Business Analysis: Majestic fizzes as wine sales buck the trend

Warehouse that sells by the caseload in for a merry Christmas, but little cheer for rivals
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The Independent Online

As Majestic Wine, the wine warehouse group that sells bottles by the caseload, racked up another sharp rise in interim profits, the clock was ticking yesterday on the sale of Unwins, its less fortunate high street rival.

As Majestic Wine, the wine warehouse group that sells bottles by the caseload, racked up another sharp rise in interim profits, the clock was ticking yesterday on the sale of Unwins, its less fortunate high street rival.

Majestic, the toast of the City for its sparkling stock market track record, revealed yesterday that underlying sales had accelerated since the summer, putting it in pole position for a merry Christmas. The group's success contrasts markedly with the rest of its wine retailing peers, who have variously hoisted the "for sale" sign, metamorphosed into a convenience store or just vanished from the high street in the case of brands such as Ushers.

Fed up with losing money, the family that owns Unwins is seeking to cut its ties with one of the country's last big independent wine chains after concluding that without outside investment its prospects were glum. Castel, the French owner of Oddbins, is poised to buy Unwins - at least it was unless it missed last night's deadline for a firm bid. With several private equity houses breathing down Castel's neck, a deal is just days away.

Thresher, the self-appointed drinks cabinet for all unwanted off-licence chains, has thrown up its hands and insisted it cannot compete with the mighty supermarkets. Roger Whiteside, the group's new chief executive, admits: "There is a role for specialists but we aren't special enough."

Meanwhile, Majestic, a niche retailer that has shunned the convenience of town centres, goes from strength to strength. Yesterday the group, which opened its doors in 1980, said pre-tax profits rose 27 per cent in the first half of its year to £5m, putting it on track for its 12th consecutive year of profit growth. So what is its elixir for success?

Tim How, the chief executive, says Majestic works because it has a low cost-base compared with its high street rivals and the space to sell the broadest range of wines around at irresistible prices. "The cost structure of our business means we can operate on a gross margin that allows us to offer really good value in stark contrast to traditional off licences," he explains.

Because the group has an imaginative approach to choosing new sites - selecting old garages, pubs or even, on occasion, a former salmon processing factory - it keeps its rents down. It can also secure bigger outlets, which means it can keep all its stock on site, rather than run an expensive central depot, and offer its customers car parking. Its wine-by-the-case rule keeps its average spend way ahead of its rivals, who more often than not sell their wine by the single bottle. (The average spend at Majestic rose to £110 in the six months to 27 September, up from £104 last year - and that's before the champagne season really kicks off.)

Rob Brent, a retail analyst at KBC Peel Hunt, says: "The business is in excellent shape. Plus the make-up of the competitive landscape is moving more in its favour." Mr Brent cites the potential merger of Unwins and Oddbins as a huge plus for Majestic. Wine experts have lambasted Castel's strategy of simply pushing its own brands through Oddbins, Mr Brent notes, which has destroyed Oddbins' former reputation as the high street location for a good choice of wines. "If Oddbins aren't performing, then the fact that they buy Unwins isn't going to hurt Majestic," he says.

While the might of the supermarkets is the most frequently cited risk to the longevity of Majestic's reign, Mr Brent believes each of the big players has enough issues of their own to limit their threat. Safeway, under Wm Morrison, is being refocused at the value end, while J Sainsbury has enough well-publicised problems of its own to keep it at bay. He adds: "Tesco is undecided what to do with its wine offer. It certainly hasn't moved on for a number of years."

That said, the supermarket giants have seen their share of the wine market rise by 6 per cent during the past year, at the expense of specialist off licences, whose share has dwindled by 7 per cent. Luckily, Majestic has plenty to play for, controlling just 3 per cent of the wine market.

And Numis Securities' Iain McDonald adds: "Arguably the discounting of the supermarkets at the value end of the wine market is growing the potential customer base for Majestic."

Mr Whiteside, whose Thresher group is owned by Guy Hands' Terra Firma private equity firm, blames falling wine sales for his decision to reposition the group in the convenience store sector. All seven of its brands, which span 2,000 outlets, will straddle both the food and alcohol markets. A new concept - Local - will replace Wine Rack, Bottoms Up, Victoria Wine, Huttons and Drinks Cabinet, on half of its sites, with just Scotland's Haddows set to escape the brand cull. Even they will be rechristened "Haddows Local".

The other half, mainly the larger, more upmarket sites, will become "wine-led shops that provide high-quality ready meals" under the Threshers tagline. The group bought the online site last year, and has since started selling its meals in kit form in its shops.

Mr Whiteside said the group had spent £15m so far on transforming its estate. "The lifestyle drivers are there," he explains. "All we have to do is leverage our advantages. We have 2,000 shops in very convenient places and people are turning to their convenience store parades to shop at more than in the past. We have space for food because of the decline in our wine sales."

Barring one troublesome year early on in its history, Majestic has never been troubled by falling sales. The group was started by Tony Mason, its current trading director, from a warehouse in north London. But it was only when it was bought by its rival, Wizard Wine (also started by Mr Mason) that it really started to take off. It owes much of its success to the continuity at the top: John Apthorp, the chairman and controlling shareholder, and Messrs How and Mason have worked together for the best part of two decades.

The trio endeavour to make sure their knowledge base is replicated in their 120 stores by training their staff well. All employees receive share options after working for the group for three years. Another adjunct to Majestic's success is the clutch of stores it owns in France.

With the British love affair with the grape showing no sign of abating - the market is growing by 6 per cent per year - it would be unwise to bet against Majestic uncorking many more years of good growth regardless of whether any more of its rivals change hands.