Naked Wines represents an “exemplar” match-making business model in the wine retailing sector because the transaction between wine producers and wine consumers is fully mediated by Naked Wines – it would be very difficult for the wine buyers and sellers on Naked Wine’s platform to cut the intermediation.
The model revolves around an online platform which links (a) quality independent winemakers around the world with limited production capabilities and b) end-customers seeking to explore and enjoy a broad variety of quality wines at a much lower price than from existing brick-and-mortar retailers. An innovative element of the model is that customers can sign up as ‘angel’ investors by prepaying at least £20 on a monthly basis. The company then uses this money to fund independent winemakers in advance so that they can afford the risk of producing larger than usual quantities. In this way, and by selling directly with no other intermediaries, Naked Wines can enjoy heavy discounts which are passed onto end-customers with discounts ranging between 25-50% on the full retailing price, on top of being able to redeem all the money previously prepaid. The complementary aspects of the model include: a) close monitoring of customer preferences via a detailed feedback system which can predict future purchases; 2) effective cash flow management since the company mainly invest money on the behalf of end-customers; and, 3) a pure marketplace section in which demand for new winemakers is tested with limited quantities and a bidding system until stock lasts.
Naked Wines was founded in Norwich, UK, in December 2008 by Rowan Gormely, the founder of successful firms such as Virgin Money and Virgin Wines, with backing capital from wine merchant Wein International and a German logistics partner. As of December 2013, the company had around 200 employees and over 140,000 customers in the UK as well as 60,000 in the US and Australia where it recently expanded. To date, Naked Wines has invested over £25 million in 135 independent winemakers across four continents, achieving around £35 million revenues and £1 million of pre-tax profit in 2012. In 2013 revenues climbed to around £50 million and the company received a third round of £6.4 million funding from Wein International to finance its international expansion.
Naked Wines blends elements close to traditional wine clubs models – e.g. Sunday Times wine club – and more recent approaches mixing brick-and-mortar retailing with an online website – e.g. Majestic – with other characteristics more commonly found in social network and crowd-funding platforms. For example, customers can share experiences and reviews as part of the Naked Wines community and, importantly, they can enjoy the feeling of being investors in independent winemakers. Overall, the most similar concept is arguably Virgin Wines, which however does not include the innovative crowd-funding element. In the long term, Naked Wines aspires to develop into a sort of ‘Kickstarter’ platform for wine investors. In this vein, to test expansion potential into finer wines requiring longer (up to 3 years) time for maturity, Naked Wines launched the first UK wine bond in September 2013, offering customers the possibility to invest with potential returns between 7-10%, payable in cash or wines.
CUSTOMERS – WHO THEY ARE:
The business model represented by Naked Wines mainly serves TWO groups of customers. The first is consumers of wine, a minority of which are not subscribers of the ‘angel’ system based on monthly payments and simply use the website to source good wines when needed (without additional discounts). Through the recent wine bond sales, Naked Wines is also testing the possibility to appeal to customers more interested in traditional investment opportunities rather than wines.
ENGAGEMENT – VALUE CREATION PROPOSITION:
The value proposition is twofold. On the one hand, Naked Wines offers customers interested in quality wines the possibility to buy from a large number of independent winemakers around the world with home delivery and at a substantial discount. Customer engagement is also achieve via the above mentioned crowd-funding mechanism which makes customers feel as though they are proactively supporting independent winemakers, with characteristics similar to fair-trade certifications. These customers also enjoy a sense of exclusivity – i.e. the same wine is not available elsewhere – and of being part of a creating winemaking process – i.e. each customer can interact with winemakers and provide feedback online – within a like-minded community. On the other hand, it offers these independent winemakers crowd-funded investments (generally in the region of £50,000) to reduce the risk of increasing their production volumes in exchange of very low prices which are then partly passed onto end-customers. Winemakers can also enjoy the possibility of being connected to their customers – an important aspect for small producers in this sector.
The model is bus-oriented for end-customers – although they might decide to tailor their investment to particular winemakers using the marketplace function – and taxi-oriented for independent winemakers, depending on their wine’s characteristics and production capabilities. The two sides reinforce each other, because the more customers buy from a given winemaker, the more funding it receives and the higher the discount Naked Wines is able to offer.
The platform is used to market a large number of wines in three ways, generating a certain degree of network effects. First, customers can compose their own wine cases thus generating information on their preferences which are used by Naked Wines to improve its investment strategy. Second, they can buy pre-packed wine cases through which the company generates economies of scale for winemakers and reduce warehouse and inventory costs, e.g. by increasing rotation of low-selling wines. Third, on a weekly basis, winemakers who recently joined the network can pitch a given amount of cases of their wines to test market demand and the logistics aspects of the business. In all cases, customers can use their wallet of prepayments and there is a sophisticated feedback system which they can use to grade the wines they drink and which shapes suggestions and the composition of pre-packed cases.
DELIVERY – THE VALUE CHAIN:
The value-chain of Naked Wines is rather straightforward. Consumers use the website (or the Naked Wines app) to scan available products, express their preferences, bid on the marketplace and socialize with other users and/ or winemakers. In the US and Australia, the company is also testing the possibility to run its own vineyards to engage more effectively with its customers.
To keep delivery time fast, Naked Wines uses a network of warehouses throughout the UK (and the US/ Australia). Winemakers thus ship to these warehouses and then Naked Wines delivers them to the final customer. In this way, the company can also use its stock to create pre-mixed cases thus increasing product rotation and keeping inventory costs down. Its standard delivery is £4.99 for next business day (£6.99 for Saturday deliveries) to almost everywhere in the UK if an order is placed before 5pm. However, delivery is also free to most UK postcodes for orders above £80. From spring 2014, the company is testing a same-day delivery service in London for £14.99.
In terms of marketing, Naked Wines has an intensive promotional activity, mostly based on discount vouchers for the first order – often offered as part of initiatives of co-marketing with other companies. Every month, customers also receive an email with an offer for a free bottle (generally worth £10-15) if they place a minimum order and on a weekly basis other email advertising new wines on the internal marketplace. With respect to branding activities, most of the wines specially produced for Naked Wines include a label with a dedicated ‘personal’ message of ‘thank you’ from the winemaker to its Angel customers.
MONETIZATION – VALUE CAPTURE:
The latest financial information about the company suggests that Naked Wines closed 2013 with around £50 revenues and additional funding from investors. The fine wine bond sale in autumn 2013 was also successful: the company hoped to raise at least £1 million, set an upper limit of £5 million and received offers for £6.2 million, with two-thirds of subscribers opting for the 10% return in wine credit. Although the company does not disclose its margins, information released to the public for the bond sale suggests it enjoyed between approx. 30% gross profit on wine purchases, with selling/distribution costs amounting to 13-16% and other operating expenses between 11-13%, for total pre-tax profits in the region of 4-6%.
Written by Dr Alessandro Giudici and edited by James Knuckles under the direction of Prof Charles Baden-Fuller, Cass Business School. This case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. © 2016
Published 21 April 2016