Disruption has created an opportunity for grocery manufacturers to develop a D2C model. Changes in technology, supply chains and how grocery consumers now shop for grocery (food and non-food) items have created this opportunity. This blog quickly highlights how grocery manufacturers could increase sales by developing a D2C model.
D2C (direct to consumer) is a term that the industry now uses in place of B2C (business to consumer).
Modern grocery retailing = disruption
Disruption is the ‘new normal’ for grocery manufacturers and retailers. For example, after launching in 1994, as an online book retailer (Wikipedia), Amazon is now the most valuable company in the world (CNBC). Amazon now owns grocery stores overseas and offers grocery items online in Australia (Amazon Pantry). Jarrett McCraw describes the changes to grocery retailing as:
“disruption of distribution. Much of the technology that we as consumers have adopted out of convenience is now affecting brands and retailers of all shapes and sizes.”
Whenever change occurs there are winners and losers. Many once successful retailers and grocery brands have unfortunately ceased trading due to changes in the market. The logical question then is, what should grocery manufacturers do to meet the changing customer demands?
Technology has changed shopping behaviour
Numerous reports have highlighted how technology has changed shopping behaviours. For example, the 2018 Connected Commerce report by Nielsen stated:
“It’s undisputed that internet availability, mobile technology and digital innovations are redefining consumers every interaction and will continue to enable and disrupt many aspects of consumers’ lifestyles into the future.”
Statistics, from Australia Post, that highlight the growth of online shopping in Australia in 2017 include:
Online sales reached 8% of traditional retail sales
Australians spent $21.3B buying goods online, +18.7%.
Recent statistics for online grocery sales in Australia indicate that sales are growing significantly. Reported results (Power Retail) include:
Online grocery shopping in Australia +39.7% (12 months to Oct 18 – Nielsen)
Woolworths online grocery sales +26% (Q1 FY19)
Coles online grocery sales +30% (Q1 FY19)
“The online grocery landscape is likely to continue its rapid growth as Australians get more comfortable with the experience, and certainly as Amazon expands its offering,”
Alfredo Costa, head of retail at Neilsen.
All these statistics highlight that technology (internet, smart phones) has changed how grocery shoppers shop. So, how can grocery manufacturers meet Australian grocery shoppers increasing demand for online shopping?
D2C (direct to consumer)
D2C (direct to consumer) is simply a business model where businesses sell direct to consumers. Historically, the D2C model had many limitations in the grocery retailing (weekly supermarket shop) customer experience. Some of the limitations included:
- the time and inconvenience for the customer to order different products from different suppliers
- the lack of a suitable supply chain / logistics to co-ordinate the delivery of numerous items, from numerous locations. Also, the cost to deliver individual items via traditional options, e.g. Australia Post, would have been excessive.
Due to these limitations Australian grocery retailers offered Australian grocery shoppers a more convenient, simple and cheaper solution for their grocery shopping. Logically, grocery manufacturers have then focused on gaining ranging and distribution in the major Australian grocery retailers, as this is where their target market were shopping.
Looking forward, will these same limitations apply to the D2C model for grocery items? Will the “disruption of distribution” (Jarrett McCraw) create new opportunities for grocery manufacturers?
D2C Example – Nespresso
The Nespresso concept was originally created by Luiggi Bezzera. In 1986, Nespresso became part of Nestle. Importantly in 1998, Nespresso offered “an enhanced internet site enables direct on-line ordering, free shipping of minimum capsule orders, and expanded promotions of products” (Nespresso). Nespresso had created an online D2C model, when less than 1% of the worlds’ population used the internet (internet world stats). Today, Nespresso (stand alone part of Nestle) employs 13,500 people worldwide, has over 6.5 million Facebook fans and 440,000 unique customers visit their online boutique everyday (Nespresso).
Nespresso has grown dramatically during the ‘digital age’ by using an online D2C model. One of their 3 key growth drivers is “creating long-lasting consumer relationships” (Nespresso). Logically, as consumer demands have changed to expect personalised online shopping, the Nespresso D2C model has met this change in consumer demand.
Some of the many advantages of the Nespresso B2C model for grocery manufacturers include:
- direct relationships with consumers
- control over pricing / promotions
- no limitations to ranging / distribution
In the digital age consumers now expect a personalised service. For example, 63% of consumers want to receive individualised communications from brands (BrandQuarterly). IMHO (in my humble opinion) the major advantage in the Nespresso D2C model is allowing grocery manufacturers to build relationships directly with their consumers. The grocery manufacturer, very importantly, then has access to a lot of valuable data / insights about what products their customers are buying, how often, why etc. The grocery manufacturer can then use these insights to create personalised offers for their customers.
So, Nespresso offers an example of how grocery manufacturers could sell to consumers with an online B2C model.
Subscription Pricing D2C Model
A subscription business model is simply when a customer pays a recurring price at regular intervals for a product or service. Tien Tzuo estimates the subscription market has grown from $57M in 2011 to $2.6B in 2016.
One, of the many, changes that has occurred to pricing during the digital age is the increased use of subscription models. For example, Microsoft or Adobe used to sell their software for a once off fee. Today Microsoft or Adobe are more likely to offer an online subscription service with a monthly or annual fee. Even Jeep is considering offering a subscription service for their cars (consumer reports).
This model is already used by retailers throughout the world. For example, Amazon Australia offers its ‘Prime’ service for a monthly subscription fee. Prime members receive free delivery on orders, TV and movie streaming service plus promotional offers on products (Amazon). Amazon American customers can also receive discount grocery items by joining ‘subscribe and save’ program. In this program customer choose what items they want delivered, how often and then Amazon will automatically send the goods. The customer will receive a discount (up to 20%) on the items they subscribe to. Amazon Australia is planning on offering a similar scheme in Australia (Inside Retail). Personally, I am waiting for Amazon Australia to copy Amazon US and offers its ‘Carnivore Club’ subscription (4 – 6 charcuterie items or jerkies) in Australia.
Some grocery manufacturers already use a subscription service. For example, Graze uses a subscription model for its healthy snacks range. US and UK customers can subscribe to receive a box of healthy snacks delivered to their office or home. The customer can personalise their box of snacks to their tastes. Graze also allows customers to buy online, similar B2C model as Nespresso. Larger brands, such as Gillette, also offer a subscription service.
Some examples of businesses using a subscription model in Australia include:
Goodness Me Box – offering a box containing 7 – 10 health products and samples monthly
Hello Fresh and Marley Spoon – offering meal kits weekly
Importantly these Australian examples sell food items, via a subscription service. Historic supply chains, e.g. Australia Post, would not have been able to maintain temperature control for food items. Today, supply chains have evolved to be able to send temperature sensitive products, ordered online, to major cities in Australia. Some, such as Marley Spoon, claim online that they will be able to deliver to “the rest of Australia … soon.”
A D2C model, with subscription pricing, is another opportunity for Australian grocery manufacturers to increase sales.
Sales / profit opportunity of a D2C model
Personally, I believe the opportunity to build relationships directly with consumers is the biggest advantage of a D2C model for grocery manufacturers. The other major advantage is to increase sales and profit.
Generally speaking, grocery manufacturers profits have declined, over a long period, for a number of reasons. As detailed in a Morgan Stanley report, between 2007 – 14, retailers were able to transfer profit in the value chain from suppliers to retailers. Grocery manufacturers also have had to support aggressive retail pricing, e.g. Coles ‘down, down’. So, one of the main reasons for decreasing grocery manufacturer profit has been a lack of price rises to cover increasing business costs.
Branded grocery manufacturers have also suffered decreasing volume / unit sales decline due to the growth of private label in Australia. Partly due to growth of Aldi in Australia private label sales have increased dramatically. Private label now accounts for 18.1% of retail sales in Australia (inside retail). This is significantly less than some European countries, e.g. UK 41% (inside retail). As recently as June 2018, then Coles CEO John Durkan, said Coles was planning to increase its private label sales (Coles). As private label sales have grown retailers have delisted branded SKUs to make room for increased private label ranges. Changes in ranges and consumers switching to improved private label offers has led to decreasing sales for many branded products.
Considering the sales and profitability challenges, in the grocery channel, grocery manufacturers should consider other routes to market. A D2C model could be an opportunity for grocery manufacturers to increase their sales and profitability in the short and long term.
The retail market has been disrupted. Changes in technology have led to changes in how grocery shoppers purchase grocery (food and non-food) items. Solutions to historic barriers to a D2C model, e.g. temperature controlled delivery, are available now. These changes in technology, supply chain and shopping behaviours offer grocery manufacturers an opportunity to increase sales by developing online D2C models, possibly with subscription pricing.
Major grocery manufacturers, e.g. Nestle, already have developed a strong D2C model (Nespresso). Importantly, these models offer consumers the opportunity to personalise their order. For the grocery manufacturers, e.g. Nestle, it offers the opportunity to build long term relationships directly with their consumers. A D2C model also offers grocery manufacturers an opportunity to maximise sales and profit with another route to market.
Good luck to all grocery manufacturers that embrace change and launch a D2C model.
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