Why Food Brands Don’t Sell Direct-to-Consumer, and What That Means for You
Less than 1% of food sales are direct-to-consumer despite clear benefits to both food brands and their customers. Here’s why, and what Hungryroot is doing to capture this missed opportunity.
Food’s Impact on our Daily Lives
What and how we eat impacts all of us on a deeply personal and emotional level. On the one hand, eating sugar, trans fats, and processed carbohydrates can make us crash, feel guilty, and even increase the likelihood of depression. On the other hand, a diet of plants, lean proteins, and healthy fats can help us feel centered, energized, and in control.
Since food directly impacts how we feel on a day-to-day basis, food product companies (think Pepsi, Nestle, and Chobani, among others) hold enormous influence over our daily lives. Yet food represents one of the last industries to embrace selling directly to customers, and instead is still reliant on and beholden to middlemen, such as distributors and retailers. Why is an industry with such an enormous impact on our daily lives so far removed from the end consumer?
Food Brands Are Stuck Offline
While direct-to-consumer has transformed nearly every industry over the past ten years, food brands are still stuck selling through intermediaries: 98% of their sales are offline to traditional grocery stores, and the majority of the rest are to a third-party, such as Amazon. Take a look at Kellogg’s website for example, and you’ll find an experience designed for investors, not consumers. So, instead of selling direct to the individual who actually eats their food, brands sell to a distributor, who sells to a retailer, who sells to the consumer. This creates a game of telephone, distancing food brands from their customers.
Of the many drawbacks of selling through intermediaries, the biggest is the inability to quickly innovate and test new products aligned with modern consumer needs. When you sell to a distributor or retailer, you are at the mercy of that third-party. With profit margins of just 1–3% and limited shelf space to earn those profits, grocery stores are naturally risk averse. The result: more shelf space for established, low-risk products, and less shelf space for newer, more innovative products. The same is true online as search algorithms favor the most frequently purchased items, limiting the opportunity for new products to get in front of customers.
In addition, since grocers rarely develop new products on their own, they do not prioritize real-time, comprehensive data collection for the purposes of product innovation. As a result, food brands are removed from the customer feedback and insights that drive rapid product iteration.
What’s Holding Food Brands Back
It’s not for a lack of effort that food brands are stuck offline. Since the Amazon purchase of Whole Foods, the pressure to innovate has forced brands to upgrade their digital efforts. Many food companies have established venture capital and innovation departments, hired “heads of e-commerce,” and acquired emerging brands in an effort to better align their product offerings with the millennial consumer. Despite these efforts, food brands face key constraints that prevent them from selling direct-to-consumer.
First, most food brands lack the product breadth needed to succeed DTC. No one wants to buy Kraft cheese at Kraft.com. No one wants to buy Oreos at Oreo.com. Consumers’ online food purchase behavior mimics their offline grocery behavior — for convenience, most consumers want to purchase at just one store, as opposed to going to one for yogurt, another for pasta, and another for fresh vegetables. Even the product portfolios of the largest food companies don’t cover enough grocery categories for a convenient direct-to-consumer experience.
The inability to offer a one-stop-shop also prevents the large basket sizes needed to make direct-to-consumer economically attractive. Since perishable and frozen food needs to be kept cool with ample insulation and ice, the cost of shipping just a couple of items is prohibitive. However, these costs are largely fixed, meaning direct-to-consumer margins are increasingly attractive the more consumers order. For example, at an average basket size of $50, gross margins are often only 10–15%, whereas at $100 they can be closer to 50%.
Additionally, customers have different expectations online than they do offline, and their online expectations don’t align with most food brands’ expertise. Online customers want personalized experiences, white glove service, and product curation and discovery. In an online grocery experience, this means building seamless digital experiences, personalizing deliveries based on dietary and lifestyle preferences, and providing customers with easy and delicious recipes to help them understand how to use their groceries. These are not currently areas of expertise for most food brands, making it harder for them to build compelling DTC experiences.
Finally, since most food brands are heavily reliant on traditional grocery channels for distribution, there is a real channel conflict risk of going direct-to-consumer. Grocers may view such a move as competitive unless food brands create and sell entirely different products online, and since direct-to-consumer is still a much smaller market today than traditional offline grocery, the work to do so may not appear worth the benefits.
How Hungryroot Is Solving This Problem
At Hungryroot, we see food brands’ inability to sell direct-to-consumer as a real issue in 2019 America. We know that accessibility to fresh, healthy, easy-to-prepare food plays a critical role in solving the health epidemic affecting the United States. Most consumers today avoid high-fructose corn syrup, hydrogenated fats, and artificial colors and preservatives, yet the majority of packaged food still includes these additives.
This is a problem that deserves attention, and we’ve spent the last four years working towards a solution. When we launched Hungryroot, we offered just six products. We quickly learned that while customers loved them, they wanted to be able to purchase them with other groceries. We therefore began expanding our product assortment aggressively, and even paused customer orders for six months to support growing from six products to sixty. Throughout this progression, we saw an almost perfect correlation between the number of products offered and customer lifetime value (i.e. customers spend twice as much now that we have 60 products than they did when we only offered 30). But even sixty products isn’t enough to support a truly convenient, direct-to-consumer experience. Customers buy their fresh vegetables, sauces, and proteins from Hungryroot, but they still go to their local grocery store to get other items. Knowing that, we decided to expand our product assortment further by partnering with like-minded, modern food brands, rather than relying entirely on our own product research and development.
Today, we’re excited to announce that Hungryroot now features products from nutritiously conscious food brands including Banza, RightRice, Beyond Meat, Freshe, Ozery, Kite Hill, and Field Roast, with additional brands rolling out in the coming weeks. By partnering with these companies rather than solely developing our own unique offerings in-house, we can vastly expand the variety of products offered on Hungryroot, enhancing the convenience and overall experience for our customers.
In doing so, we’re also moving one step closer to solving the problem we’ve laid out above. Given that we develop our own food products at Hungryroot (have you tried our Almond Chickpea Cookie Dough?!), our DTC platform is inherently designed to inform product innovation, rather than simply serving as a distribution channel. Our customers indicate which occasions they want us to solve for them (e.g. breakfast, lunch, dinner, snacks, sweets), which types of meals they prefer (e.g. pasta, grain bowl, salad), any dietary restrictions they have (e.g. vegan, pescatarian), how they like to pair items together (e.g. pesto or marinara with their pasta), and which specific items they like or don’t like, and why. With this information, we can better understand why a product is or isn’t selling, and how we can make it better.
By building a multi-brand platform focused on new, innovative products, we also reduce the risk of channel conflict. Items already proven with significant traditional distribution are less valuable to both consumers and brands on Hungryroot, and thus we serve as an innovation platform for emerging products, rather than a competitive distribution channel to grocery.
While traditional grocers seek to maximize sales with proven, mainstream items, Hungryroot’s platform seeks to maximize customer feedback, personalized experiences, and product discovery. This lends itself to rich data collection, which we use to not only enhance our own products, but offer to our partner brands so they can make smarter and faster product innovation decisions as well. Once this data is collected and used to refine new products, those items can then be scaled through traditional grocery channels with higher confidence of success. The end result: more health-conscious options for Americans nationwide.
Toward a Better, Healthier Future
Selling direct-to-consumer enables food brands to innovate faster and build customer loyalty. Yet food brands today are inherently limited in their ability to sell direct-to-consumer. This results in mainstream unhealthy products continuing to occupy grocery shelves, rather than nutritious, health-conscious food options. At Hungryroot, we’ve created a solution by building a direct-to-consumer platform of modern, healthy foods with a customer experience designed to provide insights that can be leveraged for product innovation. Not only do we use these insights to improve our own products, but we also share them with our partner brands so they can improve theirs. Once these insights have been used to refine new products, those items can then be scaled in traditional grocery channels with greater confidence. In doing so, our goal is to help modernize the packaged food industry, making healthier, convenient food a part of mainstream America.
Know of a healthy food brand that would be perfect for Hungryroot’s innovative platform? We’d love to hear from you: firstname.lastname@example.org