Naked Wines wine
March 05, 2022 - 6:18pm EST by
2022 2023
Price: 3.82 EPS 0 0
Shares Out. (in M): 73 P/E 0 0
Market Cap (in $M): 281 P/FCF 0 0
Net Debt (in $M): 3 EBIT -2 0
TEV (in $M): 227 TEV/EBIT 0 0

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Naked was founded in 2008 by Rowan Gormley, who had launched an e‐commerce wine business under Richard Branson unsuccessfully called Virgin Wines. Rowan took some key insights and with about 17 team members— started Naked Wines after parting ways with Virgin. In 2015, Majestic purchased Naked, and sold off the retail division in 2019.

As of early March 2022, Naked Wines had a market capitalization of £280M with approximately £57M in cash.

Naked Wines, as mentioned in previous write-ups (Kumiko & Trev62), charges a $40 monthly subscription for the opportunity to buy wine online which provides working capital and creates a certain level of customer commitment, with  visibility on future demand— allowing “angels” or customers to bypass the three tier wine system of distributors, marketers, and retailers, to buy direct from exclusive wine-growers who were funded and curated by management. Customers are offered quality wine for less.

Naked Wines provides upfront capital for independent talented winemakers to produce wine and sell it in an established marketplace filled with committed customers.

Finally, through its web and mobile apps, customers are encouraged to rate the wines they consume. A direct relationship with the customer provides data on preferences.  With 25M+ reviews, this allows Naked Wines to identify and maximize individual customer preferences and provide data‐driven recommendations on what wines should be included in future product planning, leading to greater customer satisfaction.

Naked initially operated in the UK, and entered both Australia and the United States in 2012. The U.S. is now its largest market and presents the most interesting growth opportunities. The total addressable market is about 20 to 25 billion with an estimated 1% penetration.

While it’s marketplace was initially small (not too many winemakers, and not too many customers) it has emerged from its early, venture‐like years after consistently growing the number of winemakers to 226 (producing 1,000+ wines) to produce a steady stream of cash flow, of about 280 million a year; generated by the 950,000+ members globally, which helps fund projects and procure supplies. Naked Wines is now a predictable and scaling business, which means commitments to invest in certain vineyards can be done with certainty.

43 States allow for E-Commerce operations to sell wine, with Alabama being the most recent State to lift prohibition against selling online. In the future, Spirits could potentially be a complementary product to their business.



In addition, Naked Wine is paying affiliates, wine bloggers and reviewers $25 for every customer brought to the platform as a registered publisher.

Despite a $40 monthly subscription fee, angels have increased by 53% to a total of 886,000 (947k in the latest publishing), with repeat customer/sales retention rates at a commendable 83%, and selling over 18M bottles (1.5-1.8M cases sold) of wine annually and bringing in 345M pounds of revenue (2022 guidance 375M).

Naked Wines has reported a pre-tax loss of £10.7M. This is partly because investment to attract new customers has doubled, up from £23.5m in 2020 to £50m in 2021.

“Naked now stands at an inflection point with outstanding growth potential ahead,” CEO Nick Devlin said. Emerging economies of scale in the underlying production and shipping efficiencies–are prevalent in both unit economics and cohort analysis.


Competition- Direct to Consumer

In the US, competitors to Naked Wine’s businesses include Winc, FirstLeaf, Bright Cellars, and other companies who like us are regulated wineries selling direct to consumers.

If you compare their accounts to Naked Wines, their cost of goods relative to their SG&A line tells you everything you need to know about the economics of most medium-sized wineries in the US. They are spending additional money on things that aren’t the product.

In addition, Naked Wine is willing to commit to a longer time horizons with producers, with an ability to sign three-year grape contracts to five-year grape contracts. Ultimately these long term relationships drive high-quality wine.

Naked Wines very closely monitors production and supply chain—companies have tried to replicate aspects of their model, but fail to understand that what Naked Wines truly excels at is not only achieving a Costco’s like subscription model of sticky customers, but locking in their 235+ producers in 19 countries producing 1,000 different wines with an enticing proposition/agreement to ensure barriers to entry.

In the past year, Naked Wines has worked with 60 new winemakers. These winemakers get direct feedback and comments, and are required to attend an annual roadshow.



Intelligent Metrics and Measurement driving a virtuous Cycle

“If you can't measure it, you can't manage it.” This was a quote repeated incessantly by Peter Drucker and Michael Bloomberg.

If you don't measure things properly, then how do you know how you are doing? How do you quantify winning? How much money specifically should be poured back on to specific projects?

Naked Wines five years ago was just using cohorts and spreadsheets to determine their return on investment and how much recurring business they were generating through cohorts and how much they had to spend to acquire new customers.

Despite doing well in U.S markets with online purchases for wine, operating earnings and margins has not exceeded the U.K market, where Naked has a more mature operation due to a longer history. With reliable forecasting of costs and volumes and more accurate data, can this serve as a catalyst in generating operating earnings and improving repeat customer contribution margins?

As of 2021, sales U.K were £131M, whereas sales in the U.S was £161M. Management has wisely and correctly invested three times as much into new customers in the U.S (£33M) as in the U.K (£11M).

Of the entire £85M in repeat customer contribution profit, £48M comes from the U.S, and £27M comes from the U.K, while only £9M comes from Australia. Yet in 2021, operating earnings indicates that the U.S only had £2M, whereas the U.K had £11M. So EBIT is a lagging indicator. The most responsive indicator to effective increased investment is from repeat customer contribution profit and its attrition. There will always be spending required to replenish lost customers and advertising for new customers, but finding an equilibrium is key. 

Though new applications to increase stickiness and retention of angels and to make sure cohorts from previous years contribute more, applications such as Wine Genie (makes wine selection more personable, 18k subscribed) and Never Miss Out (notifies when a certain brand will be available again, 341k) were implemented.

Nick Devlin, Naked Wine’s CEO, has a better grasp of whether investments have been good or not, and a decent idea of where cohorts analysis and preferences due to Jason Scott and his team giving him insight.

Jason Scott, who isn’t mentioned enough in earnings calls or reports, heads Naked Wine’s global analytics and pioneered machine learning since 2017, where about 150 attributes were used in building 200 different unique models.

There are two things that are really important about lifetime value modelling. Effectively, when valuing each customer every day— you’re creating a trajectory of likely orders, the likely survival for the next period and then you project a forward contribution margin.

Here’s a great quote from Nick Devlin in a recent interview—

“In terms of the business, I think it was a time where we really started to professionalize and made great strides, in terms of how we interrogated our performance and, in particular, our investment performance. A lot of my role, at the time, was helping us go from having a good theoretical understanding of a return on investment, but still being a little bit abstract. We maybe knew and measured the return on a channel, in a market, but the reality is, within that channel, you are investing with seven or 10 different people and some of them could be great and some of them could be bad. If I learned one thing, it’s that in particular, in investment, averages can hide a multitude of sins. Disaggregating that down to a specific level of detail is critical, if you really want to be credible when you say that you take capital allocation seriously.”



KPI & Customer Contributions in payback periods

As you can see in the chart below, the 5 year forecasted payback is calculated by using a machine prediction of contribution profits expected to be earned from new customers divided by investment in new customers. In 2021, the 5 year payback was 3x, since 150M was expected for 50M invested.

This payback seems to be appreciating from 2.6x in 2019 to almost 3.3x in 2022 (yes, I understand 2022 is a prediction I made and so far H1 ’22 indicates otherwise with a 5 year payback of 1.7x with 2 million below expected levels due to lockdowns), which shows that investment has been fruitful so far, with contribution margins improving from 26 to 31%. Compared to last year in 2021, the first quarter had an increase in customer acquisition cost.


Repeat Customer Contribution Profit funds future investments in growth. When looking at standstill EBIT, assume for ease of calculation, we use £100M for Repeat Customer contribution profit. 88% sales retention would mean profit lost to attrition is 12% or £12M. With a 1 year payback of 0.82, to get the amount require to replace and replenish lost due to repeat customer contr. profit, we get £12M and divide it by 0.82, which is about £14M. Roughly profit lost to attrition is almost the same amount required to replenish lost due to repeat customer contribution.

General and administrative costs exceeds spending required to replenish contribution profit. These two costs continue to increase, and as long as repeat customer contribution profit grows fast enough, standstill EBIT will always be heading in the right direction. Repeat customer sales per angel or ARPU for repeat customers has been growing, and Naked Wines won’t be slowing down anytime soon.

Naked wants to be accurate in terms of values generated and do it in a timely and actionable way because the biggest use of lifetime value modelling is giving real-time feedback to operational teams to make better decisions.

One of the most important groups are Naked’s growth marketing teams.

Naked Wine’s digital marketing group makes daily decisions on allowable bids on Facebook. Also, every week, Naked’s partnerships team are deciding whether or not to renew or sign for another direct mail campaign.

Nick Devlin admits that what management did early on— did not work, and lacked accuracy. Even the lifetime values were inaccurate and has changed their 20 year life time payback measurements to 5 years.

By using a combination of transactional metrics, demographic metrics and engagement metrics, management at Naked could get to a plus or minus 10% forecast of customer quality very quickly. With a new channel or a new marketing area, it is now possible to differentiate among average quality customers, extremely high-quality customers or low-quality customers.

The biggest value is not necessarily spotting mistakes and identifying low value customers. Actually, the biggest application has been identifying high quality demographics and high-quality customer bases— which generates a real competitive advantage. It allows for Naked to back investments with conviction and early on— by committing more money and scaling the investment in those channels and, in aggregate, bringing higher quality customers into the business.



Is money poured into distribution, advertising, and new customers worth it? If so, when will we see a return?

Recently, Naked Wines has decided to ditch its legacy main warehouse in Napa and is focusing on the 4 peripheral warehouses around the country. This number may be increased to 8 in the future. Naked also transports wine around the world by shipping in a container called a flexi-tank by bottling close to source to retain freshness and flavor. Customers are satisfied—comparing New Zealand Sauvignon Blanc that’s bottled in the UK versus bottled in New Zealand.

There’s no way to separate COGS and Distribution, as management has not indicated distinctly what they are; however, we do know that both of these costs added together (22M) are still a far cry from the 40M+ in advertising spent.

£35-50M annually is invested in new customers, and it is obvious angels have grown exponentially from 300k to 900k in less than 3 years with group revenue growing 83%. General & administrative costs were £46-49m, with 200 customer service agents employed.

Naked Wines had a statutory lost of 10.7M for 2021. To see when the total will be greater than the sum of its parts, we have to look at repeat customer data and retention.

Repeat Customer Contribution profit is approximately £85-90m. By maintaining a repeat customer retention is 83% to 88% and increasing total sales for the year of 2022 to £355-£375M, it is highly likely repeat customer contribution can exceed 100M, or $50-60 per case. Each case is 12 bottles, so if a bottle sells for 13, that’s $156-160 per case. Assume $40 is made per case— about $30 per case is invested to acquire new customers. COGS and distribution will eventually come to a point where Naked Wine’s scale is so large, certain logistics will become fixed and eventually the U.S will generate operating margins similar to the U.K.



Partnering with Producers

What Naked Wine excels at is controlling future supply through locking in producers by providing them recurring and stable earnings and upfront capital.

Naked Wines pairs with passionate winemakers, who have that desire to make great wine absolutely exclusive for Naked Wine’s Angels. When customers become loyal, Naked is the only place that they can get it. And it’s got to be a wine that’s delivering so that people buy it, so the margin structure needs to be feasible for the business to work.

Naked Wine has 3 teams, led by Lucy in the US, Ray in the UK, and Johan in Australia to partner with vineyards and producers. People who bring the magic are the winemakers themselves. They give producers security through multiyear commitments, and a budgeted and priced “cost plus” model, not an ex-winery price including margin.

Most wine producers are under pressure to meet stringent cost levels and unrealistic production times. Fermentation requires time to turn grapes into alcohol. Any chemicals or catalysts added to speed up this process is undesirable, but most wine producers have small business pains including funding, scalability and marketing. Small producers are often forced into cutting corners and squeezing costs to achieve ever-diminishing margins, meaning quite often the quality of the grape is sacrificed. Producing wine requires upfront funding that must be laid out 10 to 40 months before the final product is sold.

In addition, selling wine traditionally requires finding a distributor that will get the product to a restaurant, retailer and end consumer. If the producer overcomes those two challenges, their return on time, labor and capital is still highly variable, based on the year’s harvest and environmental factors like wildfires, other input costs, and consumer preferences.

Take into account events like tariffs imposed due to Europe/Australia’s dispute with China, and fires in California in 2020— there’s a lot of factors which can impede production.

Naked Wines agrees to order in advance, with a fixed fee per bottle, so winemakers have certainty in commitment. Winemakers can be paid an advance upfront, empowering them to buy better quality grapes.

In normal circumstances, winemakers who have been involved in the industry already have a very good black book of growers they prefer to work with.

Naked will often negotiate and hold the grape contracts but producers will often help work out who has got the best fruit.

Naked Wines agrees with producers on a range of wines - wine-styles, volume and price points. Through an agreement, Naked Wine then funds production through firm orders, cash and other financing support. In terms of payment, Naked Wines pay the COGS upfront, and effectively, pays their producers a salary.

Most of those winemakers will be working on a salary-type model, where they are paid per project. Producers earn through a monthly retainer and/or bottle fee — so that income/profit is guaranteed. In terms of cash flow, and winemakers appreciate that.

Naked Wines is always thinking how to efficiently use their assets, in order to enable the winemakers to produce great wine, at the lowest cost possible. Naked Wines leverages its scale to buy corks, bottles, and boxes in bulk to bring down the costs of its vineyard producers. Afterwards, producers don’t have to worry about storage—stock/inventory is held in four distribution hubs in the U.S and eight around the world. Logistics will improve as Naked Wines expands.


COST = Grapes + Winemaking inputs + Dry goods + Bottling

PLUS = Winemaker income (retainer and / or bottle fee) + NW margin + Delivery cost


As producers scale because they’ve cooperated for a number of years, the dynamic of the relationship changes, depending on how much capital they have. There’s a different model and schedule of payment terms.

Naked’s terms still tends to be more favorable to working with big guys but, ultimately, over time, Naked won’t need to use their balance sheet to support everyone because every producer has scaled up. At a 50,000, to 60,000-case operations scale, producers/winemakers are able to fund their existing business.

Then the second factor is that it’s about creating a brand— additional earnings are possible by impacting direct sales. This gives the producer incentive to do some social media marketing and reviews. In addition, the producer has to do an annual show regarding their brand.



3 types of Winemaker/Producer groups

Assuming Naked Wines only has approximately 250 producers. There are approximately 1,700 registered wineries in Napa Valley alone according to the Alcoholic Beverage Control of California. This shows you there’s a long runway ahead in acquiring producers.

Naked Wines is flexible, and generally offers 3 different solutions for producers.


1.       Low volume winemakers from corporate backgrounds

These are incredibly talented winemakers, coming out of a corporate background and Naked Wine helps set them up in their business. They are a big group of winemakers which are slightly lower-volume projects on an individual basis and makes up approximately a third of winemakers in volume.

2.       Producers who are scaling their business

The second group would be those producers who Naked helps scale their own business. Some great examples of would be Sam Plunkett, an amazing winemaker out in Victoria, Australia. Or Scott Kelley, who runs a fantastic operation in the town of Roseburg, in Umpqua Valley, Oregon.

I don’t know if you guys know exactly the amount of impact that you have on the ground and that Naked is making. We were drawing together a budget for this year, with the pandemic starting and trying to work out if we could get by without laying people off, with revenue down 50%. As it is, with the orders coming in from Naked, we’re on track for a record year and that means we’ve been able to employ a bunch more people in the community. We’re just so grateful and it means so much to us to be a part of this.”- Sam Plunkett Winemaker

3.       Larger wineries as core partners for affordable wine

Then the third group would be larger wineries that have often got a background and heritage in grape growing which Naked Wine uses as core partners for high quality affordable wines.

A great example of that would be a long-term partnership Naked has with LangeTwins, in Lodi, California. Two winemakers work, full-time, on site there – David Akiyoshi and Karen Birmingham – they are a fantastic family business who have got access to a core supply; they have been farming in Lodi for five generations.




Diversity of product offerings in the future

The benefit Netflix has as the largest creator of unique content in digital streaming is that it can go and invest in high-quality production in areas that are relatively niche because in absolute terms, it still has enough customers to consume that content.

Once scale is achieved by catering to a broad palette, Naked Wines can find and work with some winemakers a little more off the beaten track. Naked Wines has got an opportunity to build to the kind of scale where they can do the same thing in wine with more Cabernets – Amhora-Aged, Skin Contact Pinot Gris from Georgia, etc.  Naked Wines will have a group of customers who we know are interested in a more obscure product.

Amazon only stocked books at first, but due to its warehouses, it could keep and cater to a wider variety of SKUs than a Barnes and Noble. Later they diversified into other categories such as home appliances and clothing— so can Naked Wines— but Nick Devlin has indicated moving into Spirits would be more complementary than beer.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Improved Cohort contribution from previous years

- Key metrics which indicate return on investment and payback is improving

- distribution in USA improves with warehouses

- all 250+ partners and producers become self reliant producing 40-60k cases annually

- angels continue to grow

- unit economics improve

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