Introduction
As a middle-class wine drinker I'm only too familiar with Majestic Wine and their appeal to a specific UK demographic. Whether it's through my wife returning home with a case or two for entertainment purposes, or their free glass loan for parties, the brand feels ever-present in this neck of the woods.
Since opening its doors in 1980 the company has grown to over 200 stores in an impressively consistent expansion (although with a few hiccups along the way). Fundamental to this success is a decision not to compete head-to-head with the large supermarkets (a leading cause of off-license mortality) and focus instead on higher-end but still affordable plonk.
What has happened this century?
Since the millenium Majestic Wine has doubled its store estate, turnover has more than tripled and profits have leapt almost six-fold. By any measure this enterprise is a success story and since listing on AIM, back in 1996, it has been one of the brightest stars on the alternative market. If you'd had the good sense to invest in 2001, at around 55p, then about this time last year you might have cracked open the bubbly as your investment became a 10-bagger!
Unfortunately the party came to an abrupt halt almost exactly a year ago when the share price hit 590p and began an inexorable decline; this seems remarkably prescient given that details of challenging trading conditions didn't emerge until six months later. Either way it's been a tough year for the firm and they've been motivated (forced?) to invest in infrastructure, technology and consumer insights to support future growth.
From an investment perspective this leaves us in an interesting position: if the outlay pays off then Majestic Wine will look cheap in the rear-view mirror but if it doesn't then organic growth will remain hard to come by. To my mind the key questions are whether the business is at least holding its own in the market, at present, and whether there are any green shoots visible due to this investment?
My first area of concern is over the high level of growth that management think is possible: 100 to 200 stores took 12 years but the plan is to ramp up to 330 sites in total. At the current rate of expansion (circa 12 new warehouses per annum) this will take at least a decade to achieve.…
