Business Analysis: Selling wine by the case... the secret of Majestic's success

In two weeks' time Majestic Wine will launch its biggest-ever pre-Christmas promotional onslaught. The wine warehouse group is anxious to flaunt the breadth of its bargains to its customers in time for them to stock up with a crate or two for the festive drinking season.

With consumers' wallets under pressure from rising heating bills and a backlog of credit card debt, even the seemingly infallible Majestic has admitted it needs to be more proactive if it is to keep increasing its share of the wine market. It took an additional two promotional campaigns to keep its sales numbers bubbling ahead over the summer, including slashing the price of all of its champagnes by one-third in June.

Reporting a sharp jump in interim pre-tax profits yesterday, Tim How, the chief executive, said: "In recognition of the slightly tougher consumer environment, we needed a couple of extra promotions."

Analysts believe the elixir of Majestic's success is its potent cocktail of good value at fair prices. But it is having to work harder to remind its customers what lies in store. Rob Brent, an analyst at KBC Peel Hunt, said: "Majestic is having to talk to its customers more frequently to get them to come into its stores."

In other words, even Majestic's affluent middle-class customer base likes a bargain. Expect good deals on New Zealand Sauvignon this Christmas, following the recent bumper harvest that knocked the price of bottle of Oyster Bay down to £4.99 in the summer. Wines from Argentina and Chile, the latest countries to increase their share of the floor space at Majestic, will also be priced keenly. That's floor, not shelf, space since the group's warehouse approach to retailing means it just stacks boxes on top of each other instead of using fancy - and pricey - racking to display its wares.

Indeed, it is precisely the company's low-cost approach to doing business that meant it could report an 18 per cent rise in pre-tax profits for the six months to 26 September to £5.9m, on sales up 8 per cent at £80.8m. With only two new stores opening during the period, costs remained fairly static, boosting the top line.

The group keeps its rents low by opening stores away from expensive high street locations in sites as diverse as old garages, pubs and even cinemas. Crucially, the sites, which are much bigger than your average Thresher, have to offer parking because Majestic customers must purchase a minimum of 12 bottles. (The group does deliver.) Its wine-by-the-case rule keeps its average transaction high at £155. Bigger stores means it can keep more stock in situ, keeping down distribution costs.

Meanwhile, a push into "fine wines" - that's anything more than £20 a bottle - has helped the average price of a still wine bottle increase from £5.46 last year to £5.54. That is way ahead of the national average of a little less than £4 a bottle.

Majestic's decision to expand its range of fine wines from just one outlet in London's affluent St John's Wood to a further three stores reflects its well-heeled clientele. One retail analyst said: "The fine wine offer cements where Majestic already is in the market - at the upper middle end. It is good, incremental business that supports the company's proposition."

Sales of fine wines, mainly clarets and burgundies, soared 43 per cent in the first half, although accounted for just 2.7 per cent of the group's sales. Mr How hopes to increase this to 5 per cent over the next two years by expanding the range, which must be stored in special, simulated cellar conditions, in up to 10 stores.

The group's decision to experiment with fine wines is a good example of why consumers like to shop at Majestic. Wine buffs know they will always find some interesting vintages and grapes on offer, and enthusiastic amateurs know they will find some sharp prices thanks to the group's one-off "parcel culture". Buyers are for ever snapping up parcels of wine, such as the surfeit of fine claret recently sold off by the Swedish liquor monopoly, or the £600,000 parcel of mature Burgundy purchased in August.

Majestic was spawned in 1980 during the great wine warehouse boom that saw retailers such as Barrett's Liquor Marts flood on to the market. But it took the partnership of John Apthorp, who stepped down as chairman in August, and Mr How to create the company as it is known today. Mr Apthorp bought Majestic in 1991 to add to his Wizard Wine Warehouses, an off-licence chain he hung on to after selling his frozen food outfit, Bejam, to its rival Iceland in 1988.

Without the backing of the Apthorp family, Majestic might not even be around today because an ill-fated move into California had left it in poor health before Wizard swooped. With the exception of one troublesome year early on in its reincarnation, Majestic has never looked back. A round of modest profit upgrades after yesterday's better-than-expected numbers has left the group on track for its 13th consecutive year of rising profits.

Even if the company's underlying sales continues to slow - the first half rise of 5.5 per cent slowed to 5 per cent in the first seven weeks of its second half - the underlying market trends remain strong. Wine sales are growing by an annual rate of 6 per cent as more people choose to entertain at home. A glass of wine is replacing a pint of beer as the national drink of choice, fuelled in part by the rise in female binge-drinkers.

Within the market, Majestic is well positioned thanks to Oddbins' fall from grace after its acquisition by France's Castel. French wines dominate Oddbins' shelves and its staff have lost the company their reputation as oenophiles (wine connoisseur). Although the supermarkets can offer some good bargains, they lack the space to stock wide ranges, although Mr How noted Waitrose's rapid expansion with some alarm.

The only sour note in yesterday's interims came from Majestic's operations in France, where it owns the Wine and Beer World chain. Located solely in northern France, near the main ferry terminals, the chain saw like-for-like sales drop by 4.3 per cent during the first half. As more fun-seekers opt for a no-frills flights over the traditional booze cruises, Majestic's French operations look under threat. That said, the business is still profitable and popular with those pre-ordering by the truckload for a big party.

A new era at Majestic dawned in August, when Mr Apthorp stepped down as chairman after 15 years. Simon Burke, the former Hamleys chief executive, who was already on the board, stepped up to succeed him. The Apthorps have cut their family shareholding to 24.5 per cent from almost two-thirds less than three years ago, in response to demand from institutional investors.

Although the founder selling is often an invitation for other shareholders to follow, analysts believe Majestic still has plenty of growth for the quaffing. It will trade from 125 UK sites by Christmas, but remains keen to increase this to 200, opening up to eight new outlets each year.