Sidestepping the Supermarket: A look into the DTC activity from startups and corporates going direct
I wrote this newsletter for FoodHack, a media company and community platform powering the next food revolution.
Trouble is brewing for the traditional supermarket model
Grocery stores ain’t perfect. Getting a product on shelves is expensive and complicated. And for niche products, you might be paying a premium to get your product in front of irrelevant shoppers.
When it comes to understanding your consumer, going with the grocery store also means they own all the data about your shopper. That’s a major problem for data-driven companies.
Meanwhile, the pandemic has shown us the fragility of in-person retail, with consumers opting to shop online from the comfort of their home, and grocery supply chains proving to be at times delicate and sensitive to disruption.
With more shoppers likely to stick around online post-pandemic, both CPG startups and big brands alike are expanding into distribution models that bypass the grocery store altogether. Today, we’re taking a look at the DTC activity from startups and corporates getting their goods out without grocery, as well as e-grocery businesses bypassing brick-and-mortar altogether. Sorry Kroger.
A quick overview of the companies and categories challenging the traditional grocery model - View 30+ more here
🛒 What’s wrong with the grocery store?
Getting your product on supermarket shelves is “pay-to-play,” with often-mandatory expenses for shelf space and promotions. This trade spend is a huge barrier to entry for smaller companies. That means shelves are stocked mostly by the biggest players.
Grocery stores are also a massive bottleneck. The pandemic proved that the complicated, global supply chains stocking grocery shelves are extremely vulnerable to disruption. That’s why many food security experts want to see shorter supply chains tied to local food production.
📈 Key figures & Milestones:
44% of Americans familiar with DTC brand believe that DTC retail brands offer higher quality products at lower prices.
Online grocery shifted from a niche to the norm, jumping 43% in the first year of the pandemic -- meaning consumers are more comfortable than ever ordering food online.
Consumer interest in DTCs skyrocketed during the pandemic, especially for locally-grown, healthy produce. UK veg box sales shot up 111% around March 2020, while US Community-Supported-Agriculture (CSA) programs filled up in record time (with long waiting lists).
10 minutes. That’s the delivery time promised by a slate of grocery delivery startups, like Berlin’s Gorillas, Helsinki’s Wolt, Turkey’s Getir, or Britain’s Dija. Grocery delivery isn’t a new concept, but the micrologistics networks that power lightning delivery are.
🤷♂️ Why:
Trade spend (shelf priority, free products, promo fees, demos) is the #2 cost for CPG entrepreneurs, usually around 15% of of gross sales. A DTC route lets you sidestep these costs (or at least transform them into higher-performing and more flexible channels).
The DTC model has proven successful for household brands, with many raising over $100M -- Casper, Dollar Shave Club, Warby Parker, and Bonobos to name a few. F&B products are a whole different ballgame, but there are still home runs to hit.
DTC is not just for the cash-strapped little guy. Even massive brands with the negotiation muscle for cheap shelf space are getting in on DTC channels (PepsiCo, Nestle, and more), largely to acquire their own first-party data rather than relying on retailers.
We gathered 30+ Grocery Innovators here along with company size / funding / team and more
🧑🌾 Who: Veg Boxes, Meal Kits, & DTC Startups
Oddbox is expanding beyond London with their produce boxes of ‘imperfect’ veg, following a €3.2M raise last year.
In the US, imperfect produce distributors continue to raise rounds and grow, led by Misfits Market with a $1B valuation after a $200M Series C.
Misfits’ biggest US rival, Imperfect Foods also closed a $110M Series D in February, but is recently in hot water after a failed attempt to resist driver unionization.
UK pasta delivery Pasta Evangelists sold a majority stake to Barilla for £40M.
Riverford is a UK-wide veg box service with £75.7M turnover making a bold switch to an Electric Vehicle fleet. But VCs need not inquire: Riverford’s CEO handed over a majority stake to employees to deter outside investment.
Amfora is a DTC olive oil startup founded by a former equity fund manager. They offer high-quality Greek olive oil direct from farmers.
Germany’s Frischepost raised a 7-figure series A last year and is currently raising another round for mid-2021.
Zürich-based Farmy also continues to expand following a €9.2M raise last year, selling organic goods from over 1,000 producers and delivering by electric vehicle.
Across Europe, many cities or countries have their own regional provider, like Berlin’s Obergudt or Rotterdam’s Rechtstreex.
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🧳 Who: Big Brand DTC
M&M’s is a leader in big-brand DTC strategy, with engaging content and a compelling loyalty program.
PepsiCo launched PantryShop.com and Snacks.com in 2020, building DTC relationships and actionable, direct insights.
Nestlé’s online sales grew 40% (vs. 17% overall growth), and online is now a full sixth of their overall revenue. Particularly popular were home Nespresso orders.
Kraft Heinz started selling products via their Heinz To Home early in 2020, focusing on bundles of related products like the Starter Baby Bundle with a range of baby food.
🛒 Who: Online Grocery
Instacart: an innovator in online grocery, Instacart still relies on a time-intensive ‘personal shopper’ model but is expanding into dark store distribution hubs after their $265M raise in March, bringing total funding up to $2.7B.
BigBasket: India’s largest online grocery store with a breezy $1.1B in funding.
Grofers: also in India, Grofers is about to get a $300M check from food delivery Zomato, largely to enjoy vertical integration with Hyperpure, their B2B supply business.
Gorillas: on a rapid expansion for their 10-minute bike delivery model with a whopping $335.4M raised. Started in Berlin, Gorillas is now in Germany and the Netherlands while expanding to Paris, London, and NYC.
Wolt: initially rolling out as a restaurant delivery app, Helsinki-based Wolt is expanding into grocery delivery throughout Europe with $823M in funding.
Flink: on Gorillas’ heels in Berlin, Flink is aiming to ramp up fast with $64M in funding.
Dija: another 10-minute-delivery upstart, Dija is scaling through the UK on a $20M seed round and recently acquired Genie Delivery.
Getir: the Turkish 10-minute grocery app is expanding into both Europe and Asia while seeking new funds on a minimum $7B valuation.
Peapod: perhaps the first grocery delivery space, Peapod operates in 24 cities with 32 years of experience. Peapod is owned by Dutch grocery conglomerate Ahold Delhaize.
FreshDirect: another Alhold Delhaize holding (acquired earlier this year), FreshDirect is the NYC’s leading grocery delivery service with a presence in a handful of East Coast cities.
Good Club: a counterpoint to the rapidly-scaling unicorns, the UK’s Good Club offers a zero-waste concept with a closed loop system of reusable packaging.
Crisp: the Dutch startup raised €30M in March for their next-day delivery service that skews towards larger purchases (average order €95 with 45 items).
Buymie: the Irish personal shopping startup is expanding in Bristol this summer.
Picnic: German grocery giant Edeka boosted its stake in the Dutch startup, announcing its ambition for Picnic to serve as “the online arm of Edeka.”
Big grocery chains like Kroger, Hyvee, and Giant Eagle are not asleep at the wheel, with Kroger breaking ground on fulfillment centers, Hyvee offering free delivery to annual members, and Giant Eagle expanding their Curbside Pickup and Delivery offerings.
❌ Challenges:
It’s easy to lose consumer trust. If you go DTC but the product arrives late, melted, or spoiled, it’s very hard to win that consumer back. A DTC approach requires a new investment into customer service that brands themselves usually don’t have to worry about.
“Last Mile” logistics are a very hard problem, especially for small, local producers. With most B2C shipping still going through massive shipping companies not geared for food distribution, producers often have to solve these problems themselves.
After decades of acquisitions and rollups, the big grocery players are massive entities with deep pockets. Any innovation in DTC can quickly be imitated, and grocery businesses will only get better and better at their in-house pickup and delivery services.
🔮 Our predictions:
“Last Mile” solutions will emerge with better connectivity, bike couriers, mobility tech (i.e. cargo e-bikes), just as small-business e-commerce platforms like Shopify hit their stride. This will open up a new world of DTC food businesses with a better online presence and better delivery. Customers have warmed up to specialty DTC concepts for mattresses, glasses, and clothing, and will now do the same for specialty food products.
Groceries have long offered pickups and delivery services, but many will move far too slow - especially mid-tier regional chains without a major digital budget. We predict ever more acquisitions and rollups to the largest grocery operators.
For the big food brands, DTC is all about data acquisition. Sick of relying on an inconsistent landscape of retailers to understand their consumers, the big brands will continue to introduce their own online shops. With their focus mostly on data and with no grocery store earning its own margin, such shops will offer unbeatable prices. Yet in the end, without a great story to tell, customers will still prefer to order via grocery delivery apps or Amazon, rather than directly with the big brands themselves.
💡TLDR: Yes, grocery businesses have had a blockbuster year. But trouble is brewing for the traditional supermarket model on all sides. Grocery margins are notoriously tight. A mix of delivery apps, DTC concepts, and improved DTC logistics just might tip these businesses into the red.
Grocery stores, don’t sleep easy with your lockdown loot. These outsiders are coming to eat your lunch.
