Naked wines customers warned about risk of losing deposits due to lack of protection

Customers of Naked Wines face the risk of losing their deposits due to a lack of segregation of client accounts, a prominent activist investor has cautioned. Richard Bernstein, an investment manager at Crystal Amber, has raised concerns that the company’s 706,000 “angel” customers may not fully understand the risks tied to its business model. He criticised Naked Wines for presenting its “net cash” position in a manner that he believes masks financial liabilities.

Naked Wines operates by taking regular payments from its customers, known as angels, to fund more than 250 independent winemakers. Customers then use these funds to purchase wine at discounted rates. While the company markets its approach as a “win-win” for both consumers and winemakers, its latest annual report reveals that customer deposits are used as working capital for the broader business. Bernstein likened this practice to investment platforms using client funds for their own operations – a practice he described as concerning.

Bernstein noted that Naked Wines’ lack of segregated accounts for customer deposits places angel customers at risk. If the company were to experience financial difficulties, customer funds might not be safeguarded. He highlighted the collapse of hamper seller Farepak in 2006, where customers lost £40 million in deposits, as an example of the potential consequences. Naked Wines, however, maintains that its business model is robust and that customer funds are well protected.

A spokesperson for Naked Wines has refuted the claims, stating that the suggestion of customers losing their money is highly unlikely. The company asserts that its liquidity would cover the full value of angel deposits even in the worst-case scenario. The representative added that additional layers of financial protection and insurance are in place, ensuring customer security.

The company’s financial figures reveal that it currently has £73.9 million in angel deposits, alongside an inventory valued at £116 million. It also claims to be cash generative, with £30 million in “net cash.” However, Bernstein argued that the company’s portrayal of its finances is misleading, accusing Naked Wines of failing to acknowledge the liabilities posed by customer deposits. After deducting these deposits, the company effectively owes around £40 million, he stated.

Virgin Wines, a competitor of Naked Wines, operates a different model by holding customer deposits in ring-fenced accounts. Its financial reports clearly distinguish between net cash and customer deposits, offering an additional layer of customer assurance. Bernstein, who is also a Naked Wines angel customer but has no financial interest in its competitors, expressed that his main concern is transparency and proper disclosure for consumers.