The Food Fight Intensifies
Disruptions come to the food industry & how established brands are fighting back in the age of connected kitchens
The food industry has a complicated value chain that is comprised of multiple stakeholders. From producers, processors, distributors, to retailers, and consumers, the industry is a tangled web of agricultural, logistical, operational, and retail market forces, all coming together to feed everybody on earth. And like every other industry in the 21st century, the food industry is no exception to the disruptive forces of technological innovations.
At every step of the value chain, startups and tech giants are finding ways to enter the space and fight for a piece of the trillion-dollar industry. New food sources such as plant-based protein, lab-cultured meats, and urban farming are refining the food production, while 3D printed food and the rise of meal kits are changing how raw ingredients are processed and made into food. The “farm-to-table” trend of “eating local” is scaling some food distribution networks back to a more regional focus, whereas innovations in genetic engineering, packaging, and preservation now allow perishable produce to travel far longer distances than ever before. All these trends have been propelled by the advances in biotechnology, nanotechnology, as well as rising cultural trend of eating healthy, green, and local.
All these innovations are shaping the future of what and how we eat, and each topic deserves its own in-depth analysis. Staying true to the Lab’s consumer-oriented brand perspectives, this write-up will instead focus on examining the battle playing out in the arena of food retailing, which includes both grocers and food services, as they remain the main touch points where most food brands directly reach their customers today.
Guess Who’s Coming to Dinner
Last summer, Amazon announced its $13.7 billion acquisition of Whole Foods and sent a shock wave throughout the grocery market. Soon after, the Seattle-based ecommerce giant started to roll out special deals and savings to Prime members, 2-hour delivery in select markets, and stack its Echo smart speakers near entrances and checkouts. This acquisition is less about gaining a valuable touchpoint to reach upscale grocery shoppers and convert them into Prime members, but more about gaining valuable distribution points for grocery and CPG products. For Whole Foods, getting acquired by Amazon grants its private label products the benefits of being the preferred products on the biggest ecommerce platform in the world.
Granted, private label products owned by the grocers have always been part of the game. All major grocery chains have their own private label brands that often receive preferential shelf placements and in-store promotions. However, in today’s digital age where grocery shopping is quickly becoming decoupled from the in-store experience, preferential placements on virtual shelves, such as being the top results or the default choice via voice shopping, are far more powerful at influencing consumer choice.
Therefore, by algorithmically prioritizing Whole Foods’ 365 Everyday Value products, as it has done with other private labels it owns, Amazon gains a strong CPG brand to sell directly to its customers across platforms, often at the expense of other food brands that Whole Foods and Amazon.com still carry in the same categories. In fact, a recent CNBC report found that Amazon has been promoting its own products at the bottom of competitors’ listings, stealthy infiltrating the real estate third-party brands paid for on Amazon. Such is the advantage of being the owner of the biggest ecommerce platform in the U.S. with nearly 50% of the total ecommerce market share.
By owning a strong sales channel, coupled with a popular loyalty program that is Prime, Amazon is beginning to disintermediate food brands from their customers and take over the customer relationship. Equipped with private label products, Amazon, and other grocers who are building out their digital sales channels, will gain a lot of advantages over traditional food brands as the disintermediation takes effect with more and more grocery shopping moves to online channels.
It is worth pointing out, however, that online grocery shopping is still in its nascent stage. While Chinese consumers are already buying more than 20% of their food online, in Europe and the United States, the food ecommerce market is in the low single digits. For example, in the U.S., online grocery sales make up only 5.5% of the total grocery market. Digital disintermediation is at its most effective when shopping activities are happening on digital channels, and so far, such behavioral shift in grocery shopping has yet to happen in the West.
Still, it would be premature to conclude that food and grocery shopping are immune to the disruptive forces of ecommerce. While shoppers may not be ordering groceries for home delivery like typical ecommerce purchases. 72% of US grocery buyers now interact with grocery retailers in some digital form, such as click-and-collect, curbside pickup, and mobile payments at checkout. Such digital influences are reshaping the grocery shopping experiences and laying the foundation for grocery shopping to move online. A recent report by FMI and Nielsen estimates that online grocery spending could grow to 20% of U.S. market share by 2025.
Private label is not the only unexpected guest at the dinner party of food disruption. The emerging direct-to-consumer (D2C) brands like Brandless and Daily Harvest are crashing the gate of the food industry. Following the footsteps of prior D2C successes like Casper and Warby Parker, they aim to leverage refreshing branding design, social media marketing, and optimized online sales channels to appeal to modern shoppers who are embracing new ways of grocery shopping. Bypassing the traditional grocery sales channel and going directly to consumers, these D2C food brands position themselves as the healthy, low-cost alternatives to store brands and lock in customers with subscription plans. In a sense, they also disintermediate traditional food brands and grocers from their customers simply by hijacking the entire customer relationship.
Private label is not the only unexpected guest at the dinner party of food disruption. The emerging direct-to-consumer (D2C) brands are also crashing the gate of the food industry.
Beyond online channels, some food startups are also looking to create new offline sales channels to directly reach hungry customers. For example, Cargo seeks to reach Uber and Lyft passengers in need of a quick snack as it upgrades ride-sharing cars into a mobile sales channel. Kettlebell Kitchen delivers high-protein packaged meal subscriptions to gyms while Joyride and SnackNation focus on the office space. The contexts for food retailing are expanding, and so is the value chain, therefore presenting food brands with new opportunities and new integration points to deliver value.
Thanks to the internet, shelf space and physical retail distribution are no longer the primary concerns when it comes to reaching customers and establishing brand loyalty. For the D2C brands, their digital-only sale channels are just as convenient as the thousands of physical stores that Walmart and Krogers owns. Without the cost of retail overhead and paying for shelf presence, they are able to afford their competitive pricing. In a sense, these D2C startups are shifting the integration point from owning retail distribution to owning a long-term customer relationship. According to data from IRi, $20 billion market share value has shifted from big U.S. CPG brands to the long tail indie brands from 2011 to 2017. In other words, they are coming for the incumbents’ dinner.
The Food Empire Strikes Back
Seeing the growing disruption and early signs of a behavioral shift, established CPG brands, food suppliers, and grocery retailers have been quick to respond to the changing market landscape.
Incumbents like Walmart, Kroger, Costco, and Target have taken aggressive steps to fend off Amazon’s advances in the grocery market. Each has expanded online delivery and in-store pickup, invested in supply chains and technology improvements, and kept prices low to prevent customer defections. Walmart, for example, expanded its online grocery delivery options with transportation partners like Postmates and DoorDash, aiming to cover 40% of the US population by the end of 2018. Kroger, on the other hand, is teaming up with Walgreens for a pilot where shoppers will be able to pick up their online Kroger orders at select Walgreen locations in Kentucky, and Walgreens will begin offering grocery items from Kroger’s Our Brands line.
As for food brands, moving online and going direct-to-consumer is becoming an increasingly popular practice to avoid disintermediation brought on by private labels and D2C startups. Just as grocers encroach on food brands’ turf with private label brands, food brands are taking back control by establishing their own online distribution channels. All-in-one ecommerce platforms such as Magento and BigCommerce helped food brands such as Ben and Jerry’s and Coca Cola move online and set up shop.
Influenced by the trend of brick-and-mortar retailers enhancing in-store experience as a key differentiation point against ecommerce rivals, so are food brands looking to connect with customers by delivering memorable experiences. For instance, Mars hosted a candy-themed pop-up salon this February to help New Yorkers celebrate Valentine’s Day, while brands such as Quaker’s and Lipton Tea have tried interactive pop-ups to engage with consumers. Besides pop-up experiments, Kellogg’s opened a cereal-themed cafe in New York City to serve its products in colorful, Instagram-worthy arrangements, just as Chobani has long used three physical stores as a key customer acquisition tool.
This is not limited to CPG brands either, as the rise of “grocerants” can attest. Fuelled by consumers’ need for convenience and desire to eat fresh, high-quality meals, more and more grocery stores, such as Whole Foods and Foragers Market, have started selling ready-to-eat meals meant to be enjoyed on premise in designated dining areas. Alibaba’s Hema stores even allow shoppers to pick their own seafood item to be processed and cooked on the spot for a markup, further extending the grocery value chain while enriching the in-store experience it offers.
In addition, CPG and food brands are also preparing to take back control of their customer relationships with acquisitions that will help them bypass grocery stores and go directly to consumers. Unilever invested $9 million in meal kit startup Sun Basket, just as Nestle did with meal delivery startup Freshly. Coca-Cola invested in Bringg, a delivery logistics platform, to explore new B2B resupply models and on-demand B2C deliveries. Taking a page out of the D2C playbook, some CPG food brands such as KIND bars and Oreo are also experimenting with the subscription model to ensure that the customers come back for second helpings on a regular basis.
Trust plays a big part in customer relationship. Naturally, grocery retailers are addressing consumer’s growing concerns regarding food security and ethical sourcing and earning consumer trust. In April, Walmart and a group of food companies teamed up with IBM to explore how to apply blockchain to their food supply chains so as to ensure transparency and accountability. Within a year, Walmart plans to ask suppliers of leafy greens like romaine lettuce and spinach to implement food traceability via IBM’s blockchain technology.
The common goal underscoring all these tactics is a relentless pursuit of maintaining direct access to consumers. Being traditionally product-oriented companies, however, a major challenge lies ahead as they need to transition into service-oriented brands on top of delivering quality products in order to continue building customer relationship past the transaction point. This requires solid post-sale services that keep delivering value to customers, which is not a part of the value chain that food brands typically operate in, but must now learn to explore if they wish to stay relevant.
The common goal underscoring all these tactics is a relentless pursuit of maintaining direct access to consumers.
In that spirit, some food brands went one step further and started exploring integration points beyond distribution and retail. For instance, Tyson Foods has inked a partnership with Tovala, the startup that sells a steam-based smart oven and accompanying meal kit subscription service. In this regard, the kitchen, a space that is being rapidly transformed by connected appliances, is the next frontier for food brands to conquer and co-opt into their value chain.
Digital Kitchen Confidential
The kitchen is where most food products end up. The perishable groceries get chopped and cooked or stored away in the fridge, while the snacks and non-perishables get tossed into cabinets and pantries. Kitchens used to keep a lot of secrets, including our dietary preferences and cooking habits. As Julia Child would say, “Remember, you are alone in the kitchen and nobody can see you.” However, as various smart home devices, such as Amazon Echo speakers and this recipe-guiding cooktop, start to infiltrate the kitchen, they create new digital touchpoints that offer food brands a chance to learn more about their customers and reach them with value offers and services.
Connected kitchen appliances offer food brands new touchpoints to learn more about their customers and reach them with value offers and services.
For example, Amazon is quickly infiltrating kitchens nationwide with its Echo products, whose Alexa-powered conversational interfaces makes for a hands-free experience of finding recipes and setting timers that is perfect for cooking. With devices like the Echo Show, users can even follow cooking tutorial videos step by step as they cook. Their presence in the kitchen has inspired some food brands to experiment with branded Alexa voice skills to reach customers. Whether it’s for asking for recipes or ordering deliveries via voice, Alexa offers food brands a platform to surface their products and reach customers right in their kitchens.
Two weeks ago, Amazon took things one step further with an AmazonBasics-branded microwave that respond to voice command via Alexa. When you set up the microwave for the first time, users will have an option to sign up for a subscription for microwaveable popcorn from “select popcorn brands” via the Alexa app. As you make the popcorn, Alexa will keep track of how many times you have said, “Alexa, make popcorn,” and it’ll reorder automatically via its Dash Replenishment service when you’re running low.
For food brands, this kind of automated ordering signals another level of disintermediation that Amazon could bring into food value chain. Digital kitchens are extending the food value chain beyond the post of sale into cooking, eating, recycling, and meal planning. With Alexa deeply integrated into the kitchen, Amazon aims to capture that extended part of the value chain and become the platform where food brands will have no choice but come on board as a commoditized supplier if they wish to reach an Amazon household.
By controlling the future interface of the kitchen, Amazon would be able to heavily influence what kind of food products consumers buy when they get used to simply asking Alexa for a healthy recipe or add some beef patties into their shopping cart. Similar dynamics would play out with other smart home ecosystems, where preferred partners become the default choice of suppliers and effectively block out competing brands in the process.
To fight for their rightful places in the digital kitchen, food brands will again need to become better service brands that engage their customers beyond the point of sale. Innovative packaging, branded voice skills, and partnerships with smart home appliance makers (like the aforementioned Tyson Foods-Tovala deal) are all viable options for food brands to pursue as they extend their customer relationship beyond the shelves at the grocery store.
Food brands will need to become better service brands that engage their customers beyond the point of sale.
Moreover, they should aim to become lifestyle brands with distinct products that aptly respond to the rising consumer demand for better food products. Personalized products that promote energy, sleep quality, and other health-oriented lifestyle benefits, farm-to-table or sustainably sourced products, and various meat alternatives that cater to various plant-based diets are all part of the larger food trend, and food brands would be ruefully amiss if it keeps holding onto its existing product lines, Delivering a highly differentiated products will allow food brands to stand out from private labels and maintain its customer relationship even if a competitor takes over the kitchen interface.
While the kitchen may no longer be strictly confidential, food brands can now help their customers cook, enjoy, and reorder their products with confidence. Such are the opportunities and challenges facing food brands in the age of connected kitchens.
