Welcome everyone to the 2021 interim results presentation for Naked Wines. This is my second time doing this, and again, I'm sat in my house talking to a screen. I'm very excited to share the news and the updates around the business for the last six months with you all. It has been a truly transformational period for the company. I'm going to start with some of the headline numbers, and I think it's worth pausing here because there are some pretty remarkable numbers on this page.
Overall, we grew revenue by 80% in the first six months of the year. I think Repeat Contribution growth often is something we highlight as a truer read on the underlying strength of the Naked Wines business model, and that was ahead 89%. It was generating GBP 36 million in the first half.
Really that came through, you can see, from a combination of much higher retention, 95% sales retention for the period, and a substantially enlarged customer base with over three quarters of a million active Angels. If you wanted to add all that up, the metric we use is Standstill EBITDA, which gives a read on the underlying profitability of the Naked model if you normalize for the growth investment we make.
That increased by an eye-popping 555% to GBP 26 million in the period. If you want to take a forward-looking view and think about the value we're creating for the future through productive investment in new customers, we were able to deploy GBP 23 million of investment in the half, with our payback metric doubling to 7.6, and that equates to something like GBP 173 million of lifetime value that we project to be generated. An increase of 340% on the prior year period.
I think what's clear here is that the past six months have represented a real step change in performance and scale for the group, and a set of numbers that I'm very proud of and very proud of the commitment and hard work that's been put in by all of our colleagues across all our markets.
It's not been the easiest six months operationally for any business. Like many at Naked, we've had to adjust to new working models, building out teams in fully remote environments. Our colleagues have unfailingly been focused through that on trying to provide a great experience for our customers and to continue driving our mission to connect those customers to some of the world's best independent winemakers. I'm very pleased to be able to report the set of numbers that evidences the great work that they've been doing.
I think now's an appropriate period as we've just had, thankfully, the news of potentially a vaccine for COVID-19 to reflect on what the long-term impact of the step change and the growth we've delivered in this six months is going to be for Naked Wines. And conscious we've been bracketed probably as one of the beneficiaries or the winners through COVID, but t o my mind, the really profound impact is that we have not just a bigger business as a product of the last six months, we have fundamentally a better and a stronger business.
For those of you who are maybe a little newer to Naked Wines, we talk about the virtuous circle we create through our model and the differentiation we drive by connecting customers directly to winemakers. We have a pool of members we call Angels. Their cash subscriptions and the ratings data, it allows us to work with over 200 independent winemakers.
The funding we provide and the data lets them make better wine at lower cost. We're able to pass that back on to our customers who get great quality product at a better price than they'd pay in a standard retail environment. That drives a very high retention model and we build, again, a larger customer base, and that's how a circle works. It's worth thinking about how each of these things has been reinforced and amplified in the last six months.
Firstly, we have more than an additional GBP 60 million of cash coming in in terms of subscription from additional customers. That's enabled us to work with and support a larger group of independent winemakers w e've brought more than 40 new winemakers into the model, including some we'll talk about later over the course of the last six months.
All of this means we're able to amplify and drive even better scale economics and value so w e're reducing production costs for our winemakers. We're able to pass that through with greater efficiency, lower distribution costs to again reinforce the quality to value for money advantage we're able to offer customers. All of this is sustainable and permanent improvement in this kind of virtuous circle.
Ultimately, I think what we'll see right now is there are two types of businesses that have done well out of lockdown. There are some businesses that people have been forced to use out of necessity, and there are some categories, and I firmly believe Naked and online wine in general is one, where this has been a period of time where people have had their eyes opened to new models and have discovered new things that they're going to stick with.
Ultimately the reason they're going to stick is that we've got a better way of providing wine to customers. When you connect winemakers directly to customers, you can give people more choice, better value, and a much richer experience.
What I want to do today is talk you through in a little bit more detail what we see as those enduring changes as a result of the six months we've delivered as a business, i 'm going to talk a bit about the markets we operate in, the scale we've been able to build, some of the impact that has on some of the work we've been doing to drive customer lifetime value, and how it also impacts and improves our appeal to winemakers.
Overall, I think the message here is that we see a series of changes that will be enduring, w e have, as I say, a better business as well as a bigger business as a result of the last six months. Firstly, to think about the markets we operate in. We've shared that there's been a really rapid period of inflection in terms of the penetration of the online channel in the wine category, and in particular in the U.S. where that channel was very underdeveloped.
I think it's really interesting to reflect on why that's happened, and the chart on the right-hand side here shows that there's been a massive increase w e've had a threefold increase in the number of unique buyers who've bought wine online in the U.S. looking in 2020. This is a whole new swath of people who've had their eyes opened, often who didn't even realize it was legal to buy wine online previously, and are now trying new models, maybe our own, maybe some of our competitors, w e see this as a permanently expanded pool of buyers who are open to the idea of buying wine online.
I think another way of looking at this, and again, returning to this idea of people discovering a better way to buy wine, is to look at the dynamics in the early period in the U.S. where there were very tight state-level restrictions, and then what we describe as a reopening period through the summer in the U.S. What you see, looking at the chart on the left, is that for the total off-trade in the early period with restaurants and bars shut, there was a surge in growth, 27% year-on-year growth.
As the on-trade started to reopen and things started to normalize, that fell away. If you look on the right-hand side, looking at the direct-to-consumer market, businesses like ours, wineries shipping directly to customers, you see an even larger surge in the dark bar from March to May 2020. You see really very little change in the period moving through the summer.
Again, that's a reflection that as consumers are moving to an online model, they're discovering that you can get something that's more convenient, you're getting great wine, you're getting a direct connection to a winemaker, and you're getting better value, and that's something that people want to stick with, and i think that's really profound. We're operating in an environment where our markets have seen structural change that's favorable to us.
The next important message from the last six months is that we've demonstrated that the infrastructure here at Naked Wines scales really efficiently. We've been able to deliver this step change in growth, alongside, frankly, some pretty profound transformation in how people go about doing their work, and we've been able to do that very effectively.
Operationally, we've seen capacity increase by over 100% in the half, w e've opened new distribution centers, and we've done that while maintaining great availability. From a customer service model, we're now operating a fully remote customer service environment in all our markets, w e're handling nearly twice as many contacts as we ever have before. We've done that whilst maintaining really great feedback. The thing we're always passionate about is the performance and the ratings that our customers give us. 91% feedback rating maintained.
We've also been working with winemakers and working with winemakers in new ways so w e brought in 36 new winemakers through our GBP 5 million COVID Recovery Fund. We've continued to look for ways to do things differently to support winemakers looking to take advantage of new opportunities whilst other people are pulling back or deferring payment terms. We always believe that close partnership with our winemakers is the secret to differentiation and success.
I think it is also worth just noting here that during this period of time, in none of our markets have we taken advantage of any of the different government economic support packages made available. We've taken no money in any market we've operated in in this six months, w e've not needed to.
If you want to think about what that means, and to take a U.S. example, that means we are seeing really substantial cost leverage. The fixed cost of our U.S. operation as a percentage of sales in that U.S. market, coming down by 5 percentage points, nearly halving compared to first half 2021. Then in terms of a unit cost basis, you see us driving a 22% reduction. That's very profound because driving out that cost that no one can taste, that doesn't have any value as we add scale, leads us to delivering higher lifetime value of customer.
We've got markets that are transformed and more favorable to us. We've been able to scale the business, and that's driving efficiency. The next important thing to update on is that despite the disruption that's been going on and the challenge of scaling the business up, we've also been working hard to continue to improve the underlying experience for customers. We've talked a couple of times about our creation of new subscription products, and our Never Miss Out product to allow customers to subscribe to their favorite wines.
During the first half, this has really come of age, and we've seen tremendous adoption across the customer base w e have now over 180,000 members signed up to this, and we have compelling evidence w hat the chart is showing here is the dark line is showing the amount of lifetime value we generate by days elapsed from a customer once they've signed up to a Never Miss Out on one of their favorite products, versus the green line for a control group of similar customers who haven't.
We've got evidence here that not only are we getting a lot of adoption here and generating revenue, but the revenue is highly incremental. Actually, we have GBP 11 million of contracted future revenue just through this Never Miss Out product across our group at the moment.
I think another question we talked, I think, pretty openly about six months ago was that we didn't know exactly what the impact of COVID-19 would be on behavior of existing customer cohorts. Actually, what we've discovered is the impact has been to amplify the affinity customers have to our business w e've seen improvements in our retention rates, we've seen improvement in order frequency.
The left-hand side is showing the behavior of all our customers that have been in the business for over 12 months. These are a group of customers, all of these were recruited before COVID, it's showing how their behavior has changed.
If you look at the blue line on that left-hand chart, you see a little spike in March 2020 so w e did have a little cancellation spike, and actually what we did there was reach out proactively to our customers and said, "Hey, is anyone struggling? Is anyone in trouble? Do you need to pause payments? Do you need to take your money back?" Because we've always believed that the right way to create long-term value is to clearly position Naked Wines as a business that's on the customer's side.
I'm delighted to say, if you then look at the dark blue line compared to the gray line through the rest of that chart on the left-hand side, we've seen materially improved retention of customers through the balance of the first half.
On the right-hand side, you can see not only have we had that higher retention, but each of those customers' frequency has increased. James will talk a little bit more about the financial consequences of this in his section. A couple of very important trends there in terms of change in customer behavior we've observed.
Now, the other part of that equation is obviously, well, what about the customers we have recruited in the first half? customers that have obviously come to us in a unique environment i t's a different time. I think there are two things to highlight here. We've highlighted the March through May cohorts, which in our mind are the customers we've recruited during the acute phase of COVID.
I think the message we have here is we have compelling evidence that these customers are likely to be more valuable than the long-term average. What we're showing here is the amount of contribution those customers have delivered in their first 90 days. We've compared it to the equivalent months last year, and as you can see, there's a substantial uplift.
I think if you take the cohorts from June onwards, what we've seen is really more of a reversion to the long-term trend. Still generating more contribution than the equivalent period next year, i think we're at the point now where we'd say the evidence suggests these are of similar, maybe slightly higher than long-term trend value, these cohorts.
There's two slightly different dynamics going on here, but as this data is building up, we have a lot more confidence in the value of these cohorts than we obviously had six months ago, where we knew lots of customers were turning up, but it was unclear exactly how they would pay.
I think the final part of the story that's always important for us at Naked, but we've really tried to spend even more time focusing on over the course of the last six months, is using the power of the community we have here to continue to engage people and give them a little bit of joy, a little bit of a respite from what's been a pretty bruising and challenging year.
Whether that's been supporting the wine industry by doing things like our COVID relief fund? or whether that's been creating new types of digital connectivity with customers, moving from having tasting tours where we meet thousands of Angels to having virtual experiences where we've connected with 70,000 Angels this year.
It's also been just customers doing it for themselves and looking to Naked as a great safe space where they can go and engage with something fun, connect to a winemaker, and take a little bit of time out from a crazy year. You can see that in the first half, I think it's pretty amazing, nearly 1 million posts have been recorded on our different winemaker pages, showing the scale of community we've now delivered.
We've got markets that have been fundamentally changed favorably. We have a more scaled business, and we're seeing success in a number of our initiatives to drive lifetime value. I think what all that adds up to is also a business that amplifies its appeal to the world's best winemaking talent. We've done a couple of major product launches with some of the winemakers we talked about six months ago who we brought on board as part of the COVID fund. Jesse Katz, we launched his Aperture wines on the 4 July on Independence Day.
We sold a quarter of a $1 million worth of wine in 24 hours. We did that an average bottle price of $42 a bottle, so materially ahead of where we've traded in the past. Very excited about the next stage for Jesse with Naked i was just out at his winery in the Alexander Valley a couple of weeks ago, and we've got the final label design and plans for a range that he's going to call the Exposed range, it will be 100% exclusive to Naked Wines launching from the 2019 vintage.
I think another example, I know this is an investor favorite for a lot of people, the Matt Parish Napa Reserve Cabernet. I don't know if we've got more investors or you lot are all just very thirsty, but we sold GBP 300,000 of that in its first week of launch this year as well. What does all that add up to? I think it adds up to a business that is thriving, a business that is growing ahead of the market, w e've got some clear recognition of that.
For the second year in a row, we were delighted to be voted the U.S.'s number one wine club by the readers of USA Today. If you want to look in terms of a market share lens, this is not just a growth story that comes from the market doing well w e've been taking material market share.
Our volume share actually passed the 20% mark if you look at the kind of period from March, COVID period to date. That's more than one in every five bottles of wine that are shipped from a winery in the USA to a consumer are shipped by Naked Wines. I think it's really a pretty remarkable statistic. You can also see us driving strong growth in our value share through that period.
If we add all that back up, comes back to this message of not just a bigger business, but fundamentally a better business. The change we've seen is just reinforcing, if we think about the flywheel here in terms of value creation for the business. With scale, it has meant we've got greater efficiency. That greater efficiency is translating, and you're seeing it here. James will talk about our contribution margin improvements y ou saw the reduction in operating costs.
That translates through into higher margins, h igher margins mean higher lifetime value of customers. The way we always think about higher lifetime value is that gives us an ability to go and invest and deliver customers that might have a higher CAC, but still maintain our long-term payback targets. That means more productive growth investment. That means more new customers into the business t hat drives more scale.
That's the way we always think about the business, and we've really seen the pace at which this flywheel is turning has really stepped up in the course of the last six months, and it gives us a lot of confidence looking into the future.
Against that, I think the final important part of the story is that we are in a really good position to exploit and pursue those growth opportunities. Our balance sheet continues to look strong. We had GBP 21 million of cash generation in the half. James will talk you through some of the drivers. At a high level, it's fair to acknowledge that that's not representative of the cash generation for us in high growth mode. There's a little bit of exceptional movement of working capital in this first half.
It does mean we're well set up, and we've got the strength of balance sheet we need to be able to continue to invest and to take a view where we can look for the medium and long-term opportunities in a period of uncertainty. I'm very excited about that i t's not just about investing in customer acquisition. It's also about investing in the capabilities that enable us to connect winemakers and customers, and it's about investing alongside our winemakers in exciting new wines and new projects, and to continue to build Naked Wines as the home of the world's best independent winemakers.
Medium term, no change to our capital allocation philosophy. As I said six months ago, right now we see our strong balance sheet as a real source of competitive advantage. With that, I'm going to hand over to James, and I get to embarrass James for a second time. We said six months ago that maybe it'd be James' last time. He's managed to make it through, and I'm delighted actually he's managed to make it through to present such an incredible set of results as we have today.
In the course of his time with the business as CFO, I think the business is something like 4 times the size of when he joined. I really couldn't think of a single contributor who's been such a big part of our ability to deliver that and to build the company we have today. James will be taking us through these numbers. I'm also delighted to announce that we have James' successor secured and in place. Shawn Tabak will be joining us. Shawn I think is going to be, again, a brilliant addition to this team.
His background and his experience, having worked with a number of businesses that are aligned to ours in thinking about driving sustainable long-term growth through a real understanding of the value of customers in the long term and building out growth off a really underlying set of favorable investment economics, I think meant he was an ideal candidate, and I think he's going to slot brilliant into the team. But for now, I'm going to give James the pleasure of talking us through the details of what was a pretty amazing first half.
Thanks, Nick. I'm humbled by your kind words and slightly embarrassed to have had to hear them a second time, but I promise this is the last time, folks. Starting with revenue. Top line is up 80% in the half. I think useful to see quite how much the U.S. at this point is becoming the driver of the business i t's now 49% of our global revenue in the last six months, and it's also the business that grew the fastest i t achieved 95% growth in revenues.
Not to say that the U.K. and Australia were slow, 76% and 48% respectively, but obviously with the dynamics like this, you can see that the U.S. will continue to grow its influence across the group in terms of its scale.
I think it's also informative to look at the timing of our growth, and you'll see on this chart how momentum accelerated throughout the half. What you're seeing here is in the dark blue line that we had a very large spike in revenue derived from new customers as the COVID pandemic took hold in March and April.
That then slowed as things returned to a degree of normality. The green line shows how the repeat customer revenue accelerated in that time as those new customers converted into repeat customers and started shopping again. That led to an overall increase in the pace of revenue growth, which is the medium blue line during the course of the half. I think worth flagging that that was the story of the first half. We've given guidance today as to what we expect the full year outlook to be. We are anticipating low momentum in second half.
Why is that? well, in part it's a normalization of the marketing environment, which has been some of the driver of that slowdown from the extremely high levels of new customer sales growth we saw earlier in the half. It's also a reflection of the fact that during the time of our peak trading, we get very high proportions of our customers ordering anyway, to the point where it's not going to be as achievable to grow frequency within that period.
Then there's also a reality that our new customers are generally now being offered six-packs for their first order, so we're achieving lower revenue per new customer order. That means that the rate of growth year on year will be lower. Finally, the comps at the back end of last financial year included some uplift y ou can see it in the March section here. Due to COVID-19 trading, and obviously as we annualize those numbers, the growth rates would be expected to drop.
Moving from revenue to profitability. This chart shows how we made GBP 17 million more Repeat Contribution in the half and reinvested the majority of that into increased investment into new customers, and also an amount of fixed cost and R&D spend, with the net result that profitability was still improved by GBP 1.3 million.
We've broken out the increase in Repeat Contribution in a slightly more granular way than normal because I think it's informative to start understanding how much of that growth is sustainable and how much is somewhat transient due to the trading conditions.
Of the GBP 17 million of Repeat Contribution uplift, GBP 7.5 million is due to us having more customers. That is a sustainable uplift. GBP 5.1 million is due to us realizing higher levels of sales per customer, driven by purchase frequency.
That relates more to the COVID-19 impact and, in particular, some of the consumer behaviors we saw at the start of lockdown. We would expect that to unwind, at least in part. Then GBP 4.4 million relates to the fact that our margin on repeat customer sales improved by 3.5 percentage points. That is in part sustainable, which I shall talk about in a second.
Just looking at the Repeat Contribution number in some different ways. We added GBP 17 million of Repeat Contribution in the half year. Just as context, I think Nick alluded to this, that's the same amount as we've added since the first half of fiscal 2014 on a half-by-half basis.
There are three drivers of that t he first of it is retention of sales from customers that were customers a year ago. Historically, that number has tracked around about the early 80%s, 83%. In this half, it was nearly 95%, bringing a 12-month rolling average just north of 90%. That's the first driver of the uplift in Repeat Contribution. The second driver is the payback that we have been achieving on the customers that we've recruited in this half. Normally, we would see very little contribution being delivered from the cohort of customers that we just recruited y ou can see in the previous year, it was GBP 1.2 million.
We'd invested GBP 10 million, as context, that's a 12% return realized in that six-month period. The dynamics have been very different this year. We brought in a lot of the customers early on in the year. Normally, our full-year recruitment is very much back-end weighted towards our peak trading. Because of that early recruitment of customers, we've invested GBP 22.7 million, we've actually realized GBP 7.7 million of Repeat Contribution from the customers we recruited this half already. That's a year zero payback of 35%.
That's obviously a huge positive. It reflects some of what Nick indicated around the quality indicators we're seeing from those customers. It does come with a potential slight sting in the tail in that you could expect potentially lower retention from those customers in FY 2022 because they've been recruited earlier in the year. You'll still get the payback, but the timing of the payback will be different. The timing will be positive because by getting early payback, you enhance the IRR.
The third driver of our Repeat Contribution uplift is the Contribution Margin improvement, and I said a couple of slides ago that that's in part sustainable. We achieved three and a half percentage points of improvement in Contribution Margin overall. 1.6% of that is driven by underlying improvements in gross margin in each of our markets.
Those are driven in part by marketing and range changes that were to some degree forced upon us by the rate of increase in business that we had. Some of it relates to enhanced buying scale, i t's hard to separate that entirely, but we would say that certainly the majority of that is not likely to be ongoing, s ome of it should be, but not all of it.
The other 1.9%, we believe, is a sustainable uplift in that margin. It relates to gross margins being improved as the business moves towards the U.S., offset by some increase in fulfillment costs due to that same movement. A 1.6% improvement in Contribution Margin due to fulfillment cost improvements. That is just a reflection of those operational efficiencies that Nick alluded to in the slides earlier.
Moving now from the repeat side of the business to the new customer investment. We doubled spend year-over-year, and we also doubled payback from 3.8 to 7.6x. When we look at which side of the equation that comes from, it's actually pretty evenly balanced between the cost per Angel being lower year-on-year as marketing costs went down, both in terms of rates, but also per Angel as we got improved conversion as our proposition obviously resonated strongly with people in lockdown situations.
Then we saw an equivalent increase by an increase year-on-year in the LTVs per Angel, some of which is already realized as people have shopped earlier, some of which our forecasts are showing us indicators through retention and purchase frequency that the customers will have higher values year-on-year. The net of those was that overall increase to 7.6 times. I think it's also informative to look at our investment and our returns in terms of when in the period they were delivered and what happened.
What you'll see in this chart is the bars represent how much we spent each month, the line is what payback we achieved on that investment in each month. You can see that the exceptionally high payback overall we achieved is very strongly driven by results in April/May, kind of early in the cycle of the uplift and acceleration of the business.
Why did that happen? It happened for a number of reasons. One is that it was just not possible to maximize the capacity dedicated to new customers quickly. In the U.K., our repeat customers were essentially using all of our fulfillment capacity, we actually switched off temporarily for new customers. We also weren't able to switch on partner volume quickly i t takes time to print vouchers and get them distributed.
You can see that as we then moved into May and June, we were able to significantly uplift spend in those channels alongside digital where we could move investment very quickly and start spending at a real kind of peak level for the business.
The third factor is a little more technical, but is that we set ourselves a goal of making sure that we were going to hit our 4x target by targeting actually 5x when it was uncertain what kind of quality these customers were. Over time, the cohort value forecast we've achieved for those customers have been increasing. As a result, when we thought we were targeting a 5x in May and June, we've actually ended up with a 6x to 8x type payback just because the customers have demonstrated themselves to be worth more than we expected at the time.
The overall effect of that is that we have, for the past few months of the half, been trading at a 4x to 5x payback in the investment that we're making. Obviously that remains our target going forward. Moving away now from new customers just to the fixed cost base of the business. We said at the full year that we would need to be catching up somewhat on some fixed costs we hadn't built into the business during FY 2020, and w e did that with 20% growth recognized in the fixed cost base during the half.
Given the high level of sales growth we've achieved at 80%, that remains below our medium-term guidance, despite investing in a set of additional roles, including the U.S. managing director, the director of growth, and putting in place an enhanced variable compensation package to reward employees just in this year for the exceptional efforts they've made to keep the business running and keep our quality indicators like five-star feedback high.
Just worth flagging that, in this aggregate fixed cost number, I'm including both our R&D spend, our spend exploring new marketing channels, which amounted to GBP 0.8 million in the half, and also IFRS 2 charges, share-based payment charges, which will be circa GBP 2 million per annum going forwards, but were previously reported as adjusted items, w e're now building them up into our adjusted EBITDA number.
Bringing that all together, Nick referred to our Standstill EBITDA number increasing to GBP 26 million per annum. That is the calculation of what we would make as adjusted EBITDA in the event that we only invest this to replenish the customer base and not to grow the business. I think it's most informative to look at how that has grown so much i t was GBP 4 million times on a rolling 12-month basis a year ago, to GBP 26 million now.
GBP 21 million of that uplift relates to the uplift in Repeat Contribution over that 12-month period. GBP 3 million is actually an improvement in the replenishment costs to replenish the contribution lost to attrition, and that's a reversal compared to normal trends, g enerally, you'd expect to have a bigger business, and with a bigger business, you'd expect to have to spend more money to replenish the customers that you've lost. Because we've seen higher levels of retention and enhanced levels of payback, that actually has reversed the other way.
I would flag being prudent that I would expect that number to reverse on the assumption that at some point, our retention and payback KPIs reverse towards historical normal levels. The third driver is the uplift in fixed cost in the 12-month period, which completes the bridge from GBP 4 million - GBP 26 million.
Moving away from the P&L now and into cash. Again, Nick alluded to our strong cash generation w e've generated GBP 21 million of cash in the half. A small amount of cash absorption due to the EBITDA loss, but really the moving parts in here relate to working capital. We invested GBP 15 million times in the half into inventory to grow inventory levels.
That is a number which is lower year-on-year than the GBP 23 million in the first half of fiscal 2020, despite the fact that the rate of growth was significantly higher. That actually reflects an underinvestment in inventory, and we will need to invest substantially to right size that position, i n order to keep up with demand, we pulled certain vintage releases forwards and things like that. There is a rightsizing of that required.
The increase in customer funds is what you would expect based on the enhanced level of Angels that we now have. The increase in accounts payable, from GBP 7.6 million -GBP 21.5 million of cash generation from that in the half, is not a sustainable number. It reflects, to some degree, the growth we've seen, but also the fact that in securing inventory quickly, in the pace at which things were moving through the supply chain at the back end of the half, there are balances there that you would expect to unwind over time.
I mean, worth reiterating, there's nothing in that balance like a long-term VAT deferral w e didn't take any advantage, as Nick mentioned, of those types of schemes. It is just an unusual shape of the balance due to the trading conditions we've been in.
Moving to guidance, we have upgraded our outlook today. You may remember that at the full year and with our AGM announcement, we indicated that our guidance assumed reversion of KPI trends towards the norms we've seen in recent times. We have started the second half with some sustained momentum ahead of those in those KPIs. The net result being that our central case as this is, we do have a wider range of scenarios with the amount of uncertainty that remains.
Our central case now is suggesting total sales growth between 55%-65% for the year, Repeat Contribution in a range of GBP 75 million-GBP 80 million, investment in new customers between GBP 40 million-GBP 45 million, and fixed costs, including that R&D and those share-based payment charges in the range of GBP 37 million-GBP 39 million.
Looking further forward to FY 2022, it obviously becomes more uncertain and more difficult to forecast what's likely to happen. I think what we are able to say is that we intend to sustain the levels of investment in new customers, at least at the FY 2021 levels, and targeting at least a 4X payback, which has been our target for some years now. There's a wide range of potential outcomes for the repeat business.
Obviously, we've seen exceptional trading to our repeat customers this half, and it all depends on whether or not they continue to purchase at the enhanced frequency which we've seen. If they do, we would expect our sales retention to be at the levels we considered normal pre-COVID in the early 80s. If their frequency reverts to the levels that used to be normal, actually, we would see reduced sales retention versus those levels, for one year, just as they get back into the purchasing patterns we'd seen previously.
We will continue to invest in our fixed cost base w e believe as the fixed cost base should reflect the size of the business. There are a number of areas in particular around tech and data we want to continue to build, and continue to invest in R&D to open up further marketing channels.
Hopefully, the picture I'm painting is that with sustained investment in new customers, with sustained healthy levels of sales retention, whether at this year's level or the level of years gone by, we are in a position where we've seen a step change upwards in the scale of the business, and we have confidence in the long-term ability to keep growing from that point on.
That is where I hand back to Nick. Before I do that, I just want to say again thank you to all of you for the relationships we've built over the last four or five years. Very much look forward to watching from the sidelines at these events in future as Shawn takes my place and presents the numbers to you. In the meantime, over to Nick.
Thank you very much, James. I just want to leave with you a couple of messages before we move over to Q&A. It's clear that this has been a transformative six months for Naked Wines. The results have been great. The numbers we've delivered are impressive and testament to the hard work of all our colleagues, and it's a pleasure today to be able to give you the upgrade to the full year guidance.
I think, in particular, it's shown that this is a business that really scales effectively and that the investment and the time and the thought we've put in terms of building a set of infrastructure that does allow us to build a larger business has been time well spent. It also shows that you can see for yourself now the benefits of building that scale, t hey're coming through here very clearly in the numbers in terms of some of the operational efficiency and the margin enhancement that we're disclosing in the first half.
You can see for yourself the evidence of that logic, that a bigger business is also a better business. We're, as well, a business that is now operating in a market that I believe has seen structural transformation that is favorable to us. If you look at the long-term history of any kind of consumer goods market and its migration from physical to online channels, there tends to be pretty much a one-way street on that migration.
I think the enhanced awareness, understanding, and willingness to try our online models only favorably changes the long-term growth potential of Naked and then the speed at which we can realize that potential. We're a business that's ideally positioned to go for that w e've got the funding in place w e have the strength of the balance sheet, w e've built the team that we need to do that.
I'm very excited about the prospects for the balance of the year, but more than that, the prospects that we have on an ongoing basis to continue driving towards our long-term mission, w e believe by bringing together the world's best independent winemakers with everyday wine drinkers, we can create a fundamentally better way for people to buy wine and for winemakers to do what they're passionate about, which is produce world-class product.
We're really excited about the opportunity to bring that to hundreds of thousands, if not, over time, millions more wine lovers all around the world. Thank you very much, and with that, would like to open things up for Q&A.
We will now take our first question from Jonathan Pritchard from Peel Hunt. Please go ahead. Your line is open.
Afternoon, morning all. Congratulations on a great half. Two sort of big pictures from me. The competitive set in the U.S. you've obviously taken a lot of market share just at a moment where, I guess awareness? or the willingness to buy wine online has rocketed w hat's the competitive set been up to? I mean, have they been slightly caught a little bit asleep at the wheel here that you've been able to take so much market share? I know you've got great balance sheet strength.
What have the behaviors been of the competition in the U.S.? That's question one. Just a sort of not a bad problem to have sort of question, personalization and dealing with small winemakers i mean, obviously you're growing incredibly quickly here. Is there a degree to which that lovely notion of being able to email a winemaker? or have a chat with a winemaker? as thousands and thousands more people join, does that become less, what's the word, personalized?
Jonathan, happy to take those l et's start with the question around market share. The first thing to remember is if you look at the dynamics we laid out around the channel in the U.S., coming into 2020, 95% of wine was being bought in physical locations. Not entirely dissimilar to the U.K., the largest of those, a grocery channel, a slightly larger specialist physical channel as well.
The biggest thing we've been doing has been driving the growth of the overall direct-to-consumer market, and we've been bringing new consumers into that channel, and that's had the function of both us growing share of that market, but also expanding that market.
Really, I think this has been a period where a lot of consumers have suddenly had their eyes opened, that there is a different alternative out there, and you can have something different than buying highly branded wine made from one of the big five U.S. wine groups and can have that direct connection to a winemaker, r eally, I think that's the secret behind our ability to drive share, and I think that's something that we can continue to do t here's still a lot more people buying wine, we would say, probably the wrong way, or certainly not the most exciting way.
Your second question around the personalization of the community. I think actually the first half has been really interesting to show that the community can become even more relevant and more vibrant as we get bigger. I think we pointed to nearly 1 million people posting on a winemaker wall in the first half of the year, which is an incredible number. You got to remember, we've got over 245 winemakers now across the world, so it's not like that's all happening in one place on one day.
Actually, one of the things that we're able to do with that enhanced scale is continue investing behind the technology and the user experience, making both sides of that conversation easier, so for the winemaker and for the customer. We feel it's our challenge as we grow to carry on enabling conversations and make sure they can happen.
Okay. Thank you very much c heers.
Just as a reminder, that is star one for telephone questions. We will now move to our next question from Brad Hathaway from Fairview Capital Management.
Hi, Nick and James. Congrats on some great results r eally pleased to see how well you operated during what has been an unprecedented environment. James, congrats on the move. I'm excited to see how you run the U.K. business.
One question that I think I'd be interested in discussing is the potential to move upmarket in the U.S. You've added some really exciting top-end winemakers i n the deck, you talked about Jesse and Matt, also you have a bunch of also really great winemakers now. It seems like there's an opportunity for you to move up in price point i 'm curious as to how you see that, both as an opportunity and what you think the impact on the business model might be.
Thank you very much for the kind words, Brad y eah, happy to talk a little bit about premiumization. I think I want to separate it into two things w hat we already know now, and what we think could be a further opportunity in the future.
What we know from the testing we've done already is that there are a large number of Angels within our U.S. base who are very receptive to buying wine at what we describe as a kind of premium price point, so $20 and up. When we combine a compelling story, a great winemaker, and a great product, we're actually able to move really material volume at some of those price points.
That volume plays into how we've always thought about the business t hat volume means we can produce amazing luxury wine at a lot lower cost than a traditional boutique producer, and we can share some of that benefit on with our consumers.
I think what we've proven to ourselves is there's an opportunity to stretch the range, to develop more of that product, and to use that to drive, if you like, the overall revenue per member, which in our language will always be driving the lifetime value, and I think we're confident in that and really working to build out that range and delivering authentic projects with great winemakers does unfortunately take a little bit of time, so it will take a while for those products to drop through, but we are working hard on that.
I think the interesting question, which is an opportunity for the future that we haven't 100% grounded out yet, is can we acquire material quantities of customers directly into those price points? Certainly, if you look at the direct-to-consumer market, there's a large section of that market which sits in the sort of $20 - $50 a bottle range, where I do think we've got an opportunity to become more relevant and take more share.
Working that out is still something where we're running some tests around and we haven't fully figured out. If that answers your question, Brad, there's one definite opportunity, and there's one thing that we're excited about for the future but still need to do a little bit of work to unlock.
Okay, great a s you say, you're 20% of volume, but I think 5% of value i t seems like there's a huge top-end market, and if you can grab a winemaker like Jesse and Matt and Daryl and Ken and whatnot, it seems like there's a huge opportunity to continue telling that story and moving up to those price points.
I had a very socially distanced catch-up with Daniel Baron, who's the former head winemaker at Silver Oak, whose first wines will be releasing in about six months i think they'll be right up your street, Brad. That's the next one for you to look out for.
Perfect v ery excited to try. Thanks again. Congrats on the good numbers.
There are currently no more telephone questions.
Now this is where we're testing in real-time t his is where we move over to a period where we read out some questions we've received through our web link, and then we'll give you a reply. I'm going to start out with a question here from Jonathan Orton at Imperial Capital. It's quite a long one.
Given the importance of the U.S. business and the extent of both national and state regulatory complexities, what regulatory risks do you foresee for the business, and how are you mitigating these? The question asks two specifics. One, the potential opening of interstate retailing may increase competition. Two, is there a risk that using your winery operations to facilitate D2C sales comes under scrutiny given your dominance of the segment?
Jonathan, if I may, I'm going to take those in reverse. I think the second one, very important to understand two things. Number one, the model we operate under, selling direct-to-consumer as a winery is positively enshrined in U.S. law. It's been clearly established and tested at the Supreme Court, and so it's not a workaround i t is the law, the ability of wineries to sell direct to their consumers.
I think the fact that we are the largest company doing that, it doesn't really, to my mind, pose a great risk and i n fact, there are much bigger businesses than ours who have a direct-to-consumer segment. If you go and look at someone like a Kosta Browne or you look at the Treasury, they all have their direct-to-consumer businesses. That's something that we don't see as a concern.
The second question around competition, I think you're right that there may well be over the next five to 10 years a trend of more states allowing retailers to ship direct as opposed to just wineries like ourselves. The key thing to remember there, Jonathan, is that's already the state in 13 of the states we serve, including California, our biggest market.
Naked still does very well in those markets i n fact, there's no meaningful difference in terms of either our lifetime value or our payback if you split it like that. The reason for that is retailers are still operating within a three-tier system, t hese are still retailers buying from wholesalers, buying from producers. Whilst you do have more competition, we're still structurally advantaged against those players i t doesn't, to my mind, represent anything of an existential threat.
Now I need to remember that we then move on to reading the next question. From Luke Vacher, there are question here talking about the reference in our presentation to improved gross margin as a result of mix shift for the U.S., just asking can you explain why the U.S. has higher gross margins? the simple answer comes back again to the same nature of the market in the U.S. the majority of wine in the U.S. is sold through this three-tier system.
A regulatory system where a producer makes wine, a distributor then is an intermediary, and a retailer, say either a liquor store or a restaurant, sells it on to the customer. The consequence of that is you have three margin pools built up, and wine is more expensive in the USA than it is in any other country on earth. That's not because it costs more to make, it's because of the way it's sold.
Our model allows us, as a producer, to sell direct to consumers, we're able to combine value for the consumer, getting a better wine at a better price, and generating a good margin so t hat's why we're able to generate a higher margin in the U.S. than we are in other markets where there's not that market structure, and where the market is more efficient as a baseline. Take, for example, the U.K., where there's an incredibly competitive and efficient wine market. Then you have a second question, which I think I'm going to hand over to James for.
Thank you, Nick t he second question is, we mentioned higher fixed costs due to strong growth in repeat sales and contribution from existing customers w hy does this increase fixed costs? I think two answers there. One is it's probably a bit of an overgeneralization in an introductory paragraph, and I think we've given a bit more granularity later on. There is an element of the fixed cost base that does actually kind of grow with the business so-
-certainly when we see an uplift in scale, as we did quite quickly here, just getting more people out to process more wine buying, get it listed on the site, get it into the warehouse, process the invoices t here's just a set of activity required, which as the repeat customer base buys more wine and scales, requires some more heads kind of within the organization, because we haven't, at this point, automated a lot of that activity.
I think there is then kind of more general set of increases, which we've alluded to in the fixed cost base this half, around some of the roles we filled out, such as the U.S. president role. Actually, a substantial portion of variable comp, where we've put a specific plan in place for this year to incentivize the teams to maximize the growth we can get in the extraordinary times that we're in.
Thank you, James. This is okay so far i t's clearly going to go wrong at some point. Next question is from Andreas Aarn, who's asking a question around our listing location. Your business is more and more U.S.-based, with CEO and CFO now in the U.S. How do you think about a U.S. listing as peers in the U.S. are trading at higher valuations?
I think, Andreas, I'm going to say the same thing I've said in private conversations to many of you on the line, which is Naked has actually never really had a period of time where it's had the funding, the resourcing, and the single focus to really pursue generating the long-term shareholder value that we believe is here.
What we did with the disposal of the retail business in the U.K. was create that for the first time, and I think the results we're showing today are a vindication of doing that, and, w hat I absolutely want to be focused on over the course of the next six to 12 months is delivering on the potential we've got here, continuing to grow the business, and focusing on generating long-term value, intrinsic value in that business.
My belief is that that's going to show through, and that's what we're focused on doing. You know If you get to a point where you've delivered a ton of great performance and there's no value for it, then maybe you look at different things r eally, our focus right now, and the reason we've put a CFO into the U.S., has been around creating the right operating management team to maximize long-term value creation in the business.
I think there was a question, the same question on listing came up from a Paul Jaisinger, covered that one off as well. The next question is from Michael Heary, who's asking: How does your U.S. market share compare to your nearest competitor? I think the answer here is that the data we rely on from a company called Sovos ShipCompliant, who process the winery-to-consumer transactions. It doesn't break it out and let us see individual competitor shares, I can't give you a number answer.
The reason we know we're largest is because we can tell that we are all of the largest band of they do break it out by scale of winery. I think to give an idea of relativity, we'd expect the business to probably be somewhere in the region of 2X the largest direct-to-consumer peer, but you have to do a little bit of inference to get there. I'm going to hand back over to James for our next question.
No, I'm not, sorry t his is where it was going to go wrong i 've skipped down one. The next question we have actually here is from Ben Hunt at Investec. Another slightly long one. I'll try and get this all in. Underlying fixed costs grew 20%, maybe 30% if you include R&D. Is there an argument to say, given the step up in scale, that actually the fixed costs may be more fixed than you'd have first presumed? That assuming that they grow as 50% of sales is too conservative?
In which case, would you be tempted to relax the targeted payback metrics and go for even more growth in the future? I'm going to try and unpick that into a few different parts. I think firstly on the cost assumption, I'd say two things.
We have demonstrated that you can scale the infrastructure of Naked quite effectively, and I think you're absolutely right, that we have a choice if we can deliver high growth to grow the cost base at less than 50% the rate of open i t's not a requirement, it's a choice. But our long-term guidance does remain to expect that 50%, and that's because we see actually as we grow, there are lots more areas where we can continue to invest productively to improve the customer experience and drive lifetime value.
In the same way that we're open to any type of investment that we're confident delivers a good return over the long term, that includes fixed cost investment. I'd say our guidance at 50% you should expect to see stay. I don't believe it's right for us to wholesale reduce our payback target.
I do think there is a little nuance here, and it's certainly true in periods of time where we are growing materially faster or maybe the cost base is not growing as fast. We have an opportunity to accept or make some different investment decisions on marginal spend, where we maybe might be willing to take another GBP 5 million of investment at, say, a 3x payback.
That's still consistent with generating strong IRRs and would make sense at that point where your overhead growth is covered. Hopefully, that answers the question i appreciate that's quite a long and technical question, so do my best to answer in this format. Now I'm going to hand back to James, who's got a question from Marc.
Hi, Nick q uestion from Marc Profitlich. "Why is 1.6% gross margin improvement from increased scale not here to stay?" I think this is referring to the chart labeled on page 26. I think important to say, Marc, that 1.6% is not just a simple we bought more and the costs were better. It is actually driven significantly by some of the marketing and range changes we implemented during the kind of start of the lockdown period.
For example, in the U.K., we had to operate a limited range for a period of time because of social distancing in the warehouse. That meant that what we did was essentially put forward the SKUs that we had the most depth of stock in and the biggest sellers. They tend to be the biggest scale SKUs, and therefore, we managed to achieve some of the better margins on them. There is a degree of scale benefit where we bought more wine than we had originally planned and contracted with winemakers for the year.
In some cases, we got some better pricing than the baseline pricing. Again, when we get the range back into the shape that we would expect it to be, rather than having to make some trade-offs, frankly, to fulfill in a kind of stressed scenario of warehousing space, that's where we're saying we'd expect it to unwind. I'd like to think some of it will stick, but what I didn't want to do was set that expectation given I felt that the items on the right-hand side are very much ones that we should expect to see structurally be maintained within the business. Back to Nick.
James, do you want to take the second part of Paul's question, which was, or the first part, which I think was just giving you an opportunity to gloat around how much wine you've sold recently in the U.K.?
Sorry. As an Angel in the U.K., very happy with the Naked Christmas Box, which is great to hear, Paul t hank you. I was nervous, though, when the site went down for a short period d oes this reflect more investment in systems is needed or just short-term demand? It is just short-term demand. What happened there was we had load tested the site to kind of get 2x to 3x historic transaction volumes.
We actually kind of hit a capacity within the amount we had load tested, but there was one specific subcomponent of the site that more traffic went through than we expected, and that bit failed. It was a very high spike versus what we expected w ith 40% or 50% more customers, you don't expect to get two to 3x the scale of demand, and that was the scale of transaction processing that we were undertaking.
Actually, all the tech team had to do was take that subcomponent offline, and then they can very quickly spin up more cloud-based capacity for it, and hence we got the site back up in 40 minutes. I'm going to say this processed about three transactions a second for the next hour, which is certainly an all-time high.
Okay. I don't know if that one was a plant for you, James, but it was an impressive launch. Next question, I think, Marc, you have two further questions m aybe I cover off both of those. The first one was around the R&D spend t his is investment that we make to try and open up new customer acquisition opportunities. We disclosed GBP 800,000 of that spend so far in the year j ust Marc was asking around, is there anything we can talk about?
The reason we haven't put anything in the presentation is there's nothing that we would hang our hat on at the moment as definitive and proven. We don't want to kind of make promises on something that is still in test, and whilst we've got a couple of things that look interesting, there's nothing yet that we can promise we're going to be able to deploy material spend into at our target 4x return.
We have, I can say, four different channels in test currently live through Q3, and I'm very hopeful that we'll be able to give you a more specific answer when we get to the full-year results. I don't want to make myself a hostage to fortune, I'm afraid, Marc, so I'm going to disappoint you on the specifics. The second question from Marc Profitlich was around can we give any more detail around the characteristics of the extra customers we've been acquiring? He's asking, for example, have we seen any changes in demographics around age of customer?
I can say we've done quite a lot of work here so w e disclosed in the presentation I guess the outcome, what a customer's doing in terms of their ordering characteristics. We have also given the increased magnitude of customer recruitment and obviously the potential for change in audience during what's been a pretty unusual year, done further research in partnership with Experian and some of their counterparts in all three geographies.
That has told us a pretty consistent picture, actually. In all markets, we continue to have a customer base that is highly skewed towards affluent working professional. We are, to the extent some people are kind of following a story of a K-shaped recovery, I guess we're fortunate to be on the right side of that recovery in terms of the customer base.
The average age, we remain a business that primarily recruits customers who are at that kind of family at home or post-family at home life stage, where wine at home is an important part of their lifestyle. Not a big movement, but actually a slight movement i think the fastest growing age band was about 35 to 45 in all our markets.
Really, the research we've done has given us a lot of confidence in the resilience of the customer base, and certainly the demographic profile of the people we've been recruiting during the last six months has been consistent and, to an extent, slightly favorable to the profile of the customer base if you look at 2019 acquisition.
Then I skipped over one question here, but let me go back up. A question from Ari Lazar, which is, "What is the strategy to get more popular producers similar to Jesse Katz and Matt Parish, and how has the progress been?" Answer that in two ways i think the first one, Ari, has been that scale is massively helpful in attracting more and more of the world's best winemakers.
That's very simply because for the same level of risk exposure for us, we're able to commit to higher volumes initially, and that makes the proposition we offer to winemakers that much more attractive. The second thing is the increased confidence we're having in being able to sell some wine at higher price points, also makes us much more attractive.
Fundamentally, most great winemakers are artisans and they're passionate about creating a broad range of wines. If you can tell them you can create everything from a GBP 10 wine to a GBP 50 wine at Naked, that's a much more attractive pitch than just saying you can create a lot of GBP 10 wines. We have the right raw ingredients.
We are pursuing a number of active conversations, w e've got some winemakers that we've signed up and wines waiting to release. You can expect to see a number more coming, and our pace of new winemaker development is going to increase. Very specifically in the last six months, we worked with 44 people through our GBP 5 million COVID Release Fund.
And we see a number of opportunities to move high caliber winemakers that we initially worked with through an existing brand they have as part of that fund, and bring some of them on board full-time with Naked t hat's what happened with Jesse. There are a few other people where we're in advanced negotiations to do similar. James, I think a question from Tillman is for you.
What do you expect from the coming months? Do you see comparable demand increases as in spring?" I think that I'll refer back to the guidance we've given here, which kind of clearly demonstrates if you think that the first half at 80% and the full year at 55%-65% is a slowdown in the second half in the rate of sales growth.
The reasons for that we've outlined p art of it is we are going to be lapping the first part of the acceleration due to COVID. The second is a seasonal effect where, generally speaking, over the holiday periods of November, December, including Thanksgiving, Christmas, et cetera, very close to 100% of our Angels will order wine anyway.
Whereas earlier in the year, we were seeing uplifts in a month that normally we'd expect maybe a quarter of the Angels to order, and that was looking like 50%, and we were seeing material growth. We don't believe that people are going to be ordering twice as much wine from us at Christmas, given quite often everybody orders anyway. That's kind of basically the premise behind the guidance. That then kind of rolls through into the FY 2022 guidance that we talked about in the presentation but, y eah, it is signaling continued growth, but at a slower but still high rate.
The next question is from Vishal Bhatia at J O Hambro . Question here is, "congratulations on a fantastic half. With regards to the U.S., pleased to see the cost of order fulfillment has dropped to $31. Where can this get down to with economies of scale? At a certain volume level, do alternative or lower cost fulfillment models become feasible?" I'm not going to get myself in trouble with my ops director and give you a number. But definitely the work we've done suggests there are continued efficiencies that we can realize.
We don't think we're operating at an optimum scale yet. In terms of difference in terms of technology, it's absolutely right that there will at some point be a break point where, for example, we could look at more automation or investments like that. Actually, probably in the U.S., we're not the closest to that.
Our biggest warehouse still remains our U.K. warehouse, where the geography of the U.K. means we're able to fulfill the whole U.K. out of a single site versus the U.S. being switched across four sites. Probably actually, the lead contender for some of that innovation may well be at our site in the U.K. I t's something we obviously continue to look at, and we're committed to carrying on driving this number down. It's a great way to create value, and it's cost that's giving no benefit to the customer.
I think the next question was from Martin Cormack, and maybe James, you can give a kind of view on this one. Not sure if we're entirely interpreting this right t he question is, "Will you be able to export more to the U.K. if lower tariffs happen? Could we see a growth in value? James, you will maybe give a little bit of context on what the impact of tariffs might be on the U.K. business.
Sure y eah, sorry, Martin. I'm not sure I fully understand the question. If you're able to reframe it through a follow-up, please go ahead but, r ight now, we obviously don't pay tariffs on EU wine imported to the U.K. There are certain jurisdictions that there are tariffs payable. Overall, if we look at the EU imports, we'd be looking at something like GBP 0.10 a bottle on wine coming into the U.K.
To put that in context, right now, our consumers, via our pricing, are paying GBP 2.35 or GBP 2.50, I forget the latest number, of duty on each bottle. Yeah, if WTO tariffs are imposed post-Brexit, there will be a small increment in cost, but akin to a duty change.
Whilst, yeah, tariffs are something we're keeping a careful eye on, and we would very much prefer it don't happen, we see it, I guess, in the round of a fairly large piece of cost relating to duty, et cetera, anyway, and think it's manageable in that context. Sorry, I'm not sure if that answers the question. If you could refine it as a follow-up then please do w e'll see if we can do a better job.
The next question. Noticeably, we get a lot more questions on this format than when we turn up and do this in a room. Good job we allowed some flex in our schedule. The next question from George Perry asks, "Are you constrained at all in your customer number growth by the level of production of wine producers? Is the scenario where quality wine producer numbers limits growth?"
I think a couple of things are important there n umber one, there are a lot of incredibly talented independent winemakers around the world. The challenge for most of them is gaining access to a market, a route to market and distribution, and the other challenge is having an ability to invest back in their business to drive quality.
For example, having the additional money to pay a grower to farm grapes in a higher quality way or having the equipment you need in the cellar or the barrels you want to age your wine and make a really high-quality product.
There are a lot of potential high-quality producers, and there are lots of people who by working with Naked can make even higher quality wine so, t hat's not a barrier. What is a challenge and what is important is that you plan and you anticipate the growth that you're looking to drive because we're working with real independent winemakers here, and you can't just turn on more wine. There's not a large tap, there's not a pipeline.
You do need to make some commitments to inventory and anticipate growth iq think one of the things James was signaling in his section of the presentation was that we will be investing through the balance sheet to build up inventory levels, to give us that capacity to continue to meet accelerated growth rates, and you should probably expect to see that through the second half of the year.
The next question from Simon Caulfield was around cash, a linked question, I guess, says, "I'm a happy shareholder and a big fan of pretty much everything you guys are doing, but there's one thing I don't understand. Why do you need so much cash on the balance sheet? Even in a period of high investment, you've generated cash, why not return some cash to shareholders?" Firstly, Simon, it's a conversation we actively have as a management team, as a board on a regular basis.
The reason that we don't think now is the right time to return cash really come down to the extent to which we see the balance sheet we have today as a really important source of advantage, and the kind of thing that's allowed us to be aggressive and confident during a period of disruption in the first half of the year.
As James talked you through, I think the cash generation in the course of the last six months is a little bit of a red herring. You would not ordinarily expect to see that at a period where we're growing the customer base. Really, it reflects the fact that trading was exceptionally strong and, if we could, if we'd had a crystal ball, we would've committed to even more inventory ahead of time, and we would not have generated that cash in the first half so i guess you'd say it's accidental as opposed to intentional, that cash generation.
I think the second thing is, whilst we've delivered a big step up in new customer investment, I remain very firmly of the belief that we're nowhere near the ultimate potential for this business in terms of acquiring customers. We generate attractive and increasing lifetime values. When we look at some of our peers in other subscription categories who have got often not the same in base lifetime value. You know they're able to deploy substantially more than us in substantially more channels.
I think if we do our job as well as we can in the coming years, there's a very high likelihood that we end up needing that cash that we have to fuel growth. Certainly, I don't want to take away that opportunity or deny us the strategic flexibility in what's going to continue to be probably another unpredictable six to 12 month period. That's the view we've taken as a board, and that's the kind of things that we're taking into consideration when making that decision.
The next questions are now down to ones that have come up while I was answering previous questions, so I'm just quickly trying to work out who they're for. We've got a question from Mario Santos at Amiral Gestion, who says, "Thank you for the presentation. Congratulations on the results. Can you please comment on how Wine Genie is doing since you launched it, and maybe comment a little bit more on the value it brings to customer engagement and how it can further be enhanced from here? thank you.
For those of you, that's a little bit of a technical question, W ine Genie is a new product we've launched, which is another type of subscription for customers, where we use our data and algorithms to generate personalized cases of wine that are shipped to them according to parameters they set and on a period of their choosing. I think we're at just over 10,000, 12,000 people signed up for this product around the globe and i 'd say it's still in an early testing stage, we're using that audience to refine the product.
I think in ways it can be further developed. You know r eally for us, it's around starting to identify the groups of customers who are finding it most appealing within our base and get more of those onto it. I think also there's an opportunity for us over time to integrate some of the different parts of our experience so f or example, at the moment, that's a pure web product, w ouldn't it be great if it was integrated with some of the in-person service we offer through teams like our wine advisors?
Practically, what that looks like, we have a product development group around subscriptions, and Wine Genie is one of the two main products that they're focused on. They've got a pipeline of innovation for that. I think long term, we remain pretty positive about it w e're seeing good early performance from the test group of customers, and we hope to see that grow substantially in years to come.
Finally, this looks like it's a question for you, James. It's a question from Paul Levine, who asks, "What's the cost in wastage of various forms of fulfillment errors? Not as uncommon as you would like, I'd assume, and how would you fix them?
Yeah, sure. Look, precise number's not something we disclose, but it's immaterial in the grander scheme of things a s an example, the reported rate of mis-picks in the U.K. warehouse is less than 0.2%. Breakage in the supply chain is generally in part at least covered through contracted rates with couriers. There are a range of areas that we know that product gets broken, lost, et cetera, or in various stages of production o bviously, there are different amounts in tanks and leaks, et cetera.
It's not a huge number, and you fix it through basically finding out where each piece is happening and improving the process t hat can be anything from putting a person at the end of a pick line who audits periodic cases to actually sending boxes through different distribution systems with different weights of cardboard and seeing how many bottles get broken, and then doing the cost balance trade-off on that.
Just with everything else, we will test, learn, and choose the optimum outcome when we do that. Hopefully that gives you some sense. I think we're short on time, and I think I'm handing back to Nick for a quick wrap-up i f there are still questions coming through, we'll endeavor to capture them and get back to you offline, if that's okay. Nick, back to you.
Thank you all very much t hank you for tuning in. I just like to leave you by saying that we're very excited and motivated as a management team to take this story forward. It's been a six months of profound change for Naked Wines. We've grown this business really to some material scale, and I think you can all see in the numbers here that it's demonstrated the potential of what the economics of this business look like at scale.
I think what I'm most excited about is the extent to which the past year has really led to transformation of consumer habits and the channel shape of the markets in which we operate. I firmly believe right now the wine industry and consumers need a business like Naked more than ever, y ou've got, more than ever, really talented independent winemakers making amazing product with a ton of passion who are finding no route to market, no livelihood.
At the same time as you have big discounted brands being pushed through multiples by global wine companies. And, fundamentally, we believe there's a better answer out there for consumers and a better answer out there for producers. I think what you're seeing here is when we're able to introduce customers to that it really resonates and generates a lot of loyalty.
For us, we're excited about what the rest of the year holds and indeed over the longer term and building the Naked Wines model out to real scale and have a real impact on this industry. I want to thank you all very much for your questions and taking the time and, on that note, have a good afternoon or morning.