for your application. And without further ado, let's go back to the conversation. One of the services or partner offers you make for winemakers is also marketing to be a great marketing channel for them to address wine lovers.

You call them angels. But for this, you also have to be a great market to yourself as a platform. And maybe if you think about the whole space of food e-commerce and think of other players in the space. If you would give yourself like an naked wine, the great compared to the other. What kind of great would you give yourself in the marketing capabilities? Yeah, I think historically marketing has always been a core competence of the business, right? And, you know, marketing, in my word, is sometimes a fancy word for the human thing of storytelling. And that was an insight very early on from our founder, Rowan, that lots of people can produce great wine.

Naked's got a model that means we can do that more efficiently, and we can allow talented people to create their own brands that they're personally invested in, which is differentiated, and we can bring that wine to market, direct to consumer, so more efficiently again. But other people may be able to do that at points in time. So building that personal connection between wine drinker and winemaker has always been at the heart of everything we do. And that comes down to telling stories, right? Because if you talk about flavor compounds and phenolics and tanning profiles, you know, there's a very limited number of people for whom that's interesting. If you talk about people, what do they dream about? What are they passionate about? What are they excited by?

Those stories about people tend to be universal. So it has always been a core competence in the heart of the business. I think one of the things we have worked more on, more consciously on, in the course of the last year or two, has been thinking about how we market ourselves to an audience of winemakers. And I think, you know, really started, we ran a big effort, you know, when COVID first happened, to reach out to winemakers outside of the Naked family and offer support. We put up $5 million and worked with over 90 different winemakers around the world. Sorry, I've got that number on, over 45 winemakers around the world. And, you know, that was a great way to get the message about Naked Out.

And we've also, in the course of the last year, spent a lot more time and energy entering the wines we produce into big international competitions. So things like the Ticanto World Wine Awards, you know, IWS, to showcase the quality of wines we're making. And I think we've realized that it's important to show to the industry the kind of quality of product you can make with Naked as a partner. And I think that's been really important in driving a little bit of reappraisal. And people saying, wow, okay, you know, I knew that Naked was a fast growing company. It was doing something different online.

I didn't realize it was a platform that I could go and make world class wine and win, you know, gold medals at top awards and things like that. and I looked at one of the winemakers we just brought on who is going to be working exclusively, Tim Furr-Naked in the US. It's a guy called Rudy von Strausser. And an amazing character, the founding father of an AVA in Napa called Diamond Mountain,

and he's bringing his brand across, which has won all sorts of accolades over the course of years, and it's going to be exclusively making and distributing that at Naked. And I think that's a type of conversation and opportunity that we wouldn't have had access to a couple of years ago. And the result is actually, you know, we've changed the minds and done some good marketing of ourselves in the industry. That's a great achievement, congrats to that.

But let's also look again on the customer-facing side. You are also offering the winemakers access to. Like, where do you want to get better in terms of like your internet platform, a tech platform in this way? and marketing, you think about performance marketing, different forms in the online world, work a bit differently. And is there, what are your projects to improve on this side over time? I think one of the things we're always looking at, right, is where can we invest to get the

maximum return? If you come back to that framework at the beginning, right, make it so fantastic business. And, you know, I love all the fun parts of the wine industry. You know, that's where the passion and the energy of our teams come from. But if you wanted to be unromantic about it, you could think about it purely as a financial machine. You're putting down capital up front to acquire something, a customer or a cohort of customers, in the expectation of a stream of cash flows coming from those cohorts. And we spend a lot of time looking at, okay, you know, what's the performance of that machine?

What's the efficiency? Or to put it the other way around, where are the inefficiencies? And some of that leads to some of the things that we're really focused on at the moment. I think there are two areas that really jump out. And this came from us taking a step back and looking at the overall shape of the business, having just doubled it. It was a good time to reappraise, you know, where do we deploy a resource and where do we not deploy a resource. And two things stood out.

The first one was that we were spending a lot more money acquiring traffic. So growth marketing teams looking to develop partnerships or, you know, working with digital platforms or affiliate networks. whatever it might be, different ways of acquiring traffic than we were spending money on improving the process by which we converted that traffic. And we think we've probably had the balance of that not quite right. So one of the areas we're investing at the moment is building the size of our conversion rate optimization team and giving us the capability to bring through more iteration, you know, more testing there. In particular, looking at further changing

the experience for different types of traffic and different types of customer, leveraging our personalization capabilities more for new customers, and frankly just making the shopping experience easier and slicker. One of the things on the roadmap is integrating, for example, things like Apple Pay, more payment devices, types for mobile devices. So that's one area that jumps out. The second area is then thinking about, if you think again about the financial disclosures we make, You know, we have a very satisfied customer base.

We've built the world's largest direct consumer wine business, you know, nearly just shy of one million members globally. And it's a very high retention business, right? You know, typically we see retention of revenue from that base at around 83% year over year. However, there is opportunity for us in the gap between the first order and then getting customers into that regular stream of purchasing. So that conversion from first case to second case.

And again, when we stepped back, we said, actually, we don't have meaningful, dedicated resource to that challenge. You know, it's a part of lots of people's job, but it's not the only thing that many people wake up in the morning obsessing about. And again, when you thought about naked dispassionately, this machine of kind of turning, you know, an upfront investment into a stream of cash flows, you know, this is an area where, you know, a lot of stuff is falling off our production line, and I think we can improve it. So to do that, two things. You know, one, creating a clear group of people within the business with dedicated responsibility and accountability for that early part of the life cycle. I think that's really important because if you think

about the customer challenges, they're meaningfully different in the first few months than they become later on in your life. Because you've arrived, you've tried some great wine, but all of a sudden now you've got hundreds of products from winemakers you've never heard of, brands you don't know. And that can be quite intimidating. You've gone from a first purchase where we've made things very simple and curated, you know, a selection of wines for you to try to actually a much broader shopping experience. And we think we can do more to quickly help you understand the benefits and features of Naked, but also more through our products and UX to assist you navigate through that second shop and work out what you should be buying and why. So that's a big area of

focus for us in an area that we think we can improve pretty materially. As you were describing this, the picture of a house came into my head. Like you already have now two floors or three floors and the plan is to make it a high rise, but you need some underground digging to stabilize everything and allow the growth stronger. Are there any other topics you do underground digging? It might be interesting to understand to allow you to grow stronger and faster. more stable in the future?

Well, you're being very good and you're holding out on your inflation, but I think the other area of focus for us. And I actually tell them, you know, an area that I've reflected, I don't think we've communicated as well as we could as a business is around making sure that we have, you know, our contribution economics are set up, you know, exactly right in each of our three markets, the UK, the USA and Australia to allow us to grow the business. at an appropriate rate with really good, consistent rates of return. So I think, you know, in the time I've been at Naked, you know, we've operated in, let's be honest, a fairly benign environment up until, you know, the course of the last 12 months

or so. And, you know, that's meant that we have been able to drive, you know, substantial contribution margin leverage, if you look at a group level, and that was in our disclosure at the half year, through two things. You know, one, some like-for-like improvement within market as we leverage more volume to drive down the cost of production for our winemaking partners and are able to take some of that benefit for ourselves, share some of it with customers and winemakers. And two, we've seen at a group level as the US has grown to be the largest part of our business, that's got a favourable mixed benefit for the group's overall contribution margin. I'm talking to our repeat contribution margin, the rate at which we translate

sales to our members into that stream of cash flows that pays back on the investments we've made. I think, you know, the third big project for us this year is to make sure that we are ensuring, you know, those margins are fit for the future. You know, so I guess I don't know where we're going to take this analogy, but, you know, we're making sure we've got all the waterproofing and kind of dampproofing right on the house so that it's going to last a long time. And that's something that I think is really important. I think it's an area that we believe is very much within our control.

but I don't know if we've done as good a job as articulating why we believe that as we could. So maybe it's interesting to talk a little bit more about that now. The kind of things we're going to be looking at to offset the inflation we're seeing, both in terms of give a cost effective of getting a case to a customer, you know, through our supply chain, and some of the inflation in raw materials, in particular things like glass, you know, and then international freight transport are probably the two areas where there's the biggest pressure in terms of the cost of production. We're going to be looking at making sure, you know, through our pricing approach, through the way

we look at, you know, recouping, you know, some of the cost of shipping in some of our markets, that we are, you know, continuing to offer great value to customers, but we're just making sure that, you know, the balance of how we share that surplus that our model creates between customer and margin, you know, is right and appropriate for the long term. And I think that means we've got an opportunity to, you know, not just rebuild margin that we've seen erode over the course of the last six to 12 months, but actually we've got an opportunity to grow that over the course of the next two to three years. It's one of the things, you know, we'll be laying out in more detail when we get through and do our next set of results. But it's an area that I think is really

important and, you know, probably one that, you know, we haven't, we just haven't communicated as explicitly about because the environment's been very different over the course of the last five years. And I think that's maybe, you know, some people have taken that as saying, okay, well, do I have to accept margin erosion in the business if I want to have growth? I don't think that's true at all. You can look to our Australian division where, you know, actually even in the course of the last year, we've materially improved margins. But that's a part of the story that I think we need to do a better job of articulating. So maybe a more basic question,

if you already switched to the topic of inflation, you have some industries I talked to producers in steel. We also saw this in high gas prices in the last weeks that the producers took more margin and used to opportunity if the prices are high and the raw material goes down. Is it also a chance for you if there's a general inflationary setup

to give a certain structural price increases further? to contribute margins through it because there's more acceptance to price increases in inflationary setup? Well, I think there are a couple of things. You know, firstly, you know, it is a benefit of Naked's business model that we, you know, we make exclusive product. So in any environment when you're talking about price, that's useful. I'm, you know, if you're, you know, I learned in my early days as a consultant working

with a ton of businesses, when you're in a world where you're selling the same product as a bunch of other people, then your pricing strategy becomes less within your. own control. So, you know, that's a benefit that Naked has. I think in terms of an overall philosophy, I think about it just subtly differently, which is actually because we've got an efficient model that helps winemakers make high quality wine at lower cost and strips out a bunch of steps along the way of getting that wine to the consumer that don't add value, around distribution and retail, and reduces the number of margins from three to one, that means we've got an opportunity in an inflationary environment to both recoup costs and maybe even take some

additional margin, whilst at the same time, if anything, increasing the amount of additional value or surplus we provide to consumers. Because, you know, our model is actually well set up to deal with that type of inflationary pressure. And it's why whenever we're approaching pricing decisions, you know, we don't just look at our costs. You know, we don't just look at what's happening to input costs and the cost of getting a case to customers. But we also, we also, look at the data we're getting back from our consumers in terms of repurchase rate. We look at the benchmarking studies we do in all our markets to look at the relative performance of our products against comparable products in the market.

You know, to make sure that, you know, whilst we're getting the margin structure we want, we're also guaranteeing our members the value and the, you know, the superior value to similar quality wines elsewhere that they'd expect. So I think about a little bit differently, but I do think that there is opportunity, in this type of phase of the market for naked. And I think we can do that in a way that's consistent with our values and carries on delivering great results for both customer and winemaker. Maybe you can also try to describe inflation as a change

and also reshuffling of markets because there are different price dynamics and things come into play in a different way. Is this like a share to take market share in this market if you do this studies? that you see that naked takes market share because of the inflationary pressure? I, you know, we've been taking market share pretty consistently in our markets for a number of years now. But I definitely agree with the point, right? You know, you see a lot of times where slightly tougher consumer environments, you know, cause people to reappraise their purchasing decisions, right? I filled up my mini the other day and it was a $70 tank of gas. And I remember,

remember when I first came to the US, I think I could fill that up for 25, 30 bucks. So, you know, that's a real impact that people are feeling and seeing day to day. And, you know, I think my experience has always been that feeds through into people reevaluating their purchase decisions. And especially in wine in general as a category, you know, it tends to be that people maintain volume of consumption and then look at the brands they're picking or the retailers they're picking. So, you know, to my mind, I think that is an exciting time for a business when you've got a model like we have, which is able to produce quality at a lower cost, you know, that's a great chance to get people to try something new and understand when they

try that, actually, you know, they're amazed at what they can get. So we'll definitely be carrying on looking for opportunities to invest, looking for opportunities to amplify that message, because I definitely think, you know, it's a time when people are likely to be receptive. You don't have to finger point at competitors, but in your studies, who is in relation losing market share in such an environment? or like which models get less attractive compared to yours? Well, I think that, you know, the long-term trend that we're seeing very consistently.

And the US has probably been slowest to move in this, but, you know, is a movement away from traditional purchasing, kind of, you know, either in independent liquor, chain liquor or grocery, physical grocery, and moving into a number of different online models. You know, the comparison, 22, you know, late 21, 22 on 2021 is a little difficult, right? Because you've got businesses that went up very steeply and some of them have struggled to comp that a little bit. But I think if you zoom out, you know, that's the main trend. And I think, you know, in particular, you look at some of the, you know, there's just a big value advantage in the direct consumer model versus that traditional three-tier system. and, you know, that I think is going to be the long-term trend.

And I think that's an area that's going to, you know, there's going to be, you know, see the, see the greatest, you know, the greatest kind of pressure or the greatest impetus, I guess, for customers to reconsider their behavior. Because there's a lot of people who are buying wine that way. It's just because they've always bought wine that way. That's how their mom and dad bought wine, right? There's not, there's not because they particularly love the experience. It's not because they get great service. It's not because it helps them discover new products they enjoy. it's just familiar and I think you know re-appraising or questioning some of those purchasing habits

is just going to lead to the acceleration of the move online I think that'll be favorable for a number of different online models obviously including our own if you think like your model seems to be well positioned for an inflationary setup but are there any elements of certain parts of your business where you think okay maybe we should reconfigure this to stand better in an inflationary setup. Last time we talked about the glass bottles and their weight, which is a heavy factor by shipping and also in production, maybe. This is an example.

Actually, one area that we've been looking really actively at, which is both the way of mitigating inflation, but also a way of driving our group sustainability agenda, is the ways we can reduce the carbon footprint of our supply chain, shame. And in particular, you highlighted glass. Our benchmarking shows that, you know, the life cycle emissions associated with glass production and one of the biggest sources of emissions in the wine business. So our UK MD James Crawford actually was interviewed recently and was talking through the steps that we've taken to lightweight a number of our moulds in the UK market.

And we've also taken some similar actions in the US and being able to make some really material progress. And I think also it's an opportunity of showing what you can do under the direct model to take customers with you on the journey. So, for example, we have a sustainability group in the UK. Luke is our sustainability lead. And he chats directly to customers and gets their feedback. And what we see time and time again is that actually when you talk to growers and winemakers, they're incredibly receptive to the sustainability agenda. The thing that is holding it back in the industry, I think, are the perceptions of traditional brand owners and big corporations.

And, you know, they're the ones that are driving, you know, the choices for kind of glass molds that are, you know, a workout in and of themselves. If you go and pick up a bottle and nap a cab on the shelf, you know, you don't need to go to the gym again that day. But when you have a model like ours, which lets consumers talk directly to winemakers, actually it's a lot easier to progress a conversation and make rapid progress in areas like that. So that's, I think, one good example where ultimately kind of good sustainability often tends to be good business. And we'll be looking at more areas like that if there are chances to strip out costs that ultimately doesn't add anything to the end product, doesn't add anything to the taste and the experience for the customer, then I think that's a great area to focus on.

So there's also a certain education happening through the NACA platform about sustainability impacts. Exactly, because I think, and, you know, it's a microcosm for what we're looking to do every day and how we communicate to customers. We want to help customers understand and recognize that, you know, a lot of the ceremony, the cost built into the wine industry is sometimes an elaborate game of smoker mirrors to distract and to encourage and to support, you know, some inefficient business models and some high prices. and we want customers to recognize that if they go direct to high-quality talented producers making stuff they're passionate about, you can enjoy great wine and it can be affordable at the same time. And, you know, the glass bottle is just an illustration of that, right? You know, when you think about it, obviously, you don't need a really heavy bottle to make a great bottle of wine, but a lot of times because consumers don't feel that confident,

we default to things that are kind of simple rules of thumb to help us, right? You know, that's why people talk about, oh, never order the second cheapest wine on the wine list, or, you know, go for something with a label that looks like this, or a reassuringly heavy bottle. Or my favorite one, you ask people, you know, what type of wine do you like? I normally drank a $20, $30 bottle of wine. Well, if you think about it, that doesn't mean anything, right? But our job as a business is to help arm consumers with some of the information, the confidence, to go and then start making some better buying decisions.

And, you know, when you get people questioning, well, why does something cost that and hang on? Actually, then they can do the last part of the work for them. And, you know, they work out very quickly that actually there is a better way of doing that. And, you know, that's the model that we've got. Maybe that does now jump a bit more to the customer side again and talk a bit about the, if you have a new customer who is first entering the naked universe, you have to do some education work, but you also have to offer a great experience.

Compared to one year ago or maybe two years ago, how have you gotten better in this offering of a great experience? What have you improved? I think there are a few different things that go into that experience, right? So the first area that I, and I think the area that we have consistently improved year over year over year in the time I've been in the business is the breadth and quality of the range has never been stronger. So, you know, across those 225 winemakers we're working with, you know, people making outstanding wines, you know, everywhere from the Western Cape in South Africa to the Barrosa Valley in Australia, you know, back through the Russian River in

California and, you know, even some great sparkling wine from the hills of Kent in England. So the quality of that range, I think, has never been better. And that means, you know, customers are getting access to great diversity of wine styles, you know, an amazing product first up. And I think we are, you know, starting now to work through some of the things we've been testing for a while to get a little bit more variety into those first cases as well, to let customers give us some information about what they enjoy and start to, start to tailor that back to them. So I think that's an area that we are doing well. We can continue to do better, right? I think we can, you know, continue to make that first case more and more

relevant, but I'm very excited and passionate about that. I think the second, you know, part of the experience, right, you want to have a simple, effortless shopping experience with nothing going wrong and, you know, you want to meet expectations is really important, right, in that in the first part of the experience. We've done a really good job consistently at shortening the amount of time it takes us to get product to consumer, in particular in the US, where, you know, our model operating four different fulfillment centers across the country gives us a big speed to customer advantage in lots of areas versus some of our competitors. I think it's worth acknowledging kind of in the UK, you know, probably at Christmas this year.

We didn't do as well as we'd have liked in terms of getting the basics of getting product to you on time in line with your expectations. We didn't deliver that as well as we would have hoped. We could make excuses, you know, ended up. the volume of orders we saw was in excess of what we anticipated. But, you know, ultimately, they're just excuses, right? And we need to make sure we deliver on those basics of service. And that's a big focus for us at the moment, right?

You know, making sure that we have the redundancy and resiliency in our supply chain and fulfillment operations, especially at a time when, you know, the labor market is tight, right? You know, it's harder to get, you know, make sure you've got continuity of labor and kind of hourly paid occupations. to make sure that even when something goes wrong, it doesn't affect the end customer experience. How is Wine Genie doing in this experience? Are there any metrics you can share with us? There are a couple of things that we can share.

So I think the most exciting thing for us is that we now have Wine Genie consumers who've been on the service for over a year. And for those of you who are new to naked, Wine Genie is our platform powered by our proprietary data recommendations. which suggests you wines that you're going to love, you're in control, you pick the cadence of shipment, the price point, you know, the split between red, white, different styles of wine. And having taken customers now through the course of a year on that, what we see is that

actually there's very good feedback in rating. I think, you know, we have something like a kind of 90% rating when we do the user research, you know, how did you find the product to use? and up from when we first launched into market, I think we were getting sort of a seven out of ten score. So ease of use has been enhanced a lot. We've given a lot more opportunity to customize and skip orders and tailor things to your personal choices. We've seen that customers stay on Wine Genie

and that that contributes to incremental revenue. So, you know, it's working for customers and it's working for naked. You know, the contribution economics of Wine Genie makes sense. We've also seen that it appears to be especially relevant or of interest to customers earlier on in their life cycle. And actually seeing if we can really step change the rate of adoption is one of the hypotheses that that team that's going to be working on helping customers navigate from their first case, their second case is going to look at. Because our adoption data to date suggests that it's of most interest when you're trying to get to no naked, you want to discover new products. and a little bit more uptake from younger consumers.

Naked is often compared to the Netflix of Wine, and there was also this quite interesting video on scene. I think it was CNBC, where it was presented like this. How is your niche selection strategy going, and what are you building there over time? Yeah, I think this is one of the things that, you know, probably like developing great shows and content, you know, it takes time. So we have been working very hard for probably 18 months now to build out the diversity of wine styles on the platform.

And I think I've told you this before, Tillman, there's kind of two different strands which have got, you know, different level of emphasis or importance depending on which market we're talking about between our two big markets. So in the US, there's been a real focus on building out our luxury range. So we described that as wines over a $25 price point. And then a secondary focus is giving us breadth and of range and experience in, if you like, the kind of classic old world wine regions, you know, more wines from Spain, Italy, France. If I move to the UK, I'd flip that emphasis slightly where I think there's a big opportunity for us to add breadth of the range through different styles of wine and that older world profile, which is a little bit less about big, bold primary right fruit.

And, you know, you get a little bit more of the kind of earthy characteristics, a little bit more tan in, a little bit more acidity in the wines. And then there's the secondary opportunity from a UK perspective is stretching the price architecture and adding some of those trade-up options. The way we like to work, you know, is to find producers that we think we can work with over a long period of time and build a relationship between them and our customers. And that means we don't approach this in a kind of retail mentality. So it's not a case of going to a wine fair, kind of picking some products off the shelf and just filling the gaps. So it has taken some time. But I think to give you one illustration of that starting to have impact, if I looked at the sales through our kind of holiday quarter in the US, I think we had sales of wine by volume over $25 a bottle, we're up about 200%.

So as we now start to see the benefit of decisions we made and wines we produced out of the 2019 vintage coming through into our reign, that's translating through into great consumer uptake, and we feel very good about that. I think it's something that you'll continue to see kind of progressively roll out and see more of in terms of the customer experience over the course of the next year. And I think it should be one of the initiatives we hope will drive in a kind of classic e-commerce world, you know, revenue per member per month. I think where you see it through our disclosures, we think that's an initiative that's going to help support our sales retention.

thinking about working capital if we are in this thought concept if you have the higher quality wines they might need more time in the barrels so you have more capital bound if you're selling more high quality wines or is the turnover as as fast as the non-premium space no your dynamic is correct right so even if you might have a really quick sell-through so even if your stock turn on finished case goods might be the same you know you you've got a longer production cycle, right? So you are deploying some of your capital to produce that product further in advance of the sale than you are on, you know, a quick turnover. I think your most extremes in the world would be, you know, imagine, you know, a kind of early season rose or something that, you know, might be, you know, being pressed in September, October and you could be selling it in February. That's why wineries love rosé.

It's great for the cash flow. Versus, yeah, you know, a barrel age napper cab that we might release three years after the vintage. They do clearly have different characteristics. I think the way we have thought about that is making sure that in our pricing approach, as we've started to sell more of these wines, we've had to re-examine how we think about pricing product and make sure that we are accounting for the cost of capital when we think about the appropriate price to set. Ultimately, the time value of money is a real cost to the business, even if it doesn't. you know, show up classically on the cost of goods. And so that's been an important step for us

as we started to develop that luxury wine strategy. We said, okay, we need to have a pricing strategy that's consistent and recognizes that so that we don't, you know, so that the overall, you know, shape of our P&L and balance sheet continues to make sense. And so that it is, you know, genuinely accretive to see customers trade up into those products. So there we'll have a shift in the way you manage inventory, but there was also a shift in the way you manage inventory. you to serve new customers and that you have more quality wines on hand to make a great experience. Do you think this second shift for the new customers will get back to the level it was in 2019 or do you think you will hold a more structural buffer to be able to have

a great experience? Sorry, I'm just checking on the you gave me 2009, which I don't think 19, sorry, sorry. I was thinking, I'm sure we can definitely recruit more customers than we did in 2009. So I think, you know, it's probably back to the first question you asked me to be boring and give you the same answer again, Tillman, on, you know, how do we think about growth? Ultimately, I don't think it's very helpful or very actionable to kind of think about, hey, you know, this is a year where we will recruit X 100,000. new members or one million or whatever it might be because that gets you very much into a set of decision making and cascades all the way down through your operation where people are very focused on volume and when you get very focused on volume you find people are losing sight of

ultimately the metrics that we know and understand compound to create real intrinsic value over time so we you know in terms of the operational metrics we live and breathe in the business we try to have people very focused you know all the way through for example our growth marketing teams on, you know, what's the rate of return, that ratio, we talk about our payback ratio between lifetime value and cost of acquisition. And then how much can we deploy in different marketing initiatives subject to a minimum threshold on that ratio? And so to be boring, you know, that's how we operate the business. And, you know, ultimately, you work as hard as you can to try and maximize that. You know, you deploy strategic initiatives like the ones I've talked about

in terms of optimizing conversion rate, you know, trying to improve that conversion from first case to second case. And when you have success there, you structurally improve your economics, and it means you can go back and flow through the calculation again. And actually, the cost of acquisition that's consistent with a payback ratio you're targeting goes up. And that makes it easier for you to deploy more capital. But we try and avoid solving to, you know, here's a set number or here's a set kind of

top line growth rate, because it, in our experience, whenever we've seen parts of our business, tend more towards that mindset. it looks good for a small period of time and then it doesn't look good. You already explained a bit of the difference you're having or different strategies you're having different markets. Let me boil it down to a question coming back to marketing. Are you marketing differently in the US as in UK or Australia? We believe it's really important to have a core body of our marketing capability located

in market. and yeah, absolutely we'll be marketing differently. So what's common is if you think about, you know, maybe to take another analogy, the chassis is common. So for all our markets, we've got a proposition which is about offering two different things to customers. You know, rational differentiation, because we have an efficient model that reduces winemaker's production costs

and connects them directly to consumers, means they can enjoy a higher quality of wine at a lower cost. And we have this emotional differentiation because you can have personal connection to the winemaker. You can understand their motivation, their story, and you can hear it direct from them. And that's going to be common across all our markets and means that a lot of the kind of principles of our marketing

will be consistent. But to give you a couple of ideas of then, you know, where you have really important kind of local autonomy to make that relevant, in Australia, we wouldn't talk about having the world's best winemakers. We talk about having Australia and New Zealand's best winemakers. and our research shows us that there's an incredibly strong kind of bi-local movement, which means that we place real emphasis on that.

And the second thing that our research shows really consistently is, you know, this idea of, you know, giving a fair deal is really important in Australia and resonates really well. So a lot of our marketing communication will emphasize, you know, the way in which our model gives a fair deal to the little guy, a fair deal to small growers, small producers. and contrast that to the type of deal they're offered by the duopoly, you know, coals and woollies who own most of the liquor business out in Australia.

You know, that will be different from the narrative that we would operate in the UK. It would be different, again, if I go to the US where actually with the structure of the market and the three-tier system, you know, the focus becomes, you know, more on helping customers understand just actually how wine gets from vineyard to their door and helping them understand that they're the third person to buy that bottle of wine. And there's been, you know, a big slug taken out of it by the distributor and the retailer along the way. So if they can go direct to the producer, they can access greater value. So common set of principles, but the way that's brought to life.

And then all the way down to, you know, the tone of voice and language, you know, that's something that we own and bespoke in market. You have like four or five minutes left. So maybe we can do three quick questions if you have a quick answer for them. I've heard there might be rumors about the political chains in the tiered distribution system in the US. Is there anything to worry about? Look, I mean, I'm not going to make any kind of promises or proclamations about kind of, you know, what, you know, what the legal or regulatory landscape in the US would look like. I can say that I think the core of the three-tier system, you know, is, it is very well established, is very well supported, not least by, you know, $400 million a year of campaign contributions

made by distributors when you look to the last set of data. So as far as I can tell, the areas that are getting the most focus are around challenges from retailers. And retailers lobbying to gain access to cross-border direct shipping. And that's a status at the moment that is ambiguous. Some states would allow it. So in California, where I live, for example, I could order wine from a wine shop in New York and have it shipped to me. But in lots of states, for example, New York, I couldn't order wine from a wine shop in California and have it shipped to me. So retailers have different market access rights to producers like naked. I think as far as I can tell, you know, that's the area that is getting the most scrutiny

and the area that's most likely to see more court cases decided. And that's something that's not around challenging the three-tier system. It's around ultimately adjudicating the rules on the edge of how it works. And, you know, our business competes with retailers shipping in California just fine. So, you know, the big debates that I see, you know, not something that caused me undue concern. So that's probably the big trend I'm seeing in terms of regulation, unless there's anything else on your mind, tell me. For the south of you, there are two big tech companies, Apple and Facebook,

and they have some struggles allowed identifiers and stuff like this, and this also impacted your business. When do you think this impact will normalize and it's easier for you to have the same efficiency in marketing on these platforms again? I think there are a couple of different things in terms of normalization. One is ultimately that advertisers like ourselves, and I talk to lots of peers, chief marketing officers, there's a lot of consistency in terms of what I hear back in those conversations. One of the consequences, I think, and you see it in Facebook's latest set of results,

is that advertisers are pulling back some spend. And that has a degree like in any two-sided marketplace of some self-correction. And, you know, you see a period where, you know, CPM rates were inflated. a lot through most of 2021, and, you know, that seems to be cooling off and coming a little bit back down. So, you know, that's one way in which I think the ecosystem kind of finds a little degree of natural balance. I think for us then, you know, I'm not focused on speculating as to, you know, when, you know, when things outside of our control are going to change. We're focused on really looking at what can we do and own to improve the way we communicate our message, to improve the

cadence at which we're testing different types of creative and content, and therefore make sure that we are, you know, being efficient in the channel, recruiting good volume of customers, but more importantly, you know, getting the right customers in with the right messages that they really understand why naked's different and why naked's special. And we're generating a benefit beyond just acquiring some customers into a deal, but we're helping to get out the message that I'm very passionate about, you know, a better way for people to buy wine. So that's what we're focused on. I think we're seeing some traction, but there's still more work to do. Imagine the world where naked wines would be listed in the US as their primary listing.

When do you think such a world could become real? Or could such a world become real? It's obviously an opportunity that could become real at some point in the future. But I think for, you know, our job ultimately as a management team is to first and foremost focus on the opportunity we've got to grow and scale the business, right? And, you know, I wake up every day thinking, you know, what are the things we can do to drive intrinsic value growth for naked? What are the places we can invest, you know, profitably at good rates of return that mean, you know, under any set of circumstances, you know, with any set of kind of valuation metrics or, you know, investor sentiment, we've built. something of real meaningful value. Then there's a second set of questions, right, which are like, okay, well, you know, what is the right place for that business to operate? How's the right place for it to meet the right investors and be fairly valued? But I do think, you know, they're secondary considerations beyond, you know, making the business

in and of itself, you know, high quality and high value. You know, the reasons you can imagine that world, you know, there are all the obvious reasons why behind the question, right? You know, we have seen a migration of the investor base towards U.S. focused investors. And typically, although no one seems that focused on growth online stocks with a degree of risk in them right now, but typically that's a type of story that's resonated more with more investors here in the U.S. And obviously our market opportunity with a $25 billion town in the U.S. You know, it's our largest one.

And so if we operate successfully over time, increasingly, you know, the revenue base of the business will move towards. to the US. So absolutely it's something that you could imagine in the future, but I can't give you any breaking news, Tillman, I'm afraid, for your headline of the interview. What a pity. But it was a pleasure to talk to you again. It was fun. Thanks for taking the time. And thank you for the audience for staying this hour with us. Thank you. No worries. My pleasure. Thank you very much for having me. Bye-bye. As in every video, also here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we're doing here is no recommendation

and no advice. So please always do your own work. Thank you very much.