Navigating the economics of direct-to-consumer food e-commerce
Direct-to-consumer e-commerce isn't as far-fetched as you think
The inviting aroma of fresh flowers. The sudden chill of the frozen foods section. The vibrant hues of the candy aisle. These moments are quintessential grocery store tropes, but a technology tidal wave is threatening their stronghold. Manufacturers can prepare for that wave by working with retailers and weighing data and profit options to best handle e-commerce disruption.
Legacy food and beverage manufacturing executives are increasingly investing in e-commerce, including direct-to-consumer efforts, to match consumer trends. The market is burgeoning in retail, but the food and beverage industry has other issues that beg more pertinent attention (think FSMA implementation and nutrition labeling).
Still, the typical e-commerce tagline for the food and beverage industry resembles the iconic Optimum "We're working on it" commercial. Legacy CPG executives at this year's CAGNY conference were generally tight-lipped on the subject. Tyson Foods, however, announced at the conference an extended partnership with AmazonFresh, in addition to new meal kit brand Tyson Tastemakers.
Overall food and beverage e-commerce sales are expected to reach $12 billion by 2018. According to eMarketer, food and beverage was only projected to hit 2.4% of the overall e-commerce market last year, inching up to 2.5% by 2016 and through 2018.
Despite making headway in the marketplace, e-commerce's true penetration in the food and beverage industry is hardly substantiated. When considering future approaches, the direct-to-consumer avenue is one to pursue if the product is feasible to ship profitably and encourages consistent consumer use.
"This notion that people aren't doing it profitably is one of those that will evolve," Arif Fazal, co-founder and managing director of Blueberry Ventures, an investment fund that focus on innovation in food and beverage, told Food Dive.
The e-commerce profitability dilemma (or lack thereof)
Food delivery takes on many forms — meal delivery, ingredient delivery, grocery delivery, etc. What sets direct-to-consumer e-commerce apart is that the products are purchased directly from the manufacturer.
Mondelez wants its e-commerce business to snag a booming $1 billion by 2020 — 10 times the $100 million it is currently doing, Food Dive reported in November. This goal encompasses all e-commerce, though Valerie Moens, the associate director of corporate external communications at Mondelez, said in an email that third-party retailers will make up most of its e-commerce revenue (it doesn't share the complete breakdown). What's more: Alibaba will host a "store" for Mondelez to sell its products on Alibaba's Tmall.com platform. Mondelez also pursued its first direct-to-consumer venture with Oreo Colorfilled around the holidays last year.
"The reality is shipping Oreos isn't actually that obtuse," Fazal said. "There's a little bit of cube size there, but they're not constrained materially by weight. But when you're talking about shipping products like Pepsi or Aquafina or anything that requires a cold chain, it's a whole different ball game."
Deloitte's consumer products strategy and growth leader Rich Nanda also pointed out food and beverage e-commerce has its limitations.
"Certainly there is a potential for a true direct-to-consumer model for the manufacturers," Nanda said. "In order though for that to be compelling, I don't know that it'll ever be for the full portfolio of items."
A brand is not quite a retailer
The brand-retailer relationship today looks quite different than 70 or so years ago. Prior to the 1930s and 1940s, brands connected with consumers in three stages, according to Jennifer Silverberg, CEO of SmartCommerce: interest, purchase, and consumption.
During the 1930s and 1940s, brands lost the second stage to retailers — a key point of consumer interaction.
Just because brands are pursuing direct-to-consumer e-commerce (i.e. retailers) doesn't mean efforts with retailers have to change. In fact, working with retailers is an effective way to start.
"A musician doesn't like their agent and so they try to become both a musician and an agent, they're just two different things," Silverberg said. "A brand trying to become a retailer because they don't like the control that the retailer has; they're just two completely different things."
That said, the lines are still blurring between brands and retailers; Mondelez is a robust example. If the direct-to-consumer model isn't the be-all-end-all for manufacturers, then what could be?
"What I think is more likely to happen is that you'll have an app or an aggregator of some sort that maybe is pulling together all of what the consumer wants on a given day or in a given order, kind of like Amazon is doing, but at the grocery level. And then delivering it either all at once or in some coordinated way that makes sense for the consumer," Silverberg said.
Three major food and beverage manufacturers (PepsiCo, Kraft Heinz, and Coca-Cola) made the list of the top 10 brands with the highest market share of sales of Amazon Dash Buttons, according to 1010data's Ecom Insights Panel. The service, launched last year, now has 78 consumer products signed up.
Nanda added, "I think there's opportunities on the direct-to-consumer for the manufacturer, but they'll need to be well thought-through. It's unlikely that the role of the retailer is ever lost in the equation."
"Food retailers are working with the reality that people are shopping differently — and their customers' lifestyles demand many different shopping experiences," Heather Garlich, senior director, media and public relations at the Food Marketing Institute, told Food Dive in an email. "Change is coming indeed, but it's an evolution of technology that food retailers are watching intently and in many cases, testing, adapting and adopting. Whether it's e-commerce or mobile, grocers are mindful of the integration of systems that the payments universe will impose. Our data suggest that of e-commerce is growing in acceptance among center-store categories, so those who are working on innovation in assortment are paying close attention to e-commerce models."
What can food and beverage manufacturers do now and going forward?
CPG brands could leverage a new Nielsen/Profitero partnership for help understanding e-commerce. Nielsen announced a partnership with e-commerce analytics firm Profitero, enabling Profitero's Digital Shelf 360 suite to reach CPG companies that are Nielsen clients.
Manufacturers can also look to the Grocery Manufacturers Association and Boston Consulting Group for insight about working with Amazon.
But easing into e-commerce makes sense for brands that would struggle with making the direct-to-consumer model profitable. Expect experimental efforts — particularly on a subscription-style model.
"The retailer's got a very important role and I have a hard time thinking that goes away," Nanda cautioned. "But having said that, there are direct-to-consumer models that might work on subscription. So if the manufacturers can figure out an effective way to do shipping and it's not like the consumer has to go onto a site when they need things but it's something they set up once and then those items keep coming. If the manufacturer can figure out the economics of that model, that could work."