Supply Side: Direct-to-consumer becoming an important retail channel

Big food companies and other consumer products goods (CPG) manufacturers are expanding their direct-to-consumer businesses, bypassing traditional retailers in the process in the race to win consumer loyalty and capture more sales.

Tyson Foods, Campbell Soup, ConAgra and Hershey Co., are all working with startups and online couriers on meal kit options aimed at busy families looking for convenient dinner and dessert options that can be made at home.

Meal kits, such as the Tyson Tastemakers sold in conjunction with Amazon Fresh, are gaining traction according to Tom Hayes, president and incoming CEO of Springdale-based Tyson Foods. He said the program sells out of product because of heavy demand. Hayes said the company continues to look for ways to market its products to consumers through various channels.

ConAgra, also a major supplier to Walmart U.S. and traditional grocers, has joined forces with online marketer PeaPod to sell meal kits for entrees like Buffalo chicken quinoa and zucchini noodle primavera, dishes that can be baked at home and include Hunt’s canned tomatoes and other ingredients made by ConAgra.

Meal Kit Strategy, Growth
Kantar analyst Diana Sheehan said meal kits are a tactic in the strategy needed to combat the bigger threat of e-commerce and online grocery. While the direct-to-consumer market for meal kits is still small – about 3% of consumers – it’s growing at a healthy clip. Analysts with NPD Group said it’s an important channel because it’s a way for brand manufacturers to introduce themselves to younger consumers who seek convenience at the expense of higher costs.

Direct-to-consumer meal kits do have fatter margins for suppliers, with the typical meal kit costing about $10 per person, twice the $4 per person costs to make a dinner at home with items purchased in traditional grocery, according to the NPD Group.

The meal-kit options linked up with startups like Blue Apron and Hello Fresh have raked in about $177.5 million through the first half of this year, according to Dow Jones Venture Source data. It’s not just the main course meals wanted by consumers. Hershey partnered in September with Chef’d to launch dessert kits on Facebook Live, as the confectionary brand sought to dabble in the direct-to-consumer channel ahead of the holidays.

CPG Subscriptions
It’s not just food companies jumping into the direct-to-consumer model. Procter & Gamble has been active for several years with subscriptions. More recently P&G launched the Tide Wash Club in select U.S. cities – a subscription-based business akin to Dollar Shave Club.

Tide Wash Club gives users free shipping for single-use laundry packets of Tide Pods sent to consumers’ homes once every two or three months, depending on the plan selected. Tide Pods are the most expensive detergent offered by P&G and they have fatter margins, but the company is throwing in free shipping in hopes consumers will try the service.

P&G has since taken the Wash Club one step further by offering Tide Spin, a laundry service available in Chicago. The company describes Tide Spin as the “uberization of laundry.” The program allows customers to use a smartphone app to order laundry pickup and delivery from Tide-branded services.

“We’re focused on simplifying the chore of laundry for our customers,” the company notes on its website (TideSpin.com).

This mobile app-based service allows consumers to log in and schedule a pick up or set up a recurring schedule in which they leave their laundry bag out, and it gets cleaned and delivered back without hassle. Other than convenience, the company promises trained experts will handle the cleaning using only premium Tide detergents, and it guarantees coverage for any lost or damaged clothes. Tide Spin charges customers $1.59 per pound of regular laundry, or sets fees for dry-cleaned items.

The Tide Wash Club and Tide Spin test market are likely direct responses by P&G as Dollar Shave Club, recently acquired by competitor Unilever for $1 billion, made a huge dent in P&G’s personal grooming category. Jason Long, CEO of Shift Marketing in St. Louis, told the Northwest Arkansas Business Journal brands from P&G to Campbell’s have no choice but to adopt a direct-to-consumer strategy.

“Brands have to step up to stay relevant today as Millennials don’t have brand attachments,” Long said. “For years Tide got by on its brand affinity established decades ago, but that doesn’t mean a thing to Millennials and this generation coming behind them. We will continue to see CPG brands and food companies throw a hundred darts in the air to see which ones stick.”

Long said P&G just might have something with the Tide Spin and Tide Wash Club tests and the possible halo-effects.

“Perhaps consumers who use the service or even read about it, will say ‘Tide is a brand that understands the needs of a working professional or busy family,’ and really Tide has nothing to lose with this gamble,” Long said.

Long said P&G, ConAgra and other suppliers had it easy in traditional brick and mortar. He said the biggest suppliers to retail could pay for premier shelf space, which was limited and easy to keep competitors out. Online competition, though, has chipped away at their market share. He said categories like razors and diapers have been totally disrupted by Dollar Shave Club and Diapers.com, much the way the microbrewery industry disrupted the beer giants in recent years.

Self-Branded Stores
Carol Spieckerman, CEO of Spieckerman Retail, said subscription services are just one facet of a larger direct-to-consumer trend that is proliferating in retail.

“Brands now have the means to forge direct relationships with consumers through social media, via their own dedicated e-commerce platforms and by opening self-branded retail stores,” she said. “Many are exercising these options because they can gain valuable insights on consumer behavior even if the actual revenue isn’t meaningful to their overall business.”

Spieckerman said some companies want to maintain more control over their brands rather than completely ceding it to retailers. However, retailers have loosened up when it comes to their wholesale partners (suppliers) exploring new channels of distribution.

“Not that long ago, suppliers could face consequences, from lower orders to complete dismissal from retailers if they dared to launch any form of direct-to-consumer outreach,” Spieckerman said. “These days, exclusivity leads to obscurity because consumer attention and loyalty is so fragmented. The sensibility has shifted to where having a brand in many places, and visible in many channels, is the best way to keep it top of mind. Or as I like to say, ubiquity is the new exclusivity.”

Long agreed, saying retailers are more opened-minded about multi-channel. He said retailers like Target have admitted defeat to disruptors like Dollar Shave Club and is offering those products in its stores.

“In linking up with the disruptor, retailers can look a lot better to consumers, especially Millennials who might have seen them as ‘king of the hill’ in the past, but now these giants appear to be more thoughtful and understanding of what consumers really want,” he said.

Long and Spieckerman said subscription models are a complement and not a threat to brick-and-mortar retail. Spieckerman said it’s not easy to scale subscriptions and they can be distracting for a company like Wal-Mart, which is one reason the retail behemoth and others have tried them and moved on. That said, retailers are aware their supplier partners are finding some success in this area.

A recent study by Forrester Researchers found direct-to-consumer offerings can boost manufacturers’ brand awareness. The study found that 52% of respondents were already visiting the manufacturer websites, and about a third said they would prefer to buy directly from the manufacturer if possible.

Long said retailers can benefit from suppliers who also operate their own direct-to-consumer businesses because there is consumer data that can be shared between the retailer and supplier. He said the lines have become blurred between suppliers and retailers, and that is not likely to change.

“Manufacturers have got to explore the opportunities of direct-to-consumer options as retailers pair down store openings and more business goes online in the future,” he said. “Subscriptions are still a small segment of overall retail, but it’s among the fastest growing.”