How B2B Food Distribution is Quietly Suffocating the Food Industry
Co-Authored by Larissa Russell and Fiona Lee, founders of Pod Foods
Consumers want better quality food at affordable prices. The demand for organic food alone is growing at a 16% CAGR and local food is already a $12 billion industry. Unfortunately, due to little-known, yet massive inefficiencies in the B2B food supply chain, such products struggle to reach retailers. Meaningful improvement in the food industry will only come about once food makers and retailers alike can enjoy higher margins and more sales — without the perpetual need for millions of dollars in cash-flow and marketing investment.
The Food Industry is Trying to Be More Wholesome
Can’t you tell? Plasticky linoleum floors in Safeway and Giant have been traded in for rustic-looking, wooden veneers. Eighteen-wheelers boast FRESH, organic food in every aisle. Prolific grocery products list verifications brands bought for fortunes to win your approval… a reflection of consumer need for trust alongside declining brand equity. In fact, 43% of millennials say they don’t trust large food brands at all. But Earthy marketing by conglomerates and label “transparency” are band-aid solutions for the gap in the supply of affordable good food.
What really needs to change is B2B food distribution. Businesses that cater to changing consumer demand struggle to succeed with the supply chain’s long shelf-life requirements, lack of data, and backwards pricing model.
What is a B2B Food Distributor?
Distributors move product into retail stores — where 70% of consumers still prefer to shop. They’re involved with online retail as well.
I surveyed a group of 50 people in the food industry including food makers and retailers. Over two-thirds admitted that prior to entering the business, they did not fully understand the path that their food took to reach retailers. It is indeed very complex:
As a society, we seem to accept this system as stagnant despite the fact that it was designed to meet yesterday’s consumer preferences and purchasing habits (Deloitte, 2016). Incubators, funds and accelerators like CircleUp and AccelFoods exist to help good food brands navigate and survive this difficult landscape, when in fact the two dominant players in natural foods came about in the 90s (UNFI) and 50s (KeHE) and have hardly since been rethought. In fact, the system’s evolution actually dates back to WW2, a period described as “The Big Bang of processed food.”
In the 40s, investment from the government poured into research to create longer lasting food rations so food could reach millions of soldiers thousands of miles apart. The government became the largest vendor for large food corporations and instilled the same principles into grocery stores. The American diet became optimized for portability, convenience, shelf-life, and mass appeal, rather than health, taste, or environmental sustainability — quite the opposite of what people care about now.
Centralized Distribution Chokes Out Small Business
Have you ever heard of a small food business that was deliberately injecting unhealthy preservatives into its products, polluting the environment, harming workers and engaging in inhumane animal practices?
My guess is no. High-quality small food brands tend to address the rise in consumer demand for “good food.” My co-author and I used to have one called Green Pea Cookie. It’s easy to name hundreds of others in the Bay Area alone, like Regrained, the YES bar, Marin Living Foods, HungryRoot… the list goes on. But up to 80% of product launches in CPG alone fail.
Unfortunately, the B2B supply chain is not nearly as innovative as the products themselves. Distribution proves to be a major challenge for most small to medium sized companies.
What’s Really Wrong with Distribution?
Catering to their most profitable customers, major distributors continuously out-price local markets, and make starting a viable food business an incredible challenge without excessive capital in the bank. Here’s how:
1) Extensive Warehousing: Major distributors are essentially trucking companies. Usual shelf life requirements for grocery products can range from 6 months to a year. To last, products need preservatives, recipe modifications, or aluminum-laminate packaging that won’t biodegrade. But consumers want fresh products.
2) Lack of transparency and data in decision-making: Major distributors obscure information and collaboration between brands and retailers, yet they don’t bear any inventory risk themselves. In other words, they buy more product than they need, don’t tell the manufacturer where it’s being sold, and sell any excess back to the manufacturer. Tons of food goes to waste and small companies have major cash flow issues that can put them in debt or out of business.
3) Markups and Hidden Fees: Steep markups squeeze out manufacturers and smaller retailers and make certain products too expensive for many consumers. At the same time, inefficient distributors end up requiring hidden marketing fees in order to cover all their warehousing and overhead. Distribution is unaffordable for companies without extremely low production costs or investment.
Reinventing the Supply Chain
B2B distribution is seldom spoken of compared to new food products or B2C innovations like Instacart. But in many ways distributors are the core of the natural foods industry, the gatekeepers to an invisible fence that dictate everyone’s bottom line… and they’re still using fax machines:
Profit needs to align with purpose for lasting change. It’s why massive industry shifts often need to happen from the ground up — the giants are catering to their most profitable customers, who aren’t struggling as much with the status quo.
In this case, the long-tail equilibrium is extremely unstable. More and more “good food” makers who can’t work with distributors are burdened with antiquated, ad-hoc systems of pen and paper to transact with retailers nationwide.
Having been food makers ourselves, we created the first software-enabled food distributor: Pod Foods. With a focus on dense local networks, transparency, and a new pricing structure that incentivizes proper purchasing behavior, we are reinventing the supply chain and allowing for real market growth in good food. Vendors and retailers agree:
Sign up at podfoods.co or follow us @podfoodsco for more info.