Notable Big Food companies such as Nestlé and Unilever have entered the direct-to-consumer space either through acquisitions or in their own right, while scores of relatively new businesses have embraced D2C from the outset. But how should FMCG majors go about setting up a service? Simon Harvey investigates.
The direct-to-consumer (D2C) market is starting to grab the attention of Big Food manufacturers eager to find alternative avenues to bolster sales and reach out to younger consumers in an intensely competitive retail landscape.
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But despite the growing interest in D2C, the market is still nascent, meaning for all the attention given earlier this year to Unilever’s purchase of Graze, there aren’t too many acquisition opportunities, leaving large food producers to consider launching their own service.
Some members of Big Food have entered D2C, which, with the rise of e-commerce and digital channels, along with millennials and Generation Z embracing evolving technologies and new ways of shopping, is an area companies can’t afford to ignore.
Garyth Stone, the managing director for the consumer, food and retail division at investment bank Houlihan Lokey, which has advised companies on direct-to-consumer, describes the changing shopping environment among the younger generation who don’t have the same loyalties to brands as older folk.
“The new generation simply don’t accept the interest, legitimacy or relevance of those products to their lifestyle and to who they are, in a way the previous generations have,” he tells just-food.
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By GlobalData“So the big FMCG giants face an almost existential threat to their brands as these cohorts come of age, get larger and become a bigger part of the overall spending market. They need to find ways to remain relevant to those consumer segments and that’s not with their existing brands so much, it’s with new brands and new propositions; and they can only meaningfully get traction with these new generations online.”
As well as Unilever’s move for Graze, a UK-based healthy snacks business with a presence in D2C, the consumer-goods giant also showed its interest in the channel with its acquisition of D2C razor business Dollar Shave Club in 2017.
Nestlé has also made moves inside and outside food, with the launch this year of a D2C service in the UK through its KitKat chocolate brand, allowing for individual customisation but at a premium price, as well as buying a majority stake in pet-care business Tails.com in 2018.
European dairy giant Arla Foods, meanwhile, is among other food majors dipping their toes into the channel, with the launch of its own D2C service centred on baby food in the UK last year.
So how should food manufacturers go about setting up a D2C service?
Avoid retailer conflict
It’s generally agreed personalisation and premiumisation are the buzzwords around direct-to-consumer, presenting a good starting point. Interested manufacturers need to ask themselves: what products do I offer that fit into those brackets? And how do I make them unique to attract the general public away from bricks-and-mortar retailers?
Importantly, it’s about making product choices suitable for D2C that aren’t going to rile the food manufacturers’ largest customers – the retailer. It might be one thing to embark on direct-to-consumer with all the best intentions, but another if it risks losing long-established relationships which account for a big chunk of your bread-and-butter.
It was a potential obstacle Arla considered when it set up its D2C service, Steve Millard, the dairy company’s head of digital in the UK, says. In so doing, Arla picked infant-milk formula and baby food because the company wasn’t present in the mainstream category in the UK.
“The biggest [risk] most people think about, is the risk to our [retailer] relationships,” he says. “So having retailers call us up and say: ‘Well hang on a minute if you’re doing direct-to-consumer, what does that mean for us?’ What’s the risk for our business and how are we going to compete towards one another?
“We launched Baby & Me organic milk formula [and] pouch products, with a total range of ten SKUs – quite small, quite niche but very well defined, easy to target and simple to deliver. Brand and product positioning is different to that of typical retail because you don’t want to harm your existing relationships.”
However, Millard also alluded to the advantages: “From a channel perspective, we’re in control of the profit, we’re in control of the pricing.”
Pick a unique product
Let’s not forget the reasons, however obvious, for wanting to establish a D2C service – to get direct access to the consumer. That, on the one hand might save you having to give margin away to the retailer, but on the other, may cost you in terms of investment to get started, whether it’s setting up a separate factory or engaging a contract manufacturer, logistics and delivery, employing new people and research and development.
That’s why some of the food majors are opting for acquisitions, but as mentioned, there aren’t many targets. Cyrille Filott, a global strategist for consumer goods at Dutch investment bank Rabobank, offers some advice. “My recommendation would be two fold – try not to annoy your main customer right now and come up with a premium solution that really attracts the consumer to your site. For instance, I don’t think it would work to go D2C on biscuits because the consumer can buy them from any retailer. So it needs to be a very premium solution.”
Some have picked a route that can’t easily be replicated by the retailer or supermarket, such as Nestlé with KitKat Chocolatory. And pet food is an ideal fit for D2C when you think about catering to the myriad of breeds, animal sizes, food preferences and so on.
Filott says: “The retailers might think you are competing against them, so what you see happening is the more successful D2C offerings are slightly outside of where there’s a huge concentration in food retail.” With respect to Nestlé and KitKat, he adds: “One, it’s not really invasive to the retailer, and two it is a premium product.”
However, Stone at Houlihan Lokey says FMCG firms have no choice but to embark on acquisitions to get into D2C, mainly because they lack the appropriate skill-set, aside from the lack of opportunities.
Should a manufacturer decide to go it alone they should consider contracting out the production rather than making a capital outlay, but at the same time spend on marketing, distribution, logistics and data collection to support the D2C business, Filott says.
“You see various models and that is one option,” he concedes. “You can also outsource that whole process but then you may lose the touch point with the consumer, which in the end is what you are looking for.”
The acquisition argument
Arla’s Millard also alluded to a lack of appropriate skills when it embarked on direct-to-consumer.
“I think it was fair to say that we didn’t have the skills and the capabilities,” he says. “We had traders that were engaging with retailers on a regular basis and actually what we needed was something completely different. We need tech people, we need data and analytics. We need significant involvement from IT. It wasn’t really our wheelhouse.”
Meanwhile, Stone adds that in starting out, companies need to identify the “core” areas where they have the “legitimacy to play and therefore where [they] should be investing”, choosing products adjacent to where they are currently at but with a modern twist.
“I don’t think any of the big FMCG firms have a combination of the capabilities to create a D2C branded business from scratch – they have to buy,” he argues. “They don’t have the social marketing expertise, the back-end IT expertise, the ability to understand the consumers in the right way to come up with the right proposition. So they have to buy businesses that have been started as a small niche: exciting start-ups that have proved they have all of these capabilities, grown themselves to a certain scale and demonstrated that they have longevity, broad appeal and the potential for meaningful profitability.”
But what do companies eager to get in on the act do when there aren’t sufficient targets? “They compete headlong against each other to buy them, and pay very high prices for the good ones,” he counters, before adding: “The way this eco-system is working at the moment, and I think will continue to work very well, is you have individual entrepreneurs identifying huge numbers of open-market niches that appeal to the next generation of consumers. Most of those will fail, but some of those will succeed extremely well, scale extremely well and then become appropriate to be bought by the FMCG guys, who will then buy them at compelling prices.
“Typically, what they do is hold these businesses slightly separate from their main business for a period of time – which is what they should do. If they bring them inside and fully integrate them they will lose that entrepreneurial spirit that has made them so successful.”
Once launched, how does a company make a success out of direct-to-consumer?
Collect consumer insights
Having a successful D2C service rests largely on the consumer. So from the onset it’s imperative to create an online experience that in a way replicates the retail environment but also offers more. It has to be a fun experience, and a service that ticks the value-added box to warrant or encourage the consumer to pay, in some instances, a premium price for the good.
Rabobank’s Filott says: “Think about the experience for the consumer. It’s fun to go on a website and select products or customise your products and have it delivered to your home. So for chocolate it makes a lot of sense because that’s an indulgent product that people are willing to pay more for because it has something special.”
However, Stone at Houlihan Lokey says D2C is not all about paying a premium price, an aspect Filott agrees with, while emphasising the need to “customise it and make it special”.
Stone says consumers will pay a higher price if it’s a premium product but FMCG firms would have to “present a compelling value proposition otherwise they are not going to buy just because it’s online if they can buy the same quality of product or brand in the supermarket for cheaper”.
Arla’s Millard says the company encountered teething problems around consumer insight when it first launched into D2C due to the dairy firm’s relative inexperience, issues that had to be ironed out in the early stages.
He continues: “There were a few [other] big learnings. User experience at launch was a barrier. We made the active choice to incorporate the direct-to-consumer platform into our existing corporate site but that presented a few challenges. The first one was around the landing page construction. It just wasn’t optimal for e-commerce. It was great for brand experience but to actually drive people to make a purchase it wasn’t in the right place.
“You can do the best job in terms of driving our cost per acquisition down by having the best digital communications plan but if your website is not good enough and if it’s taking too many clicks to drive through to a checkout you will lose those customers as well, so really focus on user experience.”
Keep evolving
D2C also gives food manufacturers more control than if they were selling through a retailer, in areas such as price and in-store positioning, but they must remember they are serving as the “interface between the consumer and food company”, Filott says.
It’s imperative therefore to use consumer insights and data collection for new innovation, which in turn should make the big food producers “more agile” in getting product to market, he says. “Anything that can help you in shortening your development cycle and to increase the rate of success is a good input to have”.
But Filott also notes how, by its very nature, D2C evolves into low volumes albeit at very high gross margins so new entrants to the field need to be “constantly innovating and renewing” themselves to stay relevant.
Millard sums it up from Arla’s point of view: “We’ve got an opportunity to understand more about what drives from a content perspective, what really ticks the boxes; what from a category perspective and a product perspective we can really drive engagement and get them into our brands.
“The community management piece is really important. Also, if you’ve got a pretty weighted digital communications plan, you’re going to drive engagement there as well, so being able to respond to consumers in the place where they want responses, is so important.”
Houlihan Lokey’s Stone says direct-to-consumer businesses are seeking to create customised products through relationships with, and data collected from, consumers, facets that should enable an acceleration in product development, particularly in niche areas.
He goes on to say: “Having that relationship, they can test out on with their best consumers what the next product idea would be. You can have a much quicker innovation cycle and are much more likely to succeed.”
At the end of the day, it appears the direct-to-consumer market in food is going to take a while to develop unless new entrants come to the fore or if more producers conclude they can’t afford to wait in an atmosphere that amounts to very few acquisition opportunities.
Arla’s Millard has this advice: “Clearly defining a roadmap to launch is really important, trying to stick with it and making sure that your third parties have bought into it at the same time is clearly very important. Once you’ve got that roadmap in place, try and stick to it as best as possible but be prepared to flex and be agile.”
