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Wednesday, 18 May 2011

Naked Wines Launches Marketplace

The best entrepreneurial businesses continually evolve - they don't just carry on doing what they started off with.

Rather they grow and develop, applying their entrepreneurial skills in related areas to increase scale whilst diversifying away some of their risk.

Microsoft, once merely an operating software company, now has three separate divisions covering Platform Products & Services, a Business Division and an Entertainment and Devices Division.

Likewise, marketing services giant WPP, which began by buying Madison Avenue ad agency Ogilvy & Mather, has stuck within its knowledge sphere, but changed the whole industry model of marketing service business ownership and now sees its most exciting growth in BRIC markets.

So it should perhaps come as no surprise that internet-only wine retailer, Naked Wines, having successfully taken on rivals Laithwaites and Virgin Wines, is now moving into new, more ambitious areas.

Certainly, the company is in a good place at the moment - from a standing start, in two years, it has gained 150,000 new customers and converted 50,000 of these into regular subscribers, Angels, paying in a minimum of £20 a month to an account to spend on the company's wine.

For anyone struggling with the maths, that's £1m of cash inflow every month - and I'm one of those contributors.

Rowan Gormley
The company also has 85 exclusive producers signed up with a further 16 in the pipeline and as founder Rowan Gormley recently explained, we are not short of customers, what we need is more producers.

Naked's house style of wines is reliable, above-average, crowd-pleasers, with instant, fruit-driven appeal. Unless you are in the trade or a really serious enthusiast, what's not to like about that ?

Earlier this week, I gathered with a group of sundry other bloggers to hear details of Naked's latest venture.

Called Marketplace, it effectively aims to do for wine retailing what Ebay has done for online selling, creating a meritocracy for winemakers, where the sales go to people with huge talent, not a huge marketing budget as Naked founder Rowan Gormley noted to Jancis Robinson (see here).

As Rowan explained, with the clarity of vision that betrays his finance and venture capital background, wine producers and consumers alike are being badly served by a whole series of non-value-add middlemen who are, as he puts it, screwing both sides - pushing down prices for the producer, ramping up selling prices for the consumer and hanging on to large amounts of cash in the meantime.

Rowan's vision and ambition here is vast - he wants to do nothing less than change the whole industry model and drive out the inefficiency of the layers of middlemen.

There are some historic parallels for this type of change: Martin Sorrell separating out media-buying from advertising and then re-consolidating the buying agencies into GroupM was a similar industry-changing move; as was Roberto Goizueta spinning off Coca-Cola's bottling plants (again, re-consolidated as massive Anchor Bottlers) with the Coke Company keeping just the crown jewel parts of the business, the "secret formula" concentrate and the marketing spend.

The difference with those examples, however, is that they just moved existing parts of the business and put them in different boxes.

What Rowan Gormley has in mind is a change in consumer behaviour, with Naked Wines having a fundamental cost advantage over all other wine retailers and being a central point for online sales - much as Apple has its itunes store not just for buying online music, but all iPhone apps.

But again, there is a difference; online apps are a new product where it is easier to introduce a new sales channel.

Naked Wines' aim is to change fundamentally the way a centuries old product is sold and that will require changes in consumer behaviour.

Naked's customers all seem up for it as the company already has a similar model in place - the advance bookings scheme will allows buyers a set discount for purchasing wine a couple of weeks before it is actually bottled and shipped (this is in turn based on the en primeur concept).

Seen this way, Marketplace is more of an evolution of the existing Advance Bookings scheme than a totally new offering.

The question, then, is how will the producers react ? According to some of the Naked Angels I spoke to at the London International Wine Fair yesterday, the English-speaking former colonials were getting it much better than the other nations - so perhaps South Africa, NZ, Aus and the US will lead the way.

Perhaps the best parallel to what Naked Wines have in mind is the rise of Toys r Us - taking an existing but fragmented industry, and centralising it into something with economies of scale. But again, that does not quite have the same change in consumer behaviour as is needed here.

If it does prove to work, the obvious losers will more likely be the supermarkets and other broad-based wine retailers than, say, the independent wine merchants - the one area where Naked can't, and specifically chooses not to, compete is on the detailed, face-to-face guidance that an independent can give when you step inside the shop for a chat.

In brief, the way Marketplace will work is that winemakers will offer their wine for sale on the Naked website at a set price.

Naked's customers can then make bids for the wine, stating how much they would like to buy and at what price.

When all bids are in, the winemaker has the choice of either accepting the price and quantities offered or not.

If he accepts, the money is taken from the bidders' accounts and the winemaker has four weeks to get the wine shipped to the buyers, with Naked taking a 10% cut - much less than standard industry practice for importers and retailers.

Rowan sees Marketplace working for three distinct types of seller:

- existing Naked Wines suppliers who are known to Naked's customers and whose wines are already rated on the site

- wines for which there is already a marketplace, ie investment wines such as top Bordeaux and Burgundy

- winemakers who want to get into the UK market and have no representation here yet.

In the case of the latter, there is something of a "bootstrap" issue; who will bid for a wine they know nothing about ?

Rowan's solution to this is characteristically simple and clear - provide 10 cases of samples to be reviewed and rated by the company's top tasters (Archangels in Naked parlance) and Naked's remaining customer base will be guided by their views.

The economic logic of the scheme is compelling - cheaper prices for consumers, control over pricing and volume for winemakers and a much less inefficient distribution system.

To succeed, it needs mass adoption by both consumers and producers at roughly the same rate; given Naked's track record to date it may prove to be a case of "nothing so powerful as an idea whose time has come".

However, on the day of the announcment, wine journalist Jamie Goode tweeted "I'd love to be convinced, but I haven't been yet", but he has yet to follow up on this pronouncement.


Naked Wines - http://www.nakedwines.com/

Jancis Robinson's article on Marketplace - http://www.jancisrobinson.com/articles/a201105104.html

Jamie Goode on Twitter - @jamiegoode

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