Companies like Wal-Mart and Tesco have created their own virtuous circle. The bigger they are, the more buying power they have, the lower their prices, the bigger they get.

So what will stop worldwide retail from being dominated by one humungous supermarket?

The Internet, that’s what.

The Internet will do to today’s business dinosaurs what meteorites did for the Triceratops. More slowly, more subtly, but just as surely as a hive of bees will bring down a buffalo.

The Expelliarmus effect.

The Internet allows small companies to do something that the giants can’t. No matter how hard they try. We call it the Expelliarmus effect. It gives small companies a structural cost/price benefit over big companies.

And the nice thing is…it works through collaboration rather than confrontation. i.e. suppliers get to make more money rather than less.

If you think that sounds like Internet Alchemy work, it is!  But it really works. For two simple reasons. If we use the wine business as an example…

1. Uncorking genius.
For the first time since the wine industry went global, 3000 years ago, a star winemaker can make the wines they want, without compromise. Naked Wines will
• Finance them – buy the grapes, the barrels the bottles…
• Handle the logistics, from bottling to last mile delivery
• Sell it all.

By connecting winemakers directly with consumers, we have freed them up to show what they can do when they don’t have to compromise.

2. Eliminating the costs you can’t taste.

Why pay to be sold to?

More than half the money most people pay for wine is wasted. Dead. It adds nothing to the taste of the wine. Even the supermarkets, after all these years or remorselessly grinding costs down, still spend an unhealthy % of sales on non-product costs.

There is a new option in town

Up till now, people have to choose. Cheap and dull supermarket wines. Or delicious but expensive boutique wines.

Now they can have Delicious and Cheap.

To illustrate the point, the cost of making a great wine is not a lot more than the cost of making a mediocre wine. Le Pin, which sells for €2200 a bottle, costs €11 to make. A 0.5% cost of goods.

At the more down to earth end of the market, the difference in price between bog standard Marlborough sauvignon grapes and the top quality grapes is around 16p a bottle.

The supermarkets will gladly sacrifice that 16p, and then spend £1 on running a “3 for the price of 2″ offer

This is just the beginning.

New business models that use the power of the web to create completely new models are popping up everywhere. Take a look at Unbound. Take a look at Made.

The difference is that these companies are not just making an existing business model more efficient. They are creating products that would not exist, at prices an individual can’t get.

Don’t get me wrong.

I’m not suggesting for a second that Tesco’s enviable growth rate will slow any time soon. They are way too good at what they do.

But as Dan Jago, Tesco’s wine buyer, says, “Naked Wines is like UKIP…hugely loved by a very small group of people”.

Which is just fine by me.

Very few people have made as many expensive mistakes as I have.  These are the often painful lessons I have learned along the way.

A little background on me. I am a failed accountant (passed all the exams, but still can’t do my own tax returns) who discovered that I can start companies. I am now on my 5th start up. The earlier ones include Virgin Money, The Virgin One Account, Virgin Wines and Naked Wines.

My top tips:

1. The two pint test.  If you can’t explain why your business is going to be able to offer something your competitors can’t in the space it takes you to share a pint… and then answer the 3 main objections in one more pint….you don’t have an idea. Stick with the day job. For example… Naked Wines invests in independent winemakers, to get exclusive wines, at preferential prices, which we pass back to our customers. Shimples. The mistake… when we set up Virgin Wines all I knew was that I wanted to be in the wine business and I wanted to be online. It wasn’t enough. We burned our way through over £20m before we learned the lesson!
2. Prepare for the valley of death. When you launch, EVERYTHING is against you. Your variable costs don’t vary. Your fixed costs are too high. You can’t get the price you need on your stock. Most of the marketing ideas fail. Your lemons ripen before your plums. Prepare for it, and don’t be surprised when it happens. Remember, a fool is an optimist that thinks this time things will be different. It won’t. The early days will be black.
3. Only ever work with a small number of very good people. I have Jayne-Anne Gadhia to thank for this. When we set up Virgin Money in partnership with Norwich Union, NU wanted to send us hundreds of middle managers, project managers, change agents etc. Jayne-Anne sent them all back and instead recruited a handful of young, inexperienced, unruly ruffians. Who then worked their balls off to launch a financial services business (complete with regulatory consent, an IT system, marketing campaign, staffing everything) in 10 weeks.
4. It’s 2.0 or nothing. If your business doesn’t have an unfair advantage over your competitors by using the power of the social web, you just haven’t thought it through hard enough. For example at Naked Wines, the money to invest in our winemakers comes from our customers. Over 50,000 Angels invest £20 a month, so that we can fund our winemakers. Everyone wins. The winemakers get to do what they love – making great wines, rather than selling them. And our customers get better wines for their money than you can any other way.
5. Don’t believe your own bullshit. When I launched Virgin Wines, it didn’t work. At all. I wasted two years because I could not accept the obvious. It was just a crap idea. Once I grudgingly accepted that, and changed the business accordingly, it took off.
6. Don’t debate, prototype. Launch early, launch often. So many companies waste their best efforts debating stuff. The original objective gets lost in a cloud of ego and arse-covering. The outcome looks something like Frankenstein’s daughter, crossed with a camel. It’s late. It’s over budget. It is crap. Don’t bother. If someone has an idea, tell them to mock it up. If they can and it looks half decent, find out whether it has legs by launching it to your friendliest customers. if they like it, build it properly. If not, shut it down, clean up the mess and walk away.
7. Ride your luck. My lucky break was meeting Richard Branson, who offered me the job of setting up Virgin Money. Despite the fact that I had no experience of financial services. Or setting up new businesses. Or managing people. In fact it was hard to find someone LESS qualified than me to do this. My initial jubilation turned to sphincter twitching, gob-dribbling fear, when in no time at all a Powerpoint presentation became a real company with 100 staff and several million pounds invested in a marketing campaign. The first few weeks were awful. Nothing happened. Every time Branson called to see how it was going, I lied. Then with 2 days to go to the tax year end, the security guard came to call me… at the front door was a post office van, loaded with £30m of cheques. We had blown our launch targets out of the water. We were heroes.

We thought that was odd, so googled Hayley, and this is what we found:

When we tweeted back….

Virgin responded by saying nothing and blocking Hayley’s twitter account.

Reminds me of the good ole days at Virgin when BA were telling passengers not to fly with Virgin!

So I approached the Master of Wines’ Forging Links Symposium with some trepidation. For one thing I don’t know one end of a first growth claret from another. And I suspected that my message would be even more unpopular this time around.

How wrong I was.

1. It was really inspirational. Now that the trade can see that the internet is the best chance talented winemakers will ever get to connect direct to thier customers, they are embracing the online world

2. Unlike most businesses, in the wine trade, the closer you get to the top of your game, the nicer people are. I sat next to Paul Draper, the man who put Montebello on the map….one of my wine heros. NOt recognising him at first, the conversation went something like this.

Me….Hello, what do you do?

PD….I make wine

Me…Oh, that’s nice. Would I have heard of you?

PD…..probably not.

3. Le Pin really is the dogs bollocks. I have tasted Chateaus LAfite, Latour etc…and wondered what all teh fuss was about. Last night I tasted Le Pin for the first time, and now I know what it feels like to drink a £1500 bottle of wine…that I would actually buy if I had the money. And as above the owners Fiona Morrison and Jacques Thienpont could not have been more delightfully down to earth.

4. I met some exciting new winemakers, all with the same story…I have a delicious wine, but I don’t know how to sell it, I don’t have the money or the time to do it myself….so expect to see them on Naked in the very near future.

I am on my way back to the office now, ideas buzzing around my head.  4 days well spent

Rowan

What makes them so special?

Dominique and Baptiste are refreshingly rare in the wine trade…superstars whose top wines sell for £50 a bottle and get 98 point rating from Robert Parker. And yet they still get a kick out of producing a brilliant £7 Vin du Pays for us!

It’s a bit like getting Ferrari to make you a little run around that you can use e very day – the best technical skills that money can buy – at a price you can use every day!

How did they get going

Dominique’s gran was a very eligible lady who inherited 2 hectares of Châteauneuf 50 years ago. And for the next 40 years they grew great grapes, made great wine…and then sold it to a Negociant who made a killing on it

When Dominique and Baptise took over the farm, they bottled the wines as Cristia for the very first time…and immediately went to number 1 with their debut vintage! Unlike some, they never let it go to their heads and have kept making great wines from more humble appellations, at very realistic prices[]

Why do the wines taste so good?

Because they work so hard. On the day we turned up to see them, Baptise was in the vineyard at 5am and Dominique was in the office till 10pm. Everything they do they want to do brilliantly – whether it is their £x flagship or their scrummy rose (which I am drinking as I type this!)

Alain, the father still works in the vineyards – as does granddad who is 89. Which says something a bout the life giving qualities of good French wines!).

Why don’t they cost more?

Because they make so much money selling their Chateauneuf, they can afford to sell thier VdP at a very sensible price. Wine buyers pay over the odds for Châteauneuf, and ignore humbler appellations which grow the same grapes in the same soils

They love chatting to their customers, so please post on their wall or pop in to see them should you find yourself in Courthezon (which sounds disturbingly like cortisone I know)

So this is the email I sent to Tony Laithwaite today

Hi Tony

I hope you are well.

I am not sure if you are aware of all this Letter , but don’t you think we would both be much better off just getting on with our respective businesses?

I will happily take down the offending press release if that helps.

Regards

Rowan

Let’s hope that does the trick!

Rowan

ps please post any comments Here!

The dispute itself is pretty trivial (see box) – what is not trivial is being on the end of a legal action from a company 100x our size

Who are Laithwaites?

Tony Laithwaite and his family own a company called Direct Wines, which in turn owns virtually the whole of the wine mail order market in the UK – Laithwaites, Sunday Times Wine Club, Telegraph Wine Service, Natwest Wine Club, British Airways Wine Club, Warehouse Wines, Avery’s, and Virgin Wines. It is a huge business with sales of over £250m.

So if the arguments are so trivial, why are they in such a tizzy?

My guess is that they don’t like competition. Especially when the competition seems be doing very well, at a time when they aren’t (they lost £5.5m last year). And even more so when the competition is coming from a a group of people who used to work for them! (17 of us left Virgin Wines to set up www.nakedwines.com last year)

They have tried threatening some of our suppliers – and with one dishonourable exception, the suppliers have told them where to go.

So my guess is that they are using their size as a last resort. I think that their threatened legal action has very little chance of success because our press release is accurate. But they have the money to fight it and we don’t. And that feels to me like being bullied.

I need to decide what to do – and I would appreciate your help.

I have 3 choices

1. Do as they say – withdraw the press release, apologise to them and pay their legal costs
2. Play them at their own game by hiring a lawyer to write a similar letter back again (perhaps pointing out that if I wanted to be malicious, I have MUCH juicier material (like them threatening our winemakers to try to cut our suppliers off)
3. Ignore them and get on with finding delicious wines

What would you do? Please vote, and if you have the time, use the comments section to tell me how you would reply to their letter. A case of naked wines for the best reply!

What is all the fuss about?

Here is their letter in full, together with the offending press release.

letter

However if you have better things to do with your time, the long and short of it is…

What would you do? My lawyers advice was that we can’t afford to take them on, so avoid a fight. I hate the thought of giving into a bully, just because they are bigger than you. What do you think?

Your votes please – and a case of wine for the best reply to their letter.

Rowan

Which is this…they are sheep. DON’T be one of them!

For some bizarre reason, people who feel very comfortable making important decisions about their jobs, relationships, homes and holidays, turn to sheep when it comes to wine.

They stick to what they know. and so they get slaughtered by wine marketeers everywhere

Let me give you an example. Most of the big champagnes taste acidic and thin.  When we do our tastings, we often give people 2 glasses…one with a £25 big name champagne in it. And one with a £7 sparkling wine. when asked which wine they PREFER most people choose the cheap one. When they are asked which wine they buy, they choose the expensive one, at 3x the price.  Bonkers.

Why is this bad?

As a wine drinker, acting like a sheep means that you pay too much money for mediocre wines. and you never get to discover all the sensational wines out there that cost less and taste better

Another example…Cloudy Bay is the most desperately sought after New Zealand Sauvignon, costing around £25 a bottle. It used to taste delicious when it was a small winery hand crafting delicious wines. Now that it is a 50,000 case monster, owned by (you guessed it) one of the big champagne producers, it tastes…fine. But not worth £25. and not nearly as good as hundreds of other wines costing less than a tenner

Are you a sheep?

When you eat out do you always eat the same thing, or do you like to look around? On holiday do you always go back to the same place, or do you like to experiment?

If, like me, you are curious about what is out there then EXPERIMENT. There are loads of good wine merchants who have exciting and unusual lists, so give them a go

What should non-sheep do?

At www.nakedwines.com I try to make it easy for people to experiment

1.  If you click on the “preferences” button (top right) you can tell us in 30 seconds about your wine tastes. that way we can warn you away (with a big red cross) from wines you won’t like and highlight (with a green tick) the wines you will

2. If you don’t like the wine we will refund you in full

3. and if you rate the wines we will get better and better at our recommendations for you

4.  if you are still concerned you can chat to other customers and the winemakers

5. and if you still don’t know where to start, start here www.nakedwines.com/angels

To tell the scams from the schemes, wine lovers should ask 3 questions…

1. What is in it for me, after the initial offer?

At www.nakedwines.com customers who support small independent winemakers get 33% cashback. i.e. they get 33% of their wine spend refunded to their account. This is not charity on our part or a scam. It is a genuine consumer benefit, which the customer has earned. See www.nakedwines.com/angels

In contrast many of the wine “clubs” offer no such benefit. There is a big upfront offer, and that is it

2. Is there a catch?

With the majority of wine “clubs” the retailer picks the wines, so the customer has little or no choice over what they get – and when. All too often this is used as a handy way of clearing old unsalable stock (just check the vintage of the white wines and roses…there are too many 2007’s and 2006’s in there. Way past the sell-by date.)

Most annoyingly, the wine is shipped to you with little or no prior notice. Which means that the customer has to go to the hassle of sending it back again

At Naked Wines, we don’t ship any wine that has not been specifically ordered by the customer

3. Is my money safe?

With many of these schemes, customers are paying money in advance. And if the company goes up in a puff of smoke, so too does the customers money

At Naked Wines, the customers’ money is kept in a trust account (NOT with an Icelandic bank!), so that it is protected if anything happens to us.

As I said, I run Naked Wines, so you would be forgiven for thinking “he would say that wouldn’t he”. All I can say is that when my colleagues and I planned Naked Wines, one of the first things we decided was that we wanted to build a company that worked because intelligent wine drinkers would see the difference between a genuinely good deal for genuinely good wine….and the usual “50% off, plus free glasses, plus free corkscrew, plus free air to breathe” school of wine marketing.

Have we succeeded? Feedback please.

Rowan