Interview with Digital Wine Ventures (ASX:DW8)

We spoke with Dean Taylor, CEO of Digital Wine Ventures (ASX:DW8), about the rapid growth in the Wine Depot business and the reasons why so many smaller wineries are choosing DW8’s platform to meet rapid direct-to-consumer demand.

See full transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to Stocks Down Under. My name is Stuart Roberts, and I’m one of the editors of our publication. And with me is the legendary Dean Taylor, of Digital Wine Ventures, ASX:DW8. Dean, it’s a pleasure and a privilege to have us with you at Stocks Down Under.

Dean: Stuart, thanks very much for having me.

Stuart: So, the reason I called you legendary is people have been trying for a long time to create an ecommerce and logistics platform that would easily move a lot of wine around Australia. Digital Wine has succeeded where others haven’t succeeded over the years. You back-door listed your initial startup, which was called Wine Depot, into Digital Wine Ventures, I think it’s two years ago now?

Dean: Yeah, about two and a half years ago. Yeah.

Stuart: Yeah, yeah. So, it was a market cap of about $7 million when Marc Kennis and I first took a look. It’s $150 million at this afternoon’s close, so, well done on the massive growth of Wine Depot over the last couple of years.

Dean: Thank you. Thank you very much. It’s been quite a journey.

Stuart: Wine Depot, in May, shift about 25,000 cases, so I read, in the recent release, which is about six-fold more than a year previously. What do you attribute the success of Wine Depot to?

Dean: Look, we’ve found an amazing product-market fit. You know, the…I guess the platform that we’ve created, there’s five key components that we offer from the tech platform. Logistics is just one of those, and I guess most of those metrics that, you know, the investors have seen really propelled over the last year in particular have been around our logistics offering, and, you know, thankfully, I mean, COVID’s provided us massive tailwinds in that regard. But look, it’s just for, you know, I guess where the industry has been getting, trying to move away from selling their wine through third parties, and moving towards direct-to-consumer sales. And I guess that releases so much more profitability for them, when they don’t have middle men in the equation.

And while they’ve been able to do that, I mean, consumers have been really embracing direct-to-consumer channels. The problem is that when they come to deliver the goods, shipping from a regional area to consumers in, you know, metropolitan areas, it’s time-consuming and expensive, and it erodes a lot of the margin that that otherwise get from, you know, by going direct. So, you know, we’ve introduced some products into the market that allow them to deliver to the customers much quicker, much cheaper. And so, for most producers, when they, once they get their head around it, it’s an absolute no-brainer. And, you know, we’re now working with over 370 suppliers, and there’s about two and a half thousand wineries in the country, so we’re certainly, you know, we’ve managed to make quite a dent in the market so far, and I feel that we’re getting close to that tipping point in market penetration, when the mainstream starts to really get behind and adopt the solution as well.

Stuart: Absolutely, yeah. I’ve got here my copy of Hallidays 2016, and it’s about 750 pages long, so there’s a deep catalog of SKUs that you can deal with. So obviously, the early adopters are with you, but there’s a heck of a lot behind, you know, coming where that came from. What are you gonna do to mainstream, beyond those early
adopters who’ve come on board so far?

Dean: Yeah, look, I mean, there’s 35,000 individual wine labels released each year in Australia. So, that’s for each vintage, so, you know, and most wineries have got, you know, several vintages sitting in their winery. So there’s, you know, 100,000 or maybe 200,000 different SKUs out there at any one time. But, look, I think the main thing for us is that we’ve got a solution, I guess, that’s attracted the smaller suppliers, the more boutique producers, who can see the real value in our proposition, and up until now, a lot of the larger producers have loved, you know, looking at our proposition, they love what they’ve seen in terms of our technology and the service level we’re trying to provide, but they’ve been concerned about our ability to maintain those service levels, because we predominantly have outsourced a lot of our logistics to third parties.

Digital Wine Ventures’ recent acquisition of Parton Wine Distribution changes that, so, we’ve, you know, we’ve effectively taken control of our supply chain, and it will allow us to deal with the bigger end of town. And some of those producers have hundreds of SKUs, you know, and they obviously move significant volumes through the network, and so I think that the, you know, this acquisition really allows us to start to cater for those bigger producers that have been sitting back, just watching and waiting for us to prove ourselves out, and make sure that we can guarantee the service level they require.

Stuart: Right, and what’s interesting to me is with Parton, you get about 23,000 square meters of warehouse space in three cities. So, your reliance on third parties is somewhat reduced by this acquisition, right?

Dean: Yeah. Yeah, definitely. Definitely. So, Sydney, Melbourne, and Perth, we’ll now, you know, utilize that Parton footprint to manage those markets. Digital Wine Ventures has also developed our own facility in Albury-Wodonga, so we’ve got about seven and a half thousand square meters down there, which we’re looking to double over the next couple of years. And we’ve recently established our own site in Adelaide, with another 3000 square meters there, so, you know, there’s only really Brisbane left to go for us, in terms of having our own controlled site, and then we’ve got a complete network that we own and operate nationally. And I think, you know, the thing about our business, and we want to reinforce, we are a tech company. It’s the technology that we’ve used that differentiates us, and but, a bit like Amazon, you know, we rely on that logistics experience to make sure that we keep our customers happy and their customers happy. And it’s really, making sure that we’ve got that infrastructure in place that will allow for the growth that we’re generating, and across our business and our customers, through initiatives like the Direct-to-Trade Marketplace and our soon-to-be-launched direct platform, which allows suppliers that we’re working with to sell their products directly into consumer marketplaces such as Amazon, eBay, and Vivino.

Stuart: Yeah. Now, it’s interesting. Wine’s not the most innovative industry in the world. You’re dealing with people who, in many cases, their premium go-to-market strategy is the cellar door, for example. How do you overcome some of that conservatism in the industry?

Dean: Look, sometimes, you just gotta do the hard yards. You know, that, you’re right, it is incredibly conservative industry, and, you know, it takes a long time to change people’s ways. I mean, we’re dealing with companies that are fifth and sixth-generation-owned. You know, they don’t like changing much, because, you know, there’s risk involved, and, you know, the weight of the family fortune is sitting on their generation’s shoulders, and so… But look, I think where we’ve succeeded is we’ve managed to get into each region, and we’ve managed to find, you know, one of the stars in that region, where we’ve convinced them to, you know, give us a shot. And then, once we get going, we end up with, you know, a positive case study from them, and it’s very, you know, quickly spreads via word of mouth through the region that their experience has being successful. And, you know, the one region where this has worked incredibly well for us in McLaren Vale, South Australia. And we now, we probably service 90% to 95%, all of the wine producers in that region.

Stuart: And a relatively new wine region as well, compared to its friends in the Barossa, for instance.

Dean: Correct. Yeah. So, that’s true. So, they’re probably a little bit more, or a little less risk-averse than their Barossa counterparts, but we’re certainly started to make some deep inroads into the Barossa as well. And it’s, again, it’s taking that same strategy. It’s just finding one or two, you know, sort of, you know, some key brands that we can get them on, and to become, I guess, evangelists, and really, then leverage that word of mouth, to improve our market penetration.

Stuart: Yeah, it’s interesting. I’ve noticed a lot of New Zealand wines that had just signed up in the most recent period. Now, it’s been difficult for Aussies and New Zealanders to talk to each other in the last little while. How have you managed to penetrate that market so effectively?

Dean: Yeah, look, I guess, actually, it’s funny that, you know, the [inaudible 00:09:12] obviously all around risk, right? And you think about New Zealand, you know, a lot of the wines comes from the South Island, around the central Otago region, Queenstown. I mean, it’s [crosstalk 00:09:25]

Stuart: Best drinking in the whole of Southern Hemisphere, in my opinion, is central Otago.

Dean: Yeah, well, but it’s the riskiest part of the world. If you’ve ever go there for a holiday, you know, you’re either bungee jumping, or you’re ripping down a river in a jet boat, or you’re paragliding, or you’re snow skiing, so… And I know, if you’ve ever read the insurance disclaimers in South Island, New Zealand, they, even upon death, the maximum they’ll pay is about $5000, so… To look [inaudible 00:09:54] you know, it’s, I guess they’re a hungrier a bunch, you know. It’s a very new wine region…

Stuart: Well, it’s only about 25 or 30 years old, right?

Dean: Right, yeah. And, like, it’s very isolated. But they have brands that are very well-known in Australia, you know, like, you know, they punch well above their weight. I mean, some of these wineries, you know, they’re actually small producers, you know. They make 5,000 or 10,000 cases a year. But their brands are really well-known in Australia and around the world, because they do. They make amazing wine. And so, for them to be able to sell directly to consumers in Australia, bypassing the layers of middle men in the supply chain, becomes very attractive. And I guess that’s what Digital Wine Ventures’ solution does for them, and so, you know, they’ve all seen it as a great opportunity to leverage the brand equity that they have, to grow direct-to-consumer sales in Australia, and put a lot more profit back into their own pockets.

Stuart: When do we expect to close the Parton’s acquisition you just announced?

Dean: So, look, that completes at the end of July. So, you know, we’re just in the, sort of, the final throes of I guess, you know, working through the last couple of items in the, you know, conditions precedent, but it’s pretty much there. You know, we’ve developed an advanced post-merger integration plan, that will see us bringing some of the synergies out of the merger of the two businesses very quickly. We certainly… One of the things that attracted us to the acquisition was obviously, their trade delivery capability. And up until now, most of the growth we’ve had in logistics has been from consumer market. You know, 95% of our orders that we process go to consumers. On the other hand, their ratio would be probably 5% consumer and 95% trade. And so, but even by acquiring this business, we’re not really taking any of the growth opportunity out of each of the businesses. You know, we’re not cannibalizing existing market share at all. If anything, the growth should stack quite nicely on top of the two businesses, and continue in a similar trajectory.

But, you know, with that capability, the trade capability, that, we see, is a fantastic way to support our recently-launched trade marketplace. You know, the trade venues, if they’re gonna order wine or beverages, they need to have it delivered the next day. And you need to have that reliability. And so, for us, if we really wanna make the marketplace scale, and grow the way that we intend, you know, to having that capability that can make sure the trade gets looked after the very next day, is critical. And it also helps us grow the marketplace, because, you know, basically, we’re performing deliveries to our target market every day of the week, and so it gives us a chance to get in there and talk to the wine buyers, and explain the proposition.

So, you know, it’s helping us in… The acquisition, even though it’s in the logistics space, it helps so much across the rest of our business, and I think the real upside in this is in bringing, you know, another 225 customers, bringing, you know, hundreds and of brands and thousands of SKUs into our marketplace, bringing all of those potential buyers [inaudible 00:13:25]. You know, that brand, you know, developing brand awareness, and getting them familiar with our service offering. And I think the, you know, the fact that it’s also going to bring our logistics business into profitability this financial year, 18 months ahead of schedule…

Stuart: profitable, so that means the share price goes down? 

Dean: Look, we’ll continue to invest heavily in our other parts of our platform, market in particular, so even though logistics will, you know, sort of be profitable as a business unit, we’re still gonna invest hard in, I guess, really trying to take as much market share in what we see as a greenfield opportunity as possible.

Stuart: Okay. So, the Jeff Bezos of Australian wine has been with us this afternoon at Stocks Down Under. It’s been great, Dean. Everything seems to be coming together for you now. You’ve had a transformative acquisition. You’ve had a great couple of years with Wine Depot, and COVID was a disaster for most of us, but it was a great tailwind for you. So, it’s all working for you.

Dean: Yeah, well, look, it’s, there’s certainly blood, sweat, and tears behind the scenes, Stuart, but yeah. Look, it’s been a great run, and for those of you, and obviously, you and I met a couple of years ago, you know, we’ve stuck to the business plan. There’s been, you know, lots of people try to convince us to pivot in different directions, but basically, the same business plan we presented two years ago is exactly the trajectory that we’re on, and, you know, it’s just sticking to our knitting, and doing what we do, really well, is what’s working for us, I think. So, yeah, thank you very much for having me on, and the kind words, and look forward to catch up again soon.