The truth is in the wine

How is Naked Wines using technology to make good wine available to all? Jason Hesse reviews the business.

The wine-making industry has existed for thousands of years. It is pretty good at what it does. How can a technology start-up disrupt the market?

Market

Naked Wines is an online wine marketplace, where consumers sign up to be “wine angels”, investing £20 per month into Naked Wines’ fund. The company then invests in independent winemakers, who make their wine available to the angels at a lower price than in traditional supermarkets.

“The old-fashioned business model is to screw the supplier and screw the customer while sitting in the middle and taking all of the profit. We use crowdfunding to do things that we wouldn’t be able to do with normal buying power,” says Naked Wines’ Greg Banbury.

“With the angels’ £20 a month, we can invest in the independent winemakers to help them set up, buy better grape varieties, improve their infrastructure and give them a reach in the UK market. Currently, it’s a tough market that is dominated by supermarkets and wine buyers who take advantage of the supplier and customer.”

Naked Wines finds local independent winemakers and offers them cash upfront. “It’s a very unusual thing to do. Traditionally, a supermarket will go into a struggling winery and just give them a price for their wine. But this means higher costs and higher prices. We pay them upfront so that all risk is removed. The winemakers don’t need to worry about selling the wine. They can focus on just producing it.”

The production details are agreed in advance with the wine maker, as Naked Wines knows its customers are already signed up and waiting for wine. “We drive down the costs, the wine maker makes a living and the customer rewards with lower prices. It’s a virtuous circle,” says Banbury.

Wine angels signed up to Naked Wines invest £20 per month, which is saved in an account towards their next order. Customers can spend their investment on whatever wine they choose to, whenever they want.

The company primarily signs new customers up through partnerships with large retailers, for example Amazon or Ticketmaster. Consumers that order goods from these partners are offered £40 vouchers for Naked Wines to try the service. “When you use the voucher, we invite you to be an angel and to try some of the wines as a one off, just to see the quality of the wine. From there, we’ll debit £20 from their bank account each month,” explains Banbury.

The majority of customers wait until they have accrued enough money to buy a case of wine. “This means we’ve got plenty of capital to play with. The money is kept in a trust account, so the money is safe.” On Naked Wines’ website, two prices are displayed: the full market price and the angel price, which is between 25 and 54 per cent lower.

The market, worth £30 billion, is dominated by the supermarkets. Eighty per cent of wine is sold through supermarkets. “The wine makers don’t get a good price. Supermarkets offer cheap, bulk-made wine that’s made in a factory and tastes like crap,” he adds.

Naked Wines’s customer base is the 20 per cent of the market that doesn’t buy through supermarkets: “We’re not trying to reach people who want to pay a lot of money for wine and store it in their cellar. We’re targeting people who used to spend £3-4 in their local store but are now happy to pay £6-7 per bottle now for something that would cost £15 in a supermarket.”

As well as indirectly competing with supermarkets, the company’s main competition is from other online retailers, such as Laithwaites and Virgin Wines. “We’re all going after people that like to buy stuff online. If you like going to your independent wine shop, we just can’t match the face-to-face element. We try our hardest to make the website informative and fun, but we can’t compete with wine tasting in a shop.”

Team

Naked Wines was founded by Rowan Gormley and the founding Virgin Wines team. After training as an accountant with Arthur Andersen in South Africa, Gormley joined venture capital firm Electra Capital Partners in the UK.

He was hired by Richard Branson in 1994 to identify new business opportunities, and helped launch Virgin Money in 1995 as chief executive, and then Virgin Wines. When the business was bought by Direct Wines in 2008, Gormley resigned as chief executive and set up Naked Wines with a team of ex-Virgin Wine staff.

“Gormley built up a very young, entrepreneurial team at Virgin Wines,” says Banbury. “When the company was sold to Direct Wines, they weren’t interested in shiny, new, clever ideas. So we all left and launched Naked Wines.”

There were 11 people involved in the founding team – the entire Virgin Wines management team. Gormley is chief executive and Derek Hardy is IT director. Banbury and Francesca Underhill lead the company’s marketing side.

As for the company’s suppliers, Eamon FitzGerald, a former wine blogger, looks after the winemakers. “Most countries have a wine trading board, which manages exports for winemakers trying to get into foreign markets such as the UK,” explains Banbury. “This is how we started finding suppliers. Today, we get sent wine from winemakers every day for us to taste.”

Naked Wines also has a network of 100 “arch angels”. These are the company’s most interactive customers, who are invited to regular wine tasting events to try out new potential wineries. “These are real wine drinkers who act as our wine buyers,” says Banbury.

Tech

Naked Wines’ platform has been built from scratch, using open-source Java technologies. Its database is also open source, using PostgreSQL. The servers are all hosted on Amazon EC2. The company uses Spring Social to manage its Facebook and Twitter integration.

“What we try to do is build service-orientated architecture. Every little bit of functionality is built separately,” says Banbury. “We’ve just built a great API so we can build iOS and Android apps.”

Banbury says the platform was built to be very scalable. The only scaling issues for Naked Wines would be its logistical and warehousing operations. “If our orders suddenly doubled, we would need an army of people to pick and pack cases,” he says.

Warehousing is headquartered in Northampton and deliveries are handled by Parcelforce. Naked Wines was Britain’s first online wine retailer to offer next-day delivery, adds Banbury.

Bottling is also a large part of Naked Wines. Until this year, all of the wines were bottled as source. The company is now experimenting with outsourcing bottling to a plant in Germany, which will help drive the cost of wine down for both the winemakers and customers. “We told our angels that we’d be able to cut costs this way. We can assure the quality, so why not try this out and bottle the wine somewhere else? The only thing it will do is to bring down the price while maintaining the quality.”

Naked Wines’ developers are currently working on improving its mobile apps. “When people drink a bottle of wine, they’ve often got a phone in their hand or nearby. We’re thinking of ways to use mobile to put wine makers in touch with customers, helping customers to decide and place orders,” says Banbury. He admits that the Naked Wines website also needs some “serious work”.

“We hatched Naked from scratch. All of the technology – the website, our app, everything – has been built in house in Norwich,” he explains. “It’s been a truly amazing experience to build something from a blank sheet of paper into a £30 million-a-year business.”

Traction

Naked Wines currently has 100,000 angels signed up to the service, investing £20 each per month. The company ships around 600,000 cases of wine a year and turned over £30 million in 2011. “Thanks to our angels, we have £2 million to invest in winemakers each month,” explains Banbury.

The company has won several innovation awards, and was a National Business Awards winner in 2011.

Naked Wines’ initial seed round came from German direct wine firm, WIV, which invested €3 million in the company. “When Rowan was looking for investment to launch Naked, they were looking to invest in talent. The reason they went with us was because they saw Rowan and us as a way to turn their business around. They’re very hands off, they let us run the business ourselves.”

Naked Wines has focused on the UK market, but is now experimenting with retail operations in the US and Australia. “As a wine business, you have interest from around the world as you’re dealing with people from around the world. These two countries offer us a huge opportunity to get in on the ground with some talented winemakers,” says Banbury.

The company is also opening its own winery in California, called the Wine App Store, where winemakers can come to the winery to use its facilities to make wine. “It’s a huge saving for a winemaker who doesn’t have the infrastructure and equipment,” Banbury explains.

Naked Wines’ international expansion will be “very low key” to start, he adds. “We’re focusing first on the winemakers, making a small number of those bottles available to the market. We’re putting the infrastructure in to begin with, before expanding properly.”