Naked Wines plc

Good morning, everyone. Clues in the title today.

This isn't the market we would have chosen, but we're pretty happy with the shape of the company is in for the market that we're in. So what we'll be talking about today is the market -- the U.K.

market's not great but we're still making headway and expect to continue to make headway despite that. Three years ago when we announced the transformation plan.

We said our goal was to build a business that could grow sustainably even in a tough market. So I think we've got some reasonable evidence today to show that, that's holding true, and accelerating this can make that even more true in the future.

So broadly, the plan from here is -- the plan is working so we're going to keep doing what we're doing, but we're going to do it faster, which we told you about at the Capital Markets Day. Now I think the area we want to focus on today is we also want to do it better, not just for faster but better.

So focusing on the starting point for this. Sales have grown a little, but profits up substantially, balance sheet's in good shape.

But 2 important numbers at the end there, online sales now 45% of all sales and international is now 20% of all sales. So this is quite a different business to what this looked like 4 years ago, and that transformation will continue.

Doing it faster, we largely talked about at the Capital Markets Day, so I'm not going to cover that in a great deal of depth. But the short story is the investment opportunity is bigger, the returns are trending up.

And since we spoke here at the Capital Markets Day and remeasured the numbers, the numbers are trending up. And it looks like the same kind of things work in Majestic and we got a bit more evidence that, that's the case today.

But like I said, the focus of today is how we don't just want to do this faster, we want to do it better. So we want to invest more money, but we want to do it more efficiently.

We're looking to get a step change in efficiency out of the business and strengthen our proposition. And finally, you've all been hearing me say for several years, we're not going to do anything about commercial until 2018.

It is 2018 and this is the year we're going to get commercial like the blue touch paper and take over the world. So let's start at the beginning.

We said a few years ago, we're going to do a bunch of things and broadly, we seemed to be about doing it. So we're delivering profitable growth.

We said that the return on investments was going to trend up. Last time, we said it was somewhere north of 4.

It's now looking something somewhere north of 4.7x. We said we'd accelerate growth from year 3 of the plan, that's exactly what we're doing.

We said we were close to completing some of the heavy lifting projects. One of the big ones we've just completed is we have integrated Majestic's pick-and-pack warehousing operation into the Naked pick-and-pack operation, which in itself will save a bundle of money and speed things up with much greater efficiency, but also opens the door for further cost savings through the supply chain next year.

So it's a big one to get out of the way. We said we'll grow international and online, we've done both of those.

And we said we wanted to get the balance sheet into good shape and we're a year ahead of schedule on that. We wanted to get debt-to-EBITDA ratio down to 0.5 by the end of next year, we've done it this year.

So we're feeling like this is -- Phil wrote a note this morning. And when I saw the headline, I wish we've used that as the headline, which is a solid platform for strong growth.

And that's how we're feeling this is. And finally, we said we pay dividend in line with expectations and we're doing that.

Okay. So what are the key drivers of growth in the year?

James will give you the accounting splits. What I tried to do was to -- the accounting doesn't tell the whole picture.

These are the real fundamental drivers when you look through all the numbers and look underneath. And broadly, they are.

We had U.K. currency impact pushed profits back significantly.

On the other hand, because Naked got a year older just by maintaining that level of investment in new customer acquisition, we put a chunk of profit onto the bottom line. The sales growth in Majestic did flow through to the bottom line.

And then something I'm going to come back to later, I talked about not just investing harder but investing better. We actually managed to generate the same amount of future value in the year at a lower cost.

And I've talked before about cutting out underperforming investments, doubling up on the ones we worked. That process saved GBP 1.3 million of investments in the year, okay, with no losses of payback on that.

So end result is nice movement in profits through the course of the year. And had that not been the case, it would have been a bit more exciting.

So looking at the gross profit line, this is if -- costs have increased over the period, over the last 4 years by around 40p per bottle, that's a combination of duty, VAT, ForEx, underlying COGS increases. So a reasonably meaningful increase in cost of goods.

The selling price of the product has barely changed, and there's the growth there, which I think is around 20p. So wine was a really pretty good value over there.

But what has happened in previous -- when currencies have moved against us previously is supermarkets have passed this cost on to consumers, this hasn't happened. The supermarkets have swallowed the cost increases.

And this isn't the case of, well, you must have bought badly and the supermarkets have bought well. You don't buy VAT better, you don't buy duty better.

These are external factors, this isn't underlying change in product. So that was the bad news.

The good news is by getting one year older and just keep doing what we're doing, we've added another layer to the graph. And as our investment in new customer acquisition grows, the thickness of that layer will grow.

And then we also got slightly more efficient at these investments. And this graph takes just a little bit of explanation.

So this is the payback from the year of customer acquisition, going all the way back to 2013. And what you can see here is when we told you about this and we said the 4x payback included all of the mistakes and everything else, what you're getting here is this was the early years in the States where we're heavily impacted by the early years in the States.

We're effectively learning, there was more test and learn than there was productive spend. We then found our groove, sorry, we found our groove and started getting the returns up significantly.

In 2017, we had the profit warning where we had the direct marketing crop up in the States, which hit the numbers there, and you can see the effect of that. And then in 2018, you can see this line is trending at a significantly higher spend, in line with the best of the previous cohorts.

So effectively what we've managed to do over time is significantly grow the spend, and we're maintaining the return on that investments and moving towards the top end of the chart, with the exception when we got our direct mail wrong in the States. Okay.

So we told you before, it looked like about a 4x payback, it looks like about 4.7x payback. So we said we're going to do it faster.

I'm going to whip through this very quickly because you've heard it all before, but the investment pool looks bigger, partly because it's digital, partly because it looks like the same opportunities are working in Majestic. And we expect to grow investment by GBP 5 million to GBP 8 million this year.

The returns are trending up broadly for the reasons I ran through before. So we're planning to double the investments at higher returns.

The more eagle eyed amongst you will notice last year -- at the Capital Markets Day, only 6 weeks ago, we said we were spending 12 and we expect to double to 24. We actually spent -- we've slightly reclassified what goes into investment and what doesn't.

We've got feedback from investors that the way we're classifying it was confusing. And so we've tried to make it more consistent with companies like [ zooplus ] and [ Zelander ] and those kind of companies.

So there's more of an apples-to-apples comparison. But the result of that is we broadly did exactly what we said we were going to do.

But the future value looks higher, and the future growth we expect to be able to double and the future value looks higher still. So outlook on that, the amount of money we think we can invest extra is about the same.

What we think we're going to get back from that looks better than we thought previously. And then I said we had early signs that this is working in Majestic, and those signs are coming through.

So we've actually recruited over 100,000 new customers into Majestic over the last 2 years. So we know for sure that this works.

Just to put that in context, if you call that 50,000 a year, that's a 10% increase in the number of new customers coming through the door per year. So if we can maintain that, that's 2% or 3% like-for-like growth without doing anything else particularly clever.

What we are now watching is what is the quality of those cohorts, like how does that graph mature over time. And as long as we see that graph follow the kind of patterns that we've seen with Naked, we'll feel confident to grow and maintain that investment.

So we know we can do it, but early signs of the customers are good. If we can get at least a medium-term view to confirm that, we can increase that level of investment, okay?

So let's talk about doing it better. So I've already said, we want to invest more efficiently.

We proved we can do it last year, we've done it in previous years. I don't know exactly what we're going to do this year.

But the important thing is that we've got the processes and the culture in place where we're always looking for the opportunities to remove underperforming spend and double up on the higher-performing spend. And therefore, you keep getting marginal improvements in efficiency, which outstrip inflation in the market.

And hopefully, we will continue to do that. The second thing we're doing is removing unproductive work.

So we took a step a couple years ago to build effectively a test pick-and-pack warehouse for Majestic. The test was to see whether if we were picking and packing in a single warehouse in a production line highly automated environment, that was more efficient than picking in stores, that is the case.

We've now integrated that operation into Naked. The prices of per case has fallen significantly.

And that frees up people in stores to engage customers better and frees up the opportunity for us to take cost out of the business. The second thing we're doing is we have just taken whole bunch of cost out of the business already, not because we're cutting people's contact with customers but because we're removing boring unproductive labor that frankly drives our staff crazy.

So things like, for example, improved availability. Availability has gone from 67% to high 80s.

We estimate that we used to spend GBP 1.8 million a year on vans driving to other stores to collect wine that we didn't have in the store. That has fallen right down.

Automation. So Olivia is over here and her commercial team.

Historically, when customers wants to pay a bill, they literally would send a check or cash into a branch and will be manually entered into a till with all the opportunities for mistakes and double counting and everything else that went wrong along the way, all of that has been automated now. And finally, and this always brings a chortle, shelving just takes a shitload of task out of store.

It is so much easier to run a store. And at Christmas when the stores are frantic, it means that the best people are customer facing not building boxes of cases of wine, while the Christmas intern is running the till.

So it's better for our people, it's better for our customers. And there's a big cost to come out of the business.

I said we've managed during this time to actually improve our customer engagement. I think this is a great start.

We asked -- as you know, one of Majestic's great assets is that we know who our customers are because we've been getting contact details of them. We measure now out of every opportunity to collect a valid e-mail address in a GDPR-compliant way.

We were getting around 18% of all the potential e-mail addresses from new and existing customers. That number has grown to 56%.

And that number's important for 2 reasons. One is it significantly increases the number of customers we can contact for free through e-mail.

But the second thing is, it is an absolute bellwether of customer engagement. If you're just going to buy some wine and walk up the counter and someone says, give me your e-mail address, our customers are going to say, no.

If you walk in and somebody helps you and you find something you like and you go up to the counter and you've had an experience that you've really appreciated and someone says, give me your e-mail address because we have events you can -- there are all kind of things going on in the store, we can tell you all about them. Customers say, yes.

So this is a very good test of customer engagement for us. And everyone is talking about the death of the U.K.

retail. Boring retail will die, exciting experience-based retail will thrive.

And for us, the experience is the experience people get in store finding wines that they can't find somewhere else, and that's the reason this stat is the one that gets us excited. The second is 5-star service.

It's gone up from mid-80s to consistently in the 90s. And finally, availability has gone up from historically 67% up into high 80s, which is a number we're very comfortable with.

There's no great value to getting it further north from that. So in terms of the customer experience in-store, we're very confident that not only have we got cost down, we've significant improved the experience to the customer.

And we've done that by removing the boring stuff not by taking, not by chopping away the things that count for customers. Franchise-Lite, the partner program is working.

This is excluding commercial, excluding online, excluding a whole bunch of other things. This is walk-in store sales only.

If you take the partner stores, they are growing, if you take the nonpartner stores, they're shrinking. We've now got 40 stores in there and obviously, too many in there.

Obviously, there is an element of -- which is the self-fulfilling prophecy, the better people become partners. But if you look at their behavior over time, 2 things are happening.

One is the partners are sticking around because they enjoy the job and they're making more money and they have more freedom. And the second thing is their performance is outstripping their performance previously.

So we're pretty excited about this and obviously, the plan is we want to get as many people as we can into the top category. It's also become a very good recruiting tactic.

Because all of a sudden, instead of saying to someone in 4 years, you could become a store manager and earn GBP 30,000, that is in 4 years, you could become a partner and earn GBP 50,000 and run your own business, and that's a much more alluring proposition for ambitious people. So the quality of the recruitment pipeline is significantly better than it was 4 years ago.

And finally, Majestic Commercial, the time has come. So just to remind you, because it's such a long time since we've talked about Majestic Commercial.

Target market is independent gastro pubs and small restaurants. We are not trying to compete against the convivialities and the [ illustrious ] of the world and we're not trying to compete against the bookers of the world.

We're looking for people who want high service and they want to have a wine proposition which differentiates them. The 3 competitive advantages we can offer them.

The first is next-day delivery nationwide as compared to, for example, conviviality, which will be we'll be there Thursday afternoon 4:00. Thursday afternoon 6:00 when you're serving customers.

That's the time that works for us. We can be there when if you need us and you're not going to run out of wine.

The second thing is we've got a store within about 9 miles of virtually every restaurant in the country. So whereas other people are doing surveys to go, oh, we think prosecco is really going to be big in Yorkshire.

We've actually got hard data, and we've got customers to introduce to the store. And finally, we've got 1,000 people who are trained in how to sell wine, who can train our customers' staff to sell wine to their customers.

And so the proposition for us is not our wine is cheaper than the next guy, it is we can help you make more money out of your wine list, which at a time when the casual dining sector is struggling is top of the agenda for every single restaurateur. So what's the plan?

The first and most important part of the plan has been to get in a Managing Director, who's got the capability to lead us. Olivia started 2 months ago.

Her background is she comes from selling software to our -- to the restaurant business. So she knows the customers and she comes from a professional sales background.

Majestic Commercial has many, many great things, but this has never been a professionally run sales organization. And Olivia is a sales professional.

And I think without doing anything incredibly clever, getting those basic disciplines in there will mean more exciting jobs for our people, better earning potential for our people and we can get the sales growing again. So clear sales proposition, some good sales discipline and some good sales training, better get the basics right is the plan.

So what's the outlook? We think the market's going to be -- it is tough, we think it's going to remain tough.

We're working on the assumption that, that's the case. We're not expecting that the sun's going to come out and miraculously make our lives get better.

We're going to have to do that ourselves against the headwinds. But despite that, we think that the year is going to be a good one because, number one, we're investing in growth.

We've got the cash to do, we've got the balance sheet to do it, we got the tools to do it, we know the returns are there. And we're executing that plan right now.

The second thing is everyone talks about U.K. retail.

U.K. physical retail is actually a shrinking part of our business, and international and online are significant material parts of our business that are growing strongly.

And finally, and this is by good luck rather than good design, we are able to time a management team. We started this transformation plan when everything was looking rosy.

And so we're in the unplanned but fortunate position that we started a turnaround at a time before everybody else and before Brexit happened and before the implications became clear. So this doesn't come as a huge shock for us.

The benefits you're seeing running through the company today are not things that we -- after Brexit we suddenly said, oh my God, we better take cost out. These were part of plan 3 years ago.

And because we've had time to plan it, organize and hire the team to execute it, they're coming through. So it's not the market we would have chosen, but I feel very good about the shape we're in.

And I think Phil's headline is about right, solid platform for growth. Thank you very much.

I'm going to hand over to James and then we'll pick some questions at the end.

So 3 key messages to run through the financials, and I said to a few of you as we've had calls, it almost feels like we told you what this was going to be about 8 weeks ago. So there's not a whole lot of new news here.

But I think the big themes are, look, this was a year where we paused for breath, we focused on efficiency, we've got some inefficiency investment out, and that's delivered a big step-up in profitability. Because of that step-up in profitability and the cash we've delivered, we've got a strong balance sheet.

We now have capital to invest. And we intend to invest it, the intent and the priority for that capital is to put it behind the growth and build the business for the future.

So starting with what drove the numbers in the sales chart you see each time. Sales growth has dropped from last year.

Last year, we reported 11% underlying sales growth. This year, it's 4%.

In each of these business units, we have been eliminating unproductive activity, and that's what's dropped the sales number. So in Naked, we took out the worst-performing spend.

At Lay & Wheeler, we've eliminated some low-margin sales. In commercial business, we actually reduced the level of resource driving new business that wasn't getting a return.

And in retail, we've focused very much on cost efficiency in the stores, and that's probably had an impact and brought the sales growth level down. But that means that those sales have converted strongly through to profits.

So if you look at the GBP 6.4 million increase in adjusted EBIT, that's about 55%. GBP 4.7 million of that comes from the revenue line, GBP 3.2 million comes from gross margin improvement.

And there's an admin cost movement of about GBP 1.5 million adverse to that. But that's on a baseline of GBP 107 million, so it's a small percentage.

And the bulk of that increase actually has gone into when we've built out teams such as the digital marketing team, such as the IT team. On the right-hand side, there's also been a big uplift since the adjusted items start dropping away, the majority of those are acquisition-related.

And either the intangibles have finalized [indiscernible] or expiring, or the level of the share-based payment charges we're taking related to the acquisition are dropping as those begin to vest. The margin mix, and I should have mentioned on there, about 28 bps of that comes from the mix of the business units changing, with Naked growing much quicker than the retail business.

The Naked business has a stronger underlying gross margin, and about 39 bps of it is improvement within the business units themselves. When you look at it across the business units, Naked is the driver of the profit growth.

The central cost I talked about, like digital marketing and IT cost, sits in there. And actually for the rest of the business, the sales growth we've driven offset by things like the FX movements, essentially means we've been running to stand still elsewhere.

Looking into Naked, we show this chart to you each time. But the driver of growth in Naked is the growth in the number of Angels, that is over half of the profit growth in the year is the GBP 4.4 million.

Angel economics continue to get better, in particular in the U.S., we're driving more contribution out of each Angel. And we did make more money because we invested the less to the tune of GBP 800,000 once you strip out the COGS movement that Rowan showed.

If you remember H1 when we showed this chart, that reduction in investment was about GBP 3.4 million. So the second half actually has demonstrated a significant step-up in investment, and that is the trajectory that we're on as we go into next year with the GBP 5 million to GBP 8 million uplift we have signaled.

The retail business was a game of driving sales to offset some margin erosion, largely driven by the FX impact as our hedges expired and the real impact of the weaker euro flowed through to the margin. Within our margin, we recognized store costs, et cetera.

We ended with a net kind of GBP 300,000 of efficiencies in that part of the margin line. And consistent with the remainder of the group and all of the remainder of the cost base across the retail business, we essentially held our cost base flat at a time when inflation was running at around 2.5% to 3%.

And net results all of that is with the level of sales growth we're achieving in retail, profits are standing still. So just looking at the retail sales line, why did that slow down?

We've talked about sales retention as a key indicator. On the left-hand side here, you see the history of our sales retention trend in the retail business.

That dropped off in 2018. It dropped off as essentially we lost sales from a group -- from different groups of customers, we didn't lose any specific group of customers, but we lost parts of their spend.

You see very clearly how the KPI translates to the sales performance as the sales growth has been growing strongly in the previous 2 years. And we've now got something like 15% more sales in the retail business than when we started the transformation.

But in this year, that trend very much flattened off as we ceased retaining that same level of sales. So that's what drove the numbers.

Where does that get us to in terms of where we're at today? We delivered very, very strong cash flow this year, GBP 24.9 million of pretax free cash flow.

That took our net debt balance down to GBP 8.4 million, it was around about GBP 26 million at the end of last year, and that's 0.35x our adjusted EBITDA. We've been targeting getting that number to 0.5 or less, so pleased to see that we're there.

That means that we have capital now to deploy. We've increased the dividend year-on-year.

The final dividend of 5.2p brings the full year to 7.2p, that's a 41% increase. For those who looked through the detail of the numbers, there is a boost to the EPS number as the tax rate is low this year.

We've gone back and go through some of our historical capital allowances in particular, and that's driven a lower tax rate ongoing where we've reassessed what we should be paying there. And then during the year, we also amended and extended our financing facility.

It now runs through December '22. We have GBP 60 million headline facility available to us.

With a strong balance sheet and the facility in place, we are well positioned to be investing in the business for growth moving forward. I think the other thing to bear in mind is that Naked is now robustly profitable.

So Naked's been turning a small profit in the last couple of years. This year, Naked's delivered an GBP 8.7 million profit.

Actually, if we add back the spend that we would attribute to growth in growing that business, that was GBP 3.7 million. So the underlying kind of 0 growth profitability of Naked, on a simple add-back basis, is over GBP 12 million.

I get asked a lot what we think the Naked margin will be long term. At the moment, if you do the analysis this way, it's 8%.

And yes, that's a healthy business at this point. But it also means is we really now have the choice with the balance sheet and the net debt we have to choose how we're going to run the business.

Are we going to run for growth? Are we going to run for profitability?

And as we announced to you 8 weeks ago, we choose to invest in growth. So the plan is to take the foundation we have and drive the business forward, investing in growth.

So you've seen this chart a million times. The reason for me to put it in here again is the F'19 spend target is now GBP 19 million or more to drive growth by acquiring customers.

As Rowan alluded to, there's a slight tweak in the way we're describing that number. In the back of the presentation for those who use this for forecasting, there's a reconciliation of that, but we've taken the profits we're making from Naked customers in the first 3 months of their lives, what we call the Immature Angels, and we've actually included that in the repeat business.

Previously, we were netting that off of the investment number. That way, it's a much cleaner, here's what you spend on the customer, here's what you get from a customer.

As Rowan said, we think that makes that more comparable, it also drives greater alignment as we implement this lifetime value metric internally. This is a zoom in of the part of the chart that Rowan showed that was quite hard to see.

But this is how the cumulative payback has been evolving for the customers we've recruited in Naked in FY '18 versus FY '17. So the blue line shows the 2 years of data we have for the people we started recruiting in April of 2016.

The kind of dirty brown line shows the same chart for those people we recruited in '18, and you can see how they're moving gently ahead and gently further and further ahead over time. And that difference as we projected forwards is the difference between the 4.7x payback we're forecasting for our Naked recruitment this year versus the 4.4x on the recruitment we did last year, which included the well-publicized mistake in the U.S.

So we're driving growth and that will drive sales. Sales uplift, I believe, will be muted by some of the headwinds that we do see in the business.

So Rowan has talked about the U.K. market, it is tough, it remains tough.

We think sales and margins will remain under pressure. As the international business gets bigger, translation of our international sales back to pounds becomes more volatile based on FX.

This is a little sensitivity showing the -- in the gray bars, these were the average FX rates for our sales translation in F'18. Actually, when we go into the new year in April, the pound had weakened -- strengthened rather, quite substantially, and we're more in that kind of pink box at the bottom right.

So I see somewhere between 1% to 2% of FX headwind in terms of our reported sales growth next year. We're not expecting fine wine to have a good year this year, both the Bordeaux and Burgundy vintages selling this year are not expected to, be as popular as recent years.

So I would not be surprised if you see us reporting a sales decline in Lay & Wheeler this year. And finally, commercial sales retention has been challenging over the last 2 or 3 years.

As you have seen, the commercial top line performance deteriorate. Olivia is here, I'm not going to place all the burden on her shoulders 8 weeks in.

But we're confident she's going to generate a plan to get the best out of our commercial business. There is definitely a market opportunity there that we sit within, and we're confident that our business remains a key contributor to the group.

And that's the kind of negative bit, but there are some positive signs. So we're continuing to work the cost to drop cost agenda.

Rowan's talked about the unproductive work we've taken out. We continue to take work out of stores with better automation, with better store layout.

We've consolidated both Majestic and Naked U.K. supply chain points to the online orders.

We continue to drive the procurement agenda and drive basically cost out of third-party suppliers. On the sales side, the retail transformation plan continues to bear fruit.

The Franchise-Lite stores are performing, they're improving the product range all the time. We've already announced, we're doubling investments over a 2- to 3-year period in new customer acquisition.

And in commercial, we believe that the new team and plan should bear some fruit. So that's where we are.

I think the profitability has come through, the balance sheet is strong. As we go forward, we'll be investing in growth for the future.

And I hand it back to Rowan.

I'm going to repeat myself because I think the message is a simple one. The market, tough in the U.K., but we are international, we are online.

We have a transformation plan underway for several years beforehand, so we expect performance this year to be in line with expectations. And we expect the long term to continue to deliver growth, driven by our ability to invest money at decent returns.

Thank you very much. Questions, please?

Wayne?

[indiscernible]

Wayne Brown, Liberium. [indiscernible] You spoke about the Franchise-Lite, can you give us an indication as to the remaining stores that aren't on Franchise-Lite and how many could transfer to that?

And then I'll ask the other ones later.

So we said, we thought that the potential number of stores was around 70%. So 140-ish have got the potential to be Franchise-Lite stores.

We've got 40 something, so we believe there are another 100 or so that have got the potential to make it over the next couple of years.

Okay. And is there any remedial action for the others that probably are -- can't transfer to Franchise-Lite?

Is there anything else that you can get -- do in those stores to return those to profitable growth?

Yes. And I think the key -- all of the things we've been doing, if you like Franchise-Lite as the headline for it, but all the things we've been doing about, collecting more e-mail addresses from customers, working harder to drive them back into the stores, those benefit all of the stores.

And we should see an uplift come across all of them. I think the only reason we think that the kind of Franchise-Lite, 70% is about the limit of what we can achieve there is that if you think a store manager takes a couple of years to get up to speed and the average lifespan is about 5 or 6 years, there's going to be turnover.

So at any one time, you're going to have a few people who are in training and therefore, the number can never be 100. It isn't the case.

If we thought the stores are a dog, we've closed it.

And then just -- in relation to Slide 34 and 37, you showed growth spend on Slide 34, can you give us an idea of allocation between countries? And then also on 37, there's the gradient of the returns that you're getting between 2018 and 2017, can you give us an indication as to what degree the steeper curve in '18 is down to digital channels versus partner channels?

Right. So God...

You need to go forward and then run again backwards. The allocation spend across Naked is weighted towards the U.S.

I'd say, 2/3 is -- probably [ not quite ] 2/3 is in the U.S.

This gives you a good indication, that's the international.

Yes, right. You can see the international piece is probably 2/3 in there.

The bulk of that is the U.S., Australia is less than probably 20% of all the spend in the U.S. because of the relative size of the market.

So I answered the first one?

Yes. I mean, the second one is the gradient of the returns of '18 versus '17, digital versus partner channels?

Yes. The way we're running digital because you can choose your kind of what you're willing to bid, is that we're basically running digital at the target return rates.

So you won't see a better return there in terms of digital. Typically, we're able to spend more through digital to target higher-value customers to get the same return out of that.

So rather than investing 10 in a customer and get 47, you might invest in 20 and get 94.

Yes. JP?

Jonathan Pritchard at Peel Hunt. Just to get back to that point on sales retention against the [indiscernible] capture, the better service, et cetera.

I can't quite rationalize the 2. I mean, if we were to look at current trading, is the direction of travel of sales retention the same?

And are the e-mails you're sending on persons are different? What is the end terms of capturing the address and then not keeping the retention and the sale that's going wrongly?

So retention is a number that largely applies to existing customers. So if you split into new and existing, our ability to convert new customers into repeat customers is improving because we're engaging in the better in-stores, we've got better ability to communicate with them.

Of the existing customers, the retention of those customers who date back up to 30 years, that has fallen off. So we're putting more good new customers into the funnel, but we have lost existing customers from inside the funnel.

And that I think is largely just a market condition factor. So as far as we can see, the quality of the people we're bringing through is working.

And the means, the mechanisms we have to convert new customers to repeat customers have actually improved the conversion percentage and the quality of the customers who convert. And if there isn't further deterioration in market conditions, we expect the retention number to stabilize.

And probably one for James, just is there a sort of medium to long-term target in pounds/millions for the merging of the supply chains?

No.

I -- we have some ideas as to what it can deliver, but a number of those has to [indiscernible] that because it's not just as simple as a warehouse, there's a whole matter of things we can do beyond that, put the reins on there. Sanjay?

Sanjay Vidyarthi, Canaccord. You mentioned in the statement that you're losing volume market share in certain categories, in particular within Majestic retail.

Can you just give us a bit more details on what's happening there? And what you are doing to fix that?

I'm going to hand it over to Richard, if I may, who's the Buying Director at Retail.

So I think in the information we gave you that the days of work we've done has highlighted if there's a gap in our trading and this reflects market condition that's typically at lower price points. And I guess if I were to describe it in mission, of customer mission terms about this kind of that [indiscernible].

So the kind of products, the categories that we're seeing on the performance here are the kind of products that people tend to visit us to buy 24 bottles at a time. We have -- and there are also categories in which we have exceeded market growth in prior years.

So we've built a particularly strong market position and in which the market can catch up. So New Zealand will be one, Argentina will be another.

And I think in the current economic climate, won't be surprise that champagne is also a market which is soft at the moment.

Interesting. If you take that retention number and you split it between customer spending of entry-level price points and customer spending at our average price point, retention of average customers has improved.

It is the retention of the customers at the low entry-level price points where there's been sharp falloff. So the people who really make us the big money are actually very stable.

[indiscernible]. I just wondered if you can talk a little bit more about the steps you're taking to bring customers into your stores?

And what differentiates you, makes people go that extra mile from picking up some wine in the supermarket? And whether you have underperforming stores that you'll be looking to close in the coming years.

I'll answer the second one first, if I may, which is if we have underperforming stores, we have closed them. We're not kind of sentimental about stores.

And we think this -- the store states is roughly in the right shape as it is now. So no significant changes up or down.

In terms of how we get customers in the store and how we keep customers in the store, we think the U.K. market is going to polarize.

And we'll look probably a lot like Germany in a few years time. And what will happen will be you'll have the discounters and supermarkets selling wine below GBP 5 a bottle, with very narrow limited ranges in the zero service proposition.

And you'll have a healthy midmarket sector for people where the mission is, I want to try something new, okay? So a typical new customer coming into Majestic will come in and go, I've been shopping in the supermarket for years, I want to try something new and I don't find it in the supermarket.

And so what they're looking for is an in-store experience where we have 200 tasting counters and 1,000 staff who'd like doing exactly that. And the reason the experience is a better one in the Majestic is partly about the range, but it's also partly we've got people who are very good at taking customer from that position to found some things that I really like, and I know I really like because I've just tasted them as opposed to I've looked at the label and gone that is prettier than that one, so I'll take that one.

So I think the human need to learn and indulge in everything will always continue. Supermarkets are never going to satisfy that need, they've tried half a dozen times over the last 20 years and always land up retreating from it.

And that is the need that we fill and our goal is to do that better than anybody else. John?

Just a couple for me, please. In terms of commercial, what will commercial look like operationally this time next year?

I'm asking for sort of profitable sales targets but just a sense of, I mean, are you sort of getting stuck in? And what should we expect when you stand up this time next year in terms of what progress would look like, in an operational target rather than the financial metrics?

and just on the pricing again. So the supermarkets are holding prices, what's your entry point bottle price done this year?

Are you going to either -- what are you going to do, if you basically steady this year and hope people come back in? Or do you have to change your strategy at the entry price point to try and get people in the following year?

So I'm not going to put Olivia under pressure until she is ready to present her plan. What I'd say about commercial is operationally, I don't think it would look that different.

It's about 50 people at the moment, the sales of around GBP 50 million. What I expect to be different is the sales growth figure going to be a positive rather than a negative number.

It is actually higher retention business. Retention has suffered over the last couple of years because customers are being -- going bust, casual dining is having a tough time.

And a number of customers are just buying less from us. So historically, higher sales retention have suffered with the market.

But there's no reason to suspect that once that stabilizes, that, that won't return to previous levels. In which case, if you've got an efficient sales force, it's a business that can deliver decent compound growth year after year after year.

And when you put that through a large fixed cost base, which we've got, actually the impact on the bottom line is pretty healthy. So we've borne the pain of that shrinkage, we should get the benefit of that coming back the other way.

There's no big capital investment plan. For instance, the IT projects of automating ordering for customers, it's all going to be done in-house with the existing spend.

So don't expect us to turn up and go over, oh, there's a GBP 5 million charge for exciting things happening in commercial. As far as pricing is concerned around the entry-level price points, broadly what happened is in January last year, all of the supermarkets put their prices up.

Somewhere during the course of the year, they took them all back down again. And we have broadly done that, followed that but done it 6 months later.

So we are -- one of the lovely things about the wine business is it's only gets made twice a year, once in the north and once in the southern hemisphere. So Richard and his team have been actively sourcing new product at price points that allow us to deliver a decent margin and hit where the market is now.

But those things just take time to come through.

Great. And just on the commercial, have you got the right sales force as you discussed about reinvigorating in and selling them back out?

That is one I'm going to ask Olivia to answer.

Yes. I think, we've got a very fantastic sales force.

They're very engaged, passionate, knowledgeable. I think what they historically passed on is a super disciplined sales machine.

But I think that's the kind of discipline that we can introduce with the [indiscernible] Standard kind of sales machine things we can fix that. So I think we've got the right people and bringing the right processes and tools in, we can make a real difference.

Just going back to this what sounds like this acceleration in the churn for the existing customer base and the retail, I mean, philosophically speaking; are you minded to, would you rather improve the retention of your existing customers? Or would you rather actually go for -- increasing the number of new customers you [indiscernible] right there better value?

We will always put retention over the new because your whole ability to acquire new customers depends upon returning or earning a return, and to earn the return, you need retention. So retention is the number we are obsessed about more about any other.

Like I said earlier, if you split the customer base into segments, which we obviously do, our core customer base, the people who will really make us the proper money are actually very stable and actual retention has improved as we have improved our service and availability and all the other things. The drop in retention amongst a very specific group of customers who are coming in and buying a lot of bottles of cheap wine.

And -- but that's something we can fix. It is just the timing and vintage thing to get that product in the door.

So we think there's a very specific action, Richard's team have done what they need to do to get that in place. And as we speak, there is wine on boats heading towards the U.K.

that we're pretty comfortable can fill that price point. The one thing we didn't want to do is compromise the quality.

And it wouldn't have been very hard to hit those price points if we've been prepared to compromise the quality. But I think if you want to be a specialist retailer, that is one thing you've got absolutely hold on to because you will pay for it in retention in the long term, okay?

Steve [indiscernible]. I've got 2 questions if you could please help?

You've pointed to the strength sterling, can you just run us through how long it takes before that hits your gross margin? And secondly, on Majestic online sales, and I'm guessing it's like 15%, 20% of the total, where could it get to?

And can you talk a bit about the relative profitability of selling a wine -- a bottle of wine in-store and selling it online?

Yes. In terms of the sterling impact, the currency we buy for the products, we buy it between kind of that 9 and 3 months before basically we take the order in.

So on average, it takes us 6 -- just over 6 months to really roll through to the margins. I think it's worth saying that the sensitivity I showed there was not around the margin piece, it was around the sales translation in international markets.

As far as online sales are concerned, at the Capital Markets Day, when we've put bits of information we put out was, the online business has grown from around 13% of sales a year ago to just short of 20% of Majestic. And the reason is we've relaunched the website and it has significant improvement.

So how far can that go? I think that can go an awfully long way.

And I think more and more sales will happen online, but the customer will be recruited in-store. So the perfect model for us was when someone walks into a store, gets greeted by one of our lovely people, goes through a tasting experience, which gets their taste profile absolutely right, so then their online shopping experience is absolutely spot on.

That is a great retail experience for us, right? And the relative profitability of online versus retail, the obvious issue is online is a variable cost if you've got a product being sourced out of a warehouse and retail is a fixed cost.

One of the reasons that the integration of the Majestic and the Naked warehouse is so important is to make sure that we manage those costs so you don't land up with incremental cost over time, depends upon our ability to migrate that work into a warehouse where it's done highly productively on the production line rather than being done sort of case-by-case in the store. And broadly for our people, that's a good thing as well because lugging boxes around is not the reason most people come to work at Majestic.

So there are different costs, but I think we've got the bits of the infrastructure in place to manage that through. And the reason when you ask what are the potential cost savings, the reason we are not giving a number here is there are cost savings in one place and there's cost growth in others, and how the 2 of those pan out is going to depend quite heavily on the sales mix over the next few years.

What I would say is unlike a number of retailers, who's stuck with structural higher fixed costs, and we are in a better position to be able to move cost between those 2. All right.

All done? I think there's still some bacon sandwiches if you're hungry, thank you very much.