What is happening to traditional grocery?
Melissa Goodhart | Among the biggest news headlines last year was the $13.7B acquisition of Whole Foods by Amazon. This was not the only large investment in the future of grocery. Over the last few years, we’ve witnessed Walmart acquire Jet, Target acquire Shipt, Albertson’s announce the launch of a digital marketplace, and Brandless raise $50M to build an all-private label online grocery store.
Alongside these big investments, the media has painted a clear message that traditional grocery is declining. According to Food Dive, grocery openings dropped 28.8% last year. Both NY-based Tops and Florida-based Winn-Dixie recently filed for bankruptcy. And analytics firm, Inmar Willard Bishop, predicts that by 2021, we’ll have lost more than 4,200 traditional grocery stores. While online grocery penetration in the U.S. is still only 4.3%, it is expected to grow to 20% of grocery retail share by 2025.
All over the world, brands are taking note of this trend and increasingly using online channels to connect directly with consumers. I tune in everyday alongside 263k followers to influencer Rachel Mansfield’s Instagram to learn about her new favorite products. NY-based, Dirty Lemon, sells its product to consumers nationwide exclusively through text message. Brands that are successful at leveraging these online channels are creating some of the most devoted tribes of consumers. Shopping habits are visibly changing. And, while online shopping remains smaller than traditional retail, it seems only a matter of time before it catches up.
If you're running a consumer brand company, you are probably already selling online, or thinking day and night about how to launch your online channel. And if you aren’t, you should probably start doing so. For an emerging brand, the challenge is figuring out how to best invest limited time and resources in pursuing the right channel strategy. There is no simple playbook. That would be boring anyway, right? But let me take you through some of the most important things to consider regarding an online channel strategy.
What are the benefits of selling your product online?
1. Launch products quickly. It can take months to launch a product in classic retail stores. Brian Rudolph from Banza, the Chickpea pasta brand, provides a telling account of the year-long effort it took the company to initially get on the shelves at Whole Foods. Online platforms like Amazon and Thrive Market can move much quicker, and a product launch on your own website can happen as soon as inventory is ready to ship. Thus, for emerging brands, selling online can represent a quick go-to market strategy, which is critical to start building your brand. It can also provide a much-needed financial bridge between the time your product is ready to ship, and the time it takes to gain significant retail distribution to start to see cash inflow from wholesalers.
2. Receive cash quickly. Elaborating further on my last point, consider that online credit card payments from customers are received within days, without having to generate an invoice or send follow-up reminders. By contrast, it can take months after your product was delivered to get paid by wholesalers! With any third-party (whether offline or online), payment terms are typically net 30-60, which means cash payment will be tied up in Accounts Receivable for that amount of time. For emerging brands, it can be very challenging to fulfill new purchase orders without steady cash flow. Direct online sales can help support these routine cash needs.
3. Connect with consumers everywhere. As I mentioned earlier, it can take a significant amount of time to get on the shelf in retail stores. Once accepted by a major retailer, brands are typically distributed to a single region for some time before gaining national distribution. While you are growing your brand, selling online provides a platform to deliver your product and build a brand immediately with customers nationwide, potentially worldwide. I recently discovered Soozy’s Muffins on Instagram. Having just launched in September 2017, the brand was only available in stores in the North East and Texas. Thankfully, they had already built an online channel, which, that day, earned them a delighted customer in the Bay Area!
4. Leverage valuable data. There is an immense amount of data that can be captured online, from sell-through velocity to purchasing trends. This is invaluable information for the development of a sales and marketing strategy. Nutpods, which sells nut-based creamers, initially launched their brand online and quickly became Amazon’s #1 best selling alternative creamer. The company is now leveraging its strong sales and velocity figures to get the attention of traditional retailers. It is also studying data on customer purchasing bundles to decide which brands to collaborate with.
5. Leverage quick feedback. In addition to collecting quantitative data, brands can use their online platforms as testing environments for product development ideas. Perfect Bar recently caught my attention through an online marketing campaign for a new walnut brownie bar flavor - it was all the buzz among social media food influencers. The company produced limited supply, which sold out within about a week exclusively through their website. In doing so, the company was able to validate demand with a limited investment before adding the product to their permanent portfolio.
6. Earn higher margin. In order to get on a grocery shelf, brands will sell to a distributor, who then sells to multiple retailers. These middlemen between you and your customers require fees, which impact your cost of sale, and therefore, your gross margin. For consumer goods, distributor margins can range from 18% to 30%, and retailer margins from 30% to 50%.
To illustrate my point, imagine you made a product that costs $2 and sells at $5 to the consumer. The graph below shows you how the $3 difference might be shared depending on the sales channel: a classic retailer, a third party online retailer, or your own website. Note that for your online platform, a portion of your gross profit will be shaved off in payment processing fees (generally around 2.5% to 3%).
Note: I've assumed that the classic retailer requires a 40% margin and the distributor a 20% margin, and that the third party online retailer takes a 25% cut.
What are some of the challenges I should be prepared for?
1. Make smart investments in driving awareness. Having a successful online channel requires significant investment to drive activity to your online store. The challenge is that the return on some marketing spend is difficult to measure. Brand marketing is typically used to build awareness, but doesn’t necessarily generate immediate sales, while direct response marketing (like an Instagram ad where you can swipe up to purchase the product) is measurable as you can directly attribute sales to the tactic. For emerging brands, it’s important to understand and set a target Cost per Acquisition (CPA) for marketing based on your own gross margin to ensure positive long-term returns.
2. Manage logistics and customer service. It is crucial that customers associate a positive purchasing experience with your brand in order to maintain a high customer retention rate. If you are operating your own website, you will likely be in charge of inventory management, order fulfillment, returns, and customer service, which are no simple nor inexpensive functions. Partnering with a third-party ecommerce platform will make things simpler. Generally, that partner will take over from the moment your product leaves your wearhouse. Amazon offers some flexibility, with the option for you to control logistics (Amazon Seller) or hand it over to Amazon (Vendor Central). One thing to keep in mind is that, by working with an e-commerce platform instead of developing your own online portal, you lose some control over the customer experience, and have lesser access to data that could be used to improve your marketing strategy.
3. Handle high shipping costs. The cost to ship a food product can be expensive, especially for certain categories like frozen foods. The online shipping cost is often passed through to the customer, although many companies have begun to offer free shipping promos.
So when does it make sense to offer free shipping? As an emerging brand, customer acquisition through trial is crucial. If your shipping costs are too high, customers may visit your website and not purchase the product, resulting in lost sales and a lost customer. Depending on the specific financial dynamics of your business, the tradeoff between revenue and gross margin may be worth it. It’s worth the exercise to analyze and understand this tradeoff before making a decision.
So what now?
If I have left you with more questions than before you started reading this piece, I may have actually reached my goal - that is to highlight the complexity of developing the optimal online strategy for your business. But that should in no way stop you from making the jump to the virtual space. Remember that your online channel constitutes just one component of a larger and dynamic strategy to connect with consumers, and their behaviors are changing perhaps faster than they ever have. As is often the case in starting a business, the winning approach to selling online might be to move in quickly, staying true to your brand, and adjusting as needed along the way.
* Illustration by Dannae Alvarez