City viewpoint: Gripes with Majestic grow as City finds reasons to whine
Majestic Wine remains a great business with a unique model that has enabled it to defend its position against the onslaught by the supermarkets on the booze market. The only problem is that it is not quite as good a business as it once was. By Glynn Davis, City editorProof of its invincibility being in doubt is its tinkering around the edges with its model. From August last year the company began trialling the sale of six-bottle cases in two stores and this was then extended to a further five outlets that will run until August.
This represents a major departure from its minimum 12-bottle ruling that has served it so well to date. This gave it 'bulky goods' status and enabled it to gain the necessary planning permission on many of its current sites, so the issue could arise on whether permission will continue to be granted if it switches to a six-bottle minimum order size.
Such action does not necessarily suggest a broken model but it does point to one under increasing pressure. Certainly some of the ongoing trends at Majestic have been worrying. One involves the falling number of active customers per store. This is probably the reason for the second worrying metric - the declining level of sales per average store.
This could be the result of its increased numbers of stores that are leading to some cannibalisation. If this is the case then why has the company placed its new outlets in such compromising locations, especially when it is widely recognised that there is still the potential for many more Majestic stores around the country.
Management must also have some concern over its foray into France where it has three stores that have been hit by a number of factors including the appreciation of the Euro versus Sterling that has curtailed the 'booze cruise' market. Although the decline in like-for-like sales was 20 per cent for the 12 months to March 30 the currency movement flatters the performance as the fall was a whopping 36 per cent in local currency terms.
This fall quickened in the second half, which is in contrast to the UK where a like-for-like sales decline of 2.7 per cent for the year as a whole compares with an uplift of two per cent for the first 10 weeks of the new financial year.
Majestic can also console itself with the fact it successfully clung on to the bulk of its gross margin, which fell only marginally from 21.3 per cent to 20.6 per cent. This helped it maintain its market share (of three per cent) in the UK. This represents an impressive performance as the market has been drowning in promotional activity.
And yet again the company saw an increase in the average price per bottle. However, this did not help to push the average transaction value up from the £133 of last year. This equates to a decline in the average spend in the second half as the figure had moved up from £128 to £135 in the first half.
It is just such metrics that highlight how much of a tougher time the company is having compared with previous years and why there is little enthusiasm for Majestic shares in the City while they continue to sit at a premium to their peers.
They have stood up well to the adverse effects of the economy and recovered from their 12-month low of 110p at the end of 2008 to now stand at 188.25p - not far off their high of 229.75p. On a PE of over 13x earnings for 2010 this looks to be far enough for now.
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