I hate to say it, but I think it is time to re-evaluate your distribution channels with a new sense of urgency.
Today, the most important channel of distribution for many food processors is still the supermarket. Yet a long list of retailers, both in stores and on-line, are selling more and more food. While the mass merchandisers immediately come to mind, there are many others making an impact on the industry.
Will you be caught short as the market continues to shift? Many companies don’t have well-developed selling programs for the alternative channels or even plans to do so. In some cases, food processors don’t know how their products got into the non-traditional stores.
I think for many the purchase of Whole Foods by Amazon got some managerial attention, as well it should. I expect Amazon to reinvent food retailing and go far beyond Amazon Direct. Only those manufacturers that are “on board with the new” will survive.
But it is not just Amazon. The meal kit companies are taking off. While they won’t all be successful, it should be a clear message that consumers are looking for something different than what they get from supermarkets. It was announced that Blue Apron is on track to surpass $1 billion in revenue over the next 12 months, with a $2 billion valuation.
Even your best customers are changing the game. Major supermarkets are opening “click and collect” locations. Their consumers don’t have to walk the aisles. Companies such as Peapod have figured out how to make money from home delivery. Its sales are estimated to be $1 billion! Yet many food companies relied on the supermarket consumer searching and making shelf comparisons to get incremental sales. Those days may be coming to an end.
There are so many small but growing channels such as subscription services. You are likely aware of the razor subscription clubs but food is not far behind. Consider Terra’s Kitchen (http://www.terraskitchen.com/). When you subscribe to Terra’s Kitchen, you’ll get a “refrigerator type vessel delivered straight to your door weekly, filled with healthy, prepped ingredients that you can use to make delicious meals from the easy-to-follow recipes included. And best of all, you have the ability to completely customize your ‘vessel’ with add-ons like proteins, snacks, fruits, and smoothies.”
A number of factors are making the supermarket chains a less attractive channel of distribution for food processors. First is the consolidation of the supermarket industry. Some food processors told me they thought this was good for the manufacturers as they can now make fewer sales calls to sell more. I warn you, just look at England or even Canada where only a few chains dominate the industry. The retailers use their leverage to extract deals like you have never known here. In England retailer margins are often higher than manufacturer margins. If this is your main channel, be prepared to give more to the retailer!
Second, supermarkets are focusing more attention on private label brands. They have recognized that national brands have taken their eyes off the consumer while reorganizing to suit Wall Street. Some supermarkets are often listing only the number one or two brand along with premium and traditional private label. This growth is not expected to ebb, as private label market share in England is 50 percent or higher, and Canada is often twice as high as current U.S. levels.
When I discuss emerging channels, I am not including the recent channels that have already developed into main lines of business for many food processors, such as drug stores, dollar stores, and convenience stores. But keep in mind that less than 20 years ago food executives argued whether it was worth it to sell to Walmart, and many had no interest in convenience stores.
Don’t sit around arguing whether the new channels are “for real,” but instead help them become real food channels. Don’t ask should if you should sell to them but how to best sell to them. Almost everybody missed the mass merchandisers as a new channel. No one should be blamed for that. It was the first new channel for food in many years. But this time, someone should be held accountable. Food companies should have learned that the world is changing and so is distribution.
Supermarkets are on a downward trend, and some will not survive. They will go the way of the corner grocery store or corner pharmacy.
I know to invest in these nascent companies will not produce immediate sales and profits, and the bulk of your sales will still come from traditional supermarkets. However, the future is with the new channels, and the question is when do you become part of it. The question of “when” can be answered by Noah … Noah started to build the Ark before it started to rain.