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Majestic Wine fizzes to new highs against flat future backdrop

The demise of the First Quench Retail business this week highlights just how tough the market is for off licences as booze is one of the categories worst hit by the growth of the supermarkets. Apart from small one-shop specialist wine operators the days of the off licence looks pretty much dead. By Glynn Davis, City editor


Majestic Wine fizzes to new highs against flat future backdrop

This is why it is hard to see much of the First Quench business remaining as a going concern once it has passed through the hands of administrator KPMG. The view is that the bulk of the trade from the First Quench-owned Threshers and Wine Rack chains will find its way into the tills of the supermarkets.

This represents no small beer as Threshers accounted for nine per cent of the market in 2007. I’m not sure what its share was at the point of collapse but the fact the group traded from a colossal 1,300 outlets must have translated into a meaningful level of turnover.

The fact that none of the trade will likely be heading to Majestic Wine highlights how First Quench was operating at the price-led end of the market (which is where you get eaten by the supermarkets) whereas Majestic is pitched at the quality end of the market.

This has helped it prosper, but even with its differentiated model it has still found life tough. This is why it recently changed course and ended its rule of only selling wine in cases of 12 and replaced it with a new six-bottle policy. This had worked sufficiently well in trials and in September it was decided to roll it out to the entire chain.

The City is hoping to hear that the public have taken to this new model when Majestic reports its interim results on November 16. It certainly taps into the current desire for consumers to spend less.

Even if the take-up has been voracious in the trial stores it will not affect the first half figures. However, analysts are still predicting that the present consensus pre-tax profits forecast of £5.6 million will be beaten slightly – at around the £6 million level.

According to Investec Securities this will be partly a result of a stronger like-for-like sales performance, a 2.9 per cent increase, in the UK on the back of softer comparatives and more favourable weather conditions. With flat like-for-likes forecast in the UK there is little expectation that forecasts for the full year 2010 will differ greatly from the consensus of £12.9 million.

This all points to little excitement for investors ahead of Christmas (but then in such a tough category, perhaps this represents good news). The fact Majestic shares have outperformed the market over the past quarter also reduces somewhat the potential upside over the short-term. They currently stand at 245p following the six per cent jump on Monday (November 9), which places them at a 12-month high and some way off the low of 105p that they hit in January.

This puts the shares on a PE of 16.5x earnings for 2010, which places them on a decent valuation for a quality business. But this is a company that is restricted by the weak consumer backdrop which means the opportunities for people to raise a glass of Champagne or fine wine in celebration will be reduced for a number of years. On that basis, there are probably more exciting investments in the sector, albeit potentially more risky.

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