It is a commonly held view that it is difficult to make money out of wine, not least because of the punitive rate of tax. Duty on a bottle of wine accounts for £2.16 of the purchase price and when you throw in 92p in VAT, taxes swallow an eye-watering 55 per cent of the cost of an average bottle of still wine.
Given the list of casualties among off licences over recent years, including Threshers, Parisa, Unwins and Oddbins (now reborn), it is hardly surprising that there are more than a few sceptics who reckon that the three-year turnaround of Majestic Wine being implemented by new management will also end in disaster.
Surprisingly, Rowan Gormley, the Majestic chief executive leading the turnaround, agrees that the off licence is dead. “If you are selling a bottle of wine, you won’t make money,” he declares. “If you’re selling a relationship, you can make money.”
As an example of what he means, Mr Gormley cites the $800,000 raised by customers of Majestic’s Naked Wines business to support winemaking communities devastated by Californian wildfires. “That’s not a normal retail relationship,” he says.
Mr Gormley, who took the reins at Majestic in April 2015 as part of its £70 million acquisition of his Naked Wines business, has spent much of his time since trying to create the same sort of relationship with its customers. As well as revamping the stores and sorting out basics such as product range and pricing, he has taken steps to improve staff retention. A more engaged workforce has in turn created improved customer engagement, thereby increasing customer loyalty and retention.
It may sound simple, but it is only now, in the final year of the three-year turnaround programme, that Majestic is in a position to kick on with accelerating the rate of sales growth. As Mr Gormley explains, the key is creating a solid bedrock or foundation for growth: “The last line to move is the sales line.”
Yesterday’s better-than-expected half-year results suggest he is still on track with his vision, despite challenging economic and political conditions. Majestic’s retail business, where one of the first things he did after arriving was to scrap new openings, sales are on the up and, as the costs associated with the transformation reduce, these are now flowing through to profit. Adjusted operating profit for the division increased by almost a third to £4.6 million.
Naked Wines, which has put last year’s US marketing glitch behind it, moved back into the black, with profits of £4.7 million, while a recent move to add craft beers to its angel-funded business model holds promise. New management at Lay & Wheeler, its 160-year-old fine wine business, reported growth in both sales and profits, although Majestic’s struggling commercial unit, which supplies pubs and restaurants, went backwards again, with profits down 36 per cent to only £1 million. However, Mr Gormley was adamant it would be back in growth from next year.
For those investors concerned at having their cash tied up in a UK retailer in such challenging times, Mr Gormley points out that 20 per cent of its sales now come from overseas, while 50 per cent of its sales are so-called multi-channel, coming via digital or over the phone.
All of which leaves him as convinced as ever that his target of turning Majestic into a £500 million turnover business is on track. Having done most of the heavy lifting, the former Virgin Wines boss reckons the company is ready to put its foot on the accelerator. While full-year results would be in line with market expectations, further out he said the group was aiming to step up the rate of sales growth in the medium term by steadily upping its investment in acquiring new customers.
ADVICE Hold
WHY At a multiple of 23 times earnings the shares are not cheap, but now is not the time to step off the ladder
John Menzies
John Menzies has come a long way since its founder opened an Edinburgh bookshop in 1833. Today it has operations around the world, but its corporate future has been dominated by persistent questions about its structure in recent years.
If, when and how to split its two divisions is something management and shareholders have been giving great scrutiny to especially because the trading divisions have little in common with one another.
One is involved in ground handling at airports across the globe, which includes doing things such as moving luggage, pushing staircases into place and de-icing aircraft. The other part delivers magazines and newspapers around the UK and has more recently moved into parcel delivery.
Previously it was felt that the distribution division helped to fund the expansion of the aviation division into new markets. The growing maturity of the latter business has reduced the effectiveness of that argument.
Thoughts of splitting the company moved forward after the appointment of Dermot Smurfit, the Irish paper and packaging magnate, as chairman in July last year. Since then Menzies has bought Asig, which had 8,000 staff and specialises in refuelling aircraft, for £153 million and had hoped to spin off the distribution division through a takeover of DX. While that second deal did not go through the Menzies board remains keen to find a way to separate the company because it believes it will offer more value for shareholders.
The confirmation yesterday that Rothschild has been brought back in to examine options should not be a surprise, but the shares nevertheless rose by 10½p, or a little under 2 per cent, to 684½p.
Whatever happens shareholders should receive a sweetener, perhaps in the form of shares in the new entity or a special dividend. A clear decision on the best route to separation will be made in March alongside annual results for 2017. A brief trading update suggested both divisions are on track. Encouragingly the integration of Asig is progressing well and savings are likely to be better than first anticipated.
ADVICE Hold
WHY The business split offers potential but uncertain upside