Paul Scott interviews Jay Wright, CEO of Virgin Wines (VINO)

Virgin Wines (VINO) CEO interview with Jay Wright (JW), 11 November 2022

Here's the transcript of my recent audio interview here (also available on podcast).

Hello, I’m Paul Scott, and today I’m talking to Jay Wright, CEO of Virgin Wines, ticker VINO. Thanks for joining me Jay!

Quick disclaimers - I'm not charging a fee (or being given free wine!), this is not advice or a recommendation, and I don't hold shares personally. Please always do your own research on investments.

As usual, could we start by asking you to give an overview of Virgin Wines please.

JW: Virgin Wines is one of the UK’s largest direct to consumer wine retailers. Key focus is customer acquisition - large numbers, at low cost, high quality with good payback. We have several subscription schemes, wine advisory, and just pay-as-you-go wine sales. High customer retention rates. Unique sourcing model, maximises margins. Growing B2B commercial division, performing extremely well. We deliver industry-leading EBITDA margins, and maintain a strong balance sheet.

You did a very interesting results webinar for FY 6/2022 recently, on InvestorMeetCompany, I watched the recording, thank you for doing these, I know investors find them very useful. I’ll try not to duplicate that content. Let’s talk about the sector for subscription wine deliveries - it’s quite competitive (e.g. Naked Wines, Laithwaites, The Wine Society), with quite tight gross margins isn’t it, so what are your competitive advantages?

JW: Our high EBITDA margin, ahead of the competition, shows that we do have a competitive advantage. It’s key bringing in new customers at a low acquisition cost. Then retaining them for many years. So we want a business that’s a bucket, not a colander! Customers love the quality of the wines, and our service. We’ve been focusing on those things for over 22 years. Along the way we’ve learned how to do it really well.

Follow on - what are the costs:benefits of hiring the Virgin brand name? Has its advertising (e.g. the latest airline ad) gone over the top with wokeness, that might not fit your customer demographic?

JW: we have the brand name under licence since 2005. We pay a % of revenue to the Virgin Group for use of the brand. It’s a global, iconic, highly trusted brand. Lots of partnerships with other parts of Virgin, so there are lots of benefits. Any brand will have its advocates, and its detractors. I’m a firm believer that the Virgin brand is a net positive, and we’re proud to be part of the group.

We’ve got a wide demographic, e.g. 15% are under 30. Probably a wide range of customer views. I’ve not seen the latest Virgin Airlines ad, so can’t comment. It’s completely up to the individual businesses how they advertise. Overall, I’ve always loved the disruptive element of Virgin as a brand. The ethos is doing business the right way, and change things for the better. We’ve tried to keep that ethos. What are all the customer frustration points, and how do we eliminate those? Putting the consumer at the heart of everything we do, is very much the Virgin ethos, which we follow too.

In a consumer downturn, won’t people cancel wine subscriptions? How much of that are you seeing?

JW: Funnily enough, alcohol is one of the last things people cancel. I can remember the 2008 financial crisis, we actually did quite well back then. We saw good growth over that period. People decided to stay in & socialise at home in 2008.

Our wine bank scheme is a very useful tool to help people budget their wine spend. Saving an amount from £15-100 per month, and we add 20% “interest” to that balance, for people to spend on wine, gives value for money. Saving little & often, is a good way to budget, when paying £100 for a full case of wine, might feel like a big ticket item if bought in one go.

This is why our 130k customer base on wine bank has stayed so loyal.

We’re not immune from macro factors. Some might cut back a bit with us, but others might curtail going out, and buy more from us instead. So there are opportunities as well as challenges in the current climate.

What is the average customer lifetime in months/years? Your customer acquisition cost seems low at £13.22, how does that compare with lifetime value?

JW: Our payback rates are on average 5x cost of acquisition, over 5 years, in terms of margin. We think that’s extremely positive. Should we reduce our payback, by paying more for customers? No, we’re disciplined in customer acquisition. That’s what drives our profitability.

We don’t really measure time re customer lifetime value, as there’s so much variation. We do a lot of cohort analysis. We still have many thousands of customers in our pre-FY 2015 cohort. In FY 2019, all those pre-FY 2015 customers delivered £20.9m revenues. In FY 2022, that same cohort delivered £20.4m of revenues - so 95% sales retention rate, which proves how loyal the customers are.

Of course there are customers who drop off straight away. Our conversion rate is 53%, so nearly half the customers who take an initial special offer, don’t order again. We know there are lots of people who take advantage of a low priced initial offer, then take advantage of another offer from a competitor. That’s just one of the consumer dynamics we have. But the 53% of customers who do convert, largely go on to be long-standing, loyal customers, giving us good payback.

Even the cohort who joined in the pandemic, at IPO, a lot of people asked us if there would be a lot of attrition from new customers in the pandemic. In FY 2022, the FY 2020 cohort delivered almost the same, £20m revenues. So again, very good customer & sales retention.

Results for FY 6/2022 impressed me. The business looks resilient, with PBT held level at £5.1m, on £69.2m revenues, only down 6% revs on the pandemic-boosted prior years. How have you managed to hold on to those pandemic gains, when others (e.g. Naked Wines) are struggling?

JW: It goes back to what I was saying about cohorts, and customer loyalty. So we don’t have that high attrition rate. In the last 12 months, we have seen order frequency go down a little, as there’s pressure on consumer discretionary spend. That’s to be expected. Where we lost the revenue, it wasn’t our core business - we retained all that existing customer revenues. Where we lost a little, was on new customer acquisition, where we scaled back a little (marketing spend), in response to the changing environment.

Also our gifting business had a pandemic boost, with shops shut for lockdowns, online gifting became a lot more popular for a while. So the lost revenues (in FY 6/2022) was exclusively from reduced customer acquisition, and lower gifting. The core business remained flat.

Online marketing costs got much more expensive in the pandemic, and this was the hidden flaw in many eCommerce businesses, as Google & Facebook grabbed their profits effectively. I’ve heard that, more recently, online marketing costs are coming down by about 18%. What are you seeing?

JW: This is a reason why Virgin Wines is as profitable as it is - because we don’t major on digital marketing. We use a partnership model with hundreds of organisations that have a customer demographic similar to ourselves. We bring customers in by advertising to their customer lists. On a fixed cost per acquisition basis, which is what keeps our CPA (cost per acquisition) so low.

Digital marketing costs fluctuate, and you’re right they went up in pandemic, so we scaled back on that element. We have an “allowable” (maximum) that we’re prepared to pay through our digital channels, and we just manage that on a day-to-day basis. We never go above our allowable. So it doesn’t affect us that much if the prices change. We’re incredibly disciplined what we’re prepared to spend.

B2B partnerships look interesting, esp Moonpig, and rail companies, even the Conservative Party (who need to drown their sorrows right now!). Talk us through how these partnerships work, and are they worthwhile financially, or more a way of attracting new customers for subscription services?

JW: We’re hoping Boris will have a big party!! [laughter]. It’s both of those things. Commercial partnerships are blossoming for us. Moonpig is a great example of customers that use our products to supply their customers. It started off in Oct 2021, with a handful of wines available on Moonpig, to attach to a card, as a gift. That relationship has blossomed in the last 12 months, we’re really well aligned, on a non-competitive basis, and supplement each others’ business models. This has been expanded to almost a store within a store now - over 70 different wines available, brilliant concept, really successful, and want to scale it up further. With rail companies, we’re supplying the wine for their trains. Lots of opportunity to scale up commercial business & partnerships. We’ve just agreed a new partnership with SAGE. “Vintage by SAGA”, we’re hoping to deliver a brilliant wine service.

We pay a “bounty” for each new customer acquired through other brands. So we’re only paying for actual customers that order product. We work with the same brands year after year, as these partnerships work for both sides.

Inflation - I saw your guidance is saying revenues flat for FY 6/2023, and EBITDA margin down from 9% to 8%, so you’re not expecting to be able to pass on all your cost increases. Why is that?

JW: Mainly because there are so many cost increases! The cost of glass has gone up substantially, so has shipping & couriers, packaging. We do manage to mitigate the vast majority of that, with different levers we can pull. Costs below the gross profit line are more difficult to mitigate - an example, The Waste Levy is a recycling tax on goods brought into the UK, so glass, packaging, metal. We have to buy PRNs (Packaging Recovery Note), which are offset vouchers. On glass, that was £25/ton about 18 months ago. It’s now £250/ton. So our waste levy costs this year will have gone up by about £300k. It’s just a tax, that you cannot do anything about. There are just costs that you can’t mitigate. We’re just pleased that we’re still aiming to deliver an 8% EBITDA margin - we think that’s still industry-leading by some way.

[Paul - and most of that EBITDA translates into profit, as you’re quite capital light, and have no interest charges as you hold net cash. I can’t talk for everyone, but many private investors are suspicious of EBITDA (I am anyway!), so it’s better to quote adj profit before tax I think. Just a bit of feedback there]

I’m impressed with your balance sheet - it looks healthy, and you have plenty of cash. I also like that you ring-fence customer cash.

JW: We see customers' cash as being their money, which they save with us. It’s not our money until they spend it on wine. It’s completely safe, in a separate account. If customers want their money back, they can just ring up and have it back. This is not something our competitors do.

[Paul: Good for you, that’s refreshingly transparent & ethical, I think]

What is the priority going forwards - driving profits or growth, dividends or acquisitions?

JW: Growth and profits are always going to be aspirations for the business. We’ve never wanted to grow at the expense of profit. We’re old fashioned - good businesses generate profit & cash, and have healthy balance sheets - which then enables us to grow further. We get to see a lot of IMs (Information Memorandum, re potential acquisitions) - there are a lot floating around. There are not enough potential acquisitions of a quality that would make us jump at them right now. But we’ve always got our eyes open, and if we could find acquisitions which would enhance profits & add value, and make strategic sense, we’d be keen to look at that.

We discuss things like dividends & share buybacks at Board meetings, because we have cash, so those are ongoing conversations.

But solidity of business, and being debt-free are so important in the current climate.

A good level of cash on the balance sheet, just enables us to take advantage of opportunities when they crop up, whatever they would be.

Paul: with hindsight, the IPO price was much too high, and a private equity exit, which often seem to go wrong. But now, the share price seems to have gone from one extreme to the other, and is now a value share, with little, if any growth in future. How do you feel about that? How much bigger can the business get, or is it reaching maturity or market saturation?

JW: It’s nowhere near that. We increased our market share from 6.1% to 8.4% in the last 12 months. That’s still a small part of the overall market, with plenty of headroom to grow - massive growth potential in the UK.

We think the business is substantially undervalued, but all we can influence is how the business performs. We’ll continue to drive the long-term strategic pillars, grow the business, and show what a resilient business it is, when times are hard. Grow & thrive when things are a bit more positive. Over time, I’m pretty sure the share price will look after itself.

[Paul: I’ve found another problem with IPOs, is that brokers are lazy, and place large lumps of shares with institutions, leaving inadequate market liquidity in the aftermarket. Liberum, an excellent broker, shares research with us on Research Tree, a good thing].

Is there anything else you’d like to mention that we haven’t covered?

JW: We’ve got a strong business, profitable in all the last 10 years, leading our sector for profitability. Resilient business model, and at the moment our shares are exceptionally good value. More than anything Paul, I love what I do! I’m incredibly lucky to do something that I love getting up to do each day, and hope I can continue doing so for a number of years to come.

Thanks & goodbyes.