Food startups face risks in avoiding brick-and-mortar presence
- A handful of food startup companies, such as Fulton Fish Market and Caulipower, are skipping the brick-and-mortar space to ramp up their business online, according to Baking Business.
- Baking Business said direct-to-consumer and third-party e-commerce initiatives allow companies to establish a stronger connection with consumers and have total control over their message.
- While there are advantages, there also are some challenges with bypassing brick-and-mortar stores, including product fulfillment and adding scale.
If the staggering success of Amazon has taught businesses anything, it’s that e-commerce is not going anywhere. That is especially true in the food and beverage space. A Food Marketing Institute/Nielsen report estimated online grocery sales are expected to reach $100 billion by 2022.
Consequently, this begs the question of whether brick-and-mortar is necessary, particularly for nimble food startup companies. At least for now, as evidenced by Amazon’s purchase of Whole Foods, brick-and-mortar is not going away. A majority of millennial consumers (70%) even go so far as to say they prefer the in-store shopping experience.
Still, there are a few successful case studies in the food startup space that illustrate the advantages of going directly to the consumer, including Fulton Fish Market, Caulipower, NatureBox and Nutpods.
Skipping brick and mortar altogether can lead to increased sales efficiencies. For example, Fulton Fish Market buys fish as it’s ordered instead of trying to sell what’s available. It can be a better experience for the customer thanks to targeted advertising and no crowds. In addition, business startup costs are significantly lower without sizable property contracts. An e-commerce model also enables them to avoid picking a bad location, one of the biggest risks in food retail.
However, for every success story, there are many stories of failure. Gilt Taste launched its “artisanal hard to find foods” online in 2011, but it failed after two years. Webvan and Foodzie are two other examples of online food sites that did not make it.
E-commerce profit margins are slimmer than brick and mortar, according to The Motley Fool, and standalone companies struggle to get past breakeven because of the cost of marketing, fulfillment centers, shipping and extra staff.
Startups will have to consider what is best for them: Pay rent for a successful location, or spend the money on a robust digital advertising strategy, which is critical to survival in the direct-to-consumer age. Distribution costs also can quickly chip away at a company’s bottom line, while distribution poses a challenge for businesses that sell perishable food.
Some argue that having a physical presence provides more legitimacy and that face-to-face customer service will always have a strong fan base. Being able to browse physical products also lends itself to upselling or spontaneous purchasing opportunities that may not exist online. While not impossible, it's certainly less likely that a consumer checking out on Amazon would impulsively decide to buy, for example, a Coke with their order than it would be for an individual grabbing one from a cooler while waiting at the grocery store checkout line.
Technology has changed the way people shop for everything, from groceries to niche food products, and that has forced companies to rethink how they sell their products. In may be easier for an established startup with a firmer financial footing, more experience and closer industry connections to move online than it would be for an fledgling upstart. But as more shoppers move to the web, a growing number of startup companies may believe this is the least risky path to take. The best chance for success comes from the companies that have found a way create a hybrid model between physical and digital. Mondelez, Nestle and General Mills are a few examples. Even Amazon bet $14 billion on this approach with its recent purchase of Whole Foods.
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