Morning:
8°c
Steve Lewis has got a drink problem: how does the chief executive of Majestic Wine keep up the price of the booze he is selling when supermarkets are full of three-bottles-for-£10 offers, which make consumers assume that wine is getting cheaper to make, even though the opposite is true?
Annual results out yesterday, the first he has overseen since taking over from industry doyen Tim How, suggest he is making a decent fist of the challenge.
Profits slumped as companies cut back on entertainment but so far Majestic is hanging on to market share of about 3% — supermarkets have most of the rest with 70%.
He managed to shove the price of the average bottle of wine sold in his stores up to £6.35, which compares to about £4 elsewhere. That's pretty good given that the High Street competition — notably Wine Rack and Threshers — is trying to undercut Majestic.
The early signs are that Lewis is getting the best of this scrap — the company behind Wine Rack and Threshers just recorded a £30 million loss for last year and the auditors says there is “material uncertainty” about its ability to survive.
David Stoddart at Altium Securities says: “There's a fundamental problem with the off-licence model. It had its period of relevance in UK retailing but it's essentially a low-gross-profit per customer business with high operating costs.”
If the off-licences do go under, that's good news for Majestic, but it creates a conundrum for Lewis about how he grows the business.
Does he chase Threshers' custom, or let Asda mop up that end of the market? He clearly can't compete with supermarkets on value — indeed, he doesn't want to — but he doesn't have the customer base to challenge the higher-end merchants.
That may explain the recent purchase of fine wine specialist Lay & Wheeler — a deal that was looked upon with suspicion by the trade.
One former Majestic executive told me: “It was regarded as a bit of a basket case. Tim How wouldn't have bought it in a month of Sundays.”
The early signs however, are that Lay & Wheeler is working out — Altium reckons it will add £600,000 of profit this year.
How much bigger Majestic itself can get remains open to question.
At the moment there are 150 stores, with plans for another 100 over 10 years.
Some analysts reckon Majestic is already close to saturation point in many areas of the country.
If Lewis does try to expand rapidly, that could just open the field for a niche operator to come in with interesting wines at lower prices.
Also, having to supply 250 stores across the country is limiting in itself: some of the most interesting winemakers would struggle to produce enough of the stuff in the first place, which, in turn, might lead to the in-store offer becoming blander.
Guy Woodward, the editor of Decanter magazine, reckons that Majestic remains the benchmark for wine retailing.
“They stock interesting, varied wines and their staff are excellent — helpful and knowledgeable, which is exactly what you need if you're going to encourage consumers to branch out. They've been head and shoulders above their traditional competitor, Oddbins, for the last few years.”
One problem remains that Majestic has a minimum purchase of a case (12 bottles), which might put off more casual wine buyers in a bad economy.
Lewis has been experimenting in a few stores with cutting that minimum to six bottles. That seems to encourage customers to buy a few quality bottles from Majestic and get the plonk
elsewhere.
That's got to make more sense than tangling with Tesco.
Caught short by Applegarth
Adam Applegarth is letting me down: his batting average has collapsed.
As if taking Northern Rock into bankruptcy at a cost to the rest of us of £15 billion wasn't enough, he is now in danger of losing me a bet.
You will recall that I am a close follower of his amateur cricket career and have been predicting that it will thrive now he has time to fully focus on the game, his stint as a chief executive being over.
Extrabet.com quoted me a spread for his batting average at the end of the season with Sunderland Cricket Club of between 28 and 31.
I have bought at £5 a run, which means I owe a financial literacy charity £5 for every run he averages below 28 and Extrabet owes the same for every run over 31.
So far he's been woeful, playing six times and scoring just 138 runs in total. That's an average of merely 23 — so I'm £25 down at this point.
The excellent statistics on the club website reveal that he usually gets caught out. Of course.
Punch and an old double act
A TV scriptwriter looking to spoof investment bankers might call his characters Simon Mackenzie-Smith and Rupert Hume-Kendall.
The real-life bankers who go by these names were back on the scene yesterday after a delay that — for us fans of their work — only made their return all the more exciting.
The chaps from Merrill Lynch could probably keep us entertained by recycling their greatest hits, but like all great performers they strive to offer something new.
Two years ago they had back-to-back smashes with the flotation of Debenhams at 195p a share (price this morning 79p) and the crackerjack deal many regard as their finest ever work of art: Sports Direct at 300p a share (89p to you today, guv).
So the air was thick with nostalgia when Punch Taverns yesterday unveiled a £350 million fund-raising exercise led by our heroes.
Some characters from Goldman Sachs were also involved, but they don't have the same cachet — indeed, they couldn't rustle up a double-barrel between them.
The offer to Punch investors was for new shares priced at between 100p and 125p each.
Any thoughts that a Mackenzie-Smith/Hume-Kendall discount should apply were dismissed.
The City studied the form and duly coughed up £375 million — at the bottom of the range, admittedly, but that's not bad for a company that until recently looked like it was facing a knockout.
I told you these boys are good. For their clients, anyway, if not for the rest of us. Investment bankers mostly don't like to be in the news (“I prefer to keep a low profile, old boy,”
they say).
But this is surely false modesty. Mackenzie-Smith and Hume-Kendall should be promoted at every opportunity.
