Snack Brands Sidestep Retailers in Pandemic
WHY YOU SHOULD CARE
Because going directly to the source can be so much more satisfying.
Some of the world’s biggest food brands are realizing long-held ambitions to sell directly to consumers in the pandemic, using coronavirus disruption to sidestep retailers.
PepsiCo Inc. started selling boxes of snacks and drinks, including Tropicana fruit juice, Cap’n Crunch cereal and Quaker granola bars, this month on its Pantry Shop site, which ships to any zip code in the contiguous United States.
A sister site, Snacks.com, allows online shoppers to pick from more than 100 Frito-Lay products, such as Doritos and Tostitos tortilla chips. In the United Kingdom, Kraft Heinz began delivering bundles of its eponymous canned food and sauces about six weeks ago.
If I’m selling individual items for just $4 or $5 each, the shipping on that is going to eat me alive.
Greg Portell, partner, Kearney
The prospect of cutting out supermarkets might seem like a big prize for food manufacturers: The absence of a middleman should mean they can retain the profits themselves.
However, like most grocery delivery ventures, the sites are not expected to make money. Executives behind them say they have no ambition to replace retailers on a substantial scale anytime soon.
Instead, they are using the initiatives to learn firsthand what works and what does not in e-commerce, and to gather valuable data about customers that are normally captured by retailers.
“It’s new for us, but I’m amazed by the kind of data you can get,” says Jean-Philippe Nier, U.K. head of e-commerce at Kraft Heinz.
Big food companies have made several efforts before to go direct, both online and in stores, although many of the initiatives have been marketing oriented.
Examples include Kellogg’s, which once had a cereal café in New York City’s Times Square, and Nestlé, which tried delivering premium Kit Kat chocolate bars to households in the U.K.
Direct-to-consumer has transformed some other consumer industries: Harry’s and Dollar Shave Club, for instance, upended the market for men’s razors. U.S. direct-to-consumer e-commerce sales leaped from $6.9 billion in 2017 to $14.3 billion last year, according to eMarketer.
Specialist brands, such as Magic Spoon and Perky Jerky in the U.S. and the U.K.’s Graze, which was bought by Unilever last year, have promised to disrupt the food business.
For most big food companies, however, direct sales “get lost in the rounding of their annual accounts,” says Chris Bones, a former dean of Henley Business School who chairs the U.K. consulting firm Good Growth.
Delivery costs are a huge barrier to going direct. “If I’m selling individual items for just $4 or $5 each, the shipping on that is going to eat me alive,” says Greg Portell, partner at consulting firm Kearney.
Grocery delivery is more cost-effective for retailers, which can pack several low-value goods into the same basket, although even most of them fail to turn a profit from it.
The coronavirus pandemic has made direct initiatives more viable. Steve Chantry, Kraft Heinz’s commercial director for northern Europe, says: “Different companies have had direct-to-consumer ambitions, but they haven’t found the right market circumstances.”
Appetite for processed food has risen in the crisis, reversing a multiyear trend in which consumers shunned old brands in favor of fresher and healthier alternatives. At the same time, shoppers have encountered bare shelves in supermarkets and struggled to secure online delivery slots.
“We felt there was an opportunity to create curated solutions for consumers,” says Gibu Thomas, head of global e-commerce at PepsiCo.
Stockpiling in lockdown has boosted demand for bundles. Pantry Shop’s kits are based around themes such as breakfast, family gatherings and workouts, and cost $30 or $50, depending on the size.
Heinz to Home offers three packages. The “essential” package includes baked beans, spaghetti hoops and tomato soup; the sauces package features ketchup, salad cream and mayonnaise. Each sell for 10 pounds sterling ($12.35). A selection of baby foods is priced at 20 pounds ($24.70).
The company charges 3.50 pounds ($4.32) for delivery, although the fee is waived for National Health Service employees and other essential workers.
In taking the tentative steps in selling directly, the companies are part of a much bigger rush into e-commerce during the pandemic.
Online sales have leaped from little more than 3 percent of the U.S. grocery market before the outbreak to 10 to 15 percent at its peak, according to Bain & Co. estimates.
While Thomas does not expect direct-to-consumer to “remotely match” the scale of traditional retail channels for companies such as PepsiCo, he says the new projects are giving the group valuable insights.
“Obviously we want any business we get into to be sustainable, but the value can come in many different ways,” Thomas says.
The data that PepsiCo and Kraft Heinz are gathering relate both to who the online shoppers are and how they behave on the sites.
“There are a lot of things we can learn from it,” says Nier. He hints that Kraft Heinz is looking at adding new products to the service in the U.K., possibly including gift options.
The ventures also give the food companies a foothold from which they can delve deeper into grocery delivery if the economics become more favorable.
Sujata Dantiki, a former global e-commerce strategy manager at Newell Brands who is now a consultant with SSA & Co. in New York, notes that it comes at a time of tension between some consumer packaged goods (CPG) groups and retailers, which have stolen market share with own-brand products.
“The lines between CPG and retail are getting blurred,” Dantiki says.
Kraft Heinz, based in Chicago, is eyeing direct-to-consumer initiatives in other countries, including the U.S., although it has no firm plans for another launch.
During the pandemic, customers stuck at home have been more willing to receive several deliveries during the day. As they return to work, they will be more likely to consolidate online shopping.
While packaged food groups maintain consumers are rediscovering the appeal of out-of-favor brands, it is an open question whether processed fare will retain its appeal after the crisis has passed.
“For sure there is potential, for us and many other companies,” Chantry says. “But I think the value in this is as much in the data, testing and learning as it is in any scale commercial proposition.”
Additional reporting by Judith Evans.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.