Food & Bev: A New Approach
How online-first brands can get a niche product into nationwide grocery distribution
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Today’s article is:
Written by: Wilson Hung
Contributors include: Justin Mares (CEO of Kettle & Fire), Nik Sharma (Founder of Sharma Brands), and Matt Davis (SVP of Retail @ Kettle & Fire)
1. The Old vs. New Approach To Growing A Food & Bev Business
For new food & bev brands, having distribution in grocery stores is still extremely important, and accounts for over 90% of food sales [1][2]. Yet most of the shelf space is still owned by incumbents, thus creating a difficult process for new challenger brands to get nationwide retail distribution.
Prior to eCommerce, the approach for new brands to get into nationwide retail distribution relied on crafting a convincing growth story based on success within specialty retail, local grocers, and farmers markets.
If things went well, these new brands eventually achieved regional, and nationwide distribution. This is a slow and competitive process that could take several years.
Fast forward to today, eCommerce has made it possible for emerging brands with a niche product to achieve nationwide retail distribution at an accelerated rate.
First by capturing early adopters by going online-first, and then leveraging the online sales data to gain the interest of retail buyers. From there, the brand can springboard into a broader and mainstream market to compete directly with the incumbents.
In this article, we’ll go over this new approach.
Step 1: Achieving Product Differentiation By Combining Food Staples With Emerging Trends
There will always be emerging diet/lifestyle trends that come and go (eg: Atkins, Paleo, Keto, Vegan, etc). In contrast, food categories and grocery aisles for the most part remain constant (broths, condiments, pasta, cereal, chips, etc.)
Each trend provides an opportunity for emerging brands to establish an initial beachhead against an incumbent by creating a niche product.
This is done by pairing food staples with emerging diet trends, which enables a premium positioning as a ‘better-for-you’ alternative in a food category.
“Big CPG is threatened by 1000+ upstart brands. It’s hard for Campbell’s to make a soup to serve customers who are into keto: what difference does a $20-50mm line of business make to a company doing $8b in revenue?” - Justin Mares, CEO of Kettle & Fire
Once a product opportunity is identified, the thesis can be validated without even having a product to sell. An example is how Kettle & Fire validated the emerging bone broth niche in 30 days by driving ads to a fake website. Nik Sharma outlines this method in this tweet.
Step 2: Initial Distribution via Direct-To-Consumer
Once the first product is ready to sell, brands that start online-first will have three key benefits compared to brands who start retail-first. These benefits are:
Benefit #1 - Ability to target niche consumers
With a niche product, the brand needs to be able to target the niche consumers. If a brand goes retail-first, the marketing levers available are limited and lack targeting capabilities (eg: field marketing teams, promotions, and brand awareness).
However, the brands that launch online-first will have access to:
Emerging Influencers: For every new diet/lifestyle trend, there are new influencers who are talking about it. These are bloggers, email lists, YouTubers, social media, and just about anyone who has an audience
Programmatic Advertising Channels: Whether if it’s using Facebook’s targeting capabilities, or bidding on niche product terms (eg: Magic Spoon bidding on “keto friendly cereal”), online marketing provides brands with scalable channels to target the early adopters
SEO: For brands that are early on an emerging trend, typically there are untapped SEO opportunities with low competition on both Google and Amazon. An example of this is how Perfect Keto captured most of the ‘keto’ related terms with their blog and on Amazon.
Benefit #2 - Attributable Marketing Spend
Online-first brands are able to accurately attribute marketing spend to performance. This results in a achieving sustainable marketing spend early on, which can then be used to build a compelling sales story to get into nationwide grocery chains.
Benefit #3 - Shorter Cash Conversion Cycles
As mentioned in this tweet by @jayvasdigital, online-first brands have much shorter cash conversion cycles because online brands are paid upfront resulting in a lower Accounts Receivable (AR).
Whereas retail-first brands have much higher ARs. For example, brands selling in Whole Foods via UNFI, have net 30 day AR terms, and this assumes they pay on time (they usually don’t).
All these benefits combined enable online-first brands to capture significant market share within a niche category, and to receive customer feedback which can be used to help improve the product.
These milestones are extremely important and can be leveraged in they future to gain the interest of buyers at the big grocery chains.
Step 3: Establishing Initial Retail Presence By Using Online Sales Data
Although eCommerce is great for gaining initial success for emerging food & bev brands, eventually these brands will saturate their online consumers as the vast majority of dollars are still spent in grocery stores.
At some point, online-first brands should consider expanding their distribution through retail grocery stores. When exploring grocery partners, there are generally five main categories to explore:
Local & Specialty Grocers (eg: Erewhon Market)
Natural Grocers (eg: Wholefoods, Sprouts)
Conventional Grocers (eg: Krogers)
Mass (eg: Walmart, Target)
Club (eg: Costco, Sams Club)
Typically for brands who have a ‘better for you’ product differentiation, they’ll want to start with the Natural Grocers (eg: Whole Foods & Sprouts).
"As an emerging ‘better-for-you’ brand, it's important to build your story with retail partners that have consumers who resonate best with your brand, typically the natural channel. This allows you to laser focus and invest in the early success of your brand then follow your channel strategy by taking those success stories to conventional and beyond.” - Matt Davis, SVP of Sales @ Kettle & Fire
Natural Grocers are typically easier to get into for an emerging brand as the retail buyers are more willing to experiment with new & trendy products.
To get into Natural Grocers, the buyers ultimately want to pick the products that have the best chance to: 1) hit their sales velocity targets, and 2) the wholesale product margins that the brand can provide.
It’s up to the brand to build a compelling sales story that hits on those key points. Online-first brands have an advantage as there is more data that can be used to craft a story, compared to retail-first brands starting out in smaller markets.
Here are some examples:
Does the brand’s target audience overlap with the grocery store? Provide customer demographic data and how they “overlap” with the grocery chain’s consumers (eg: adding in the post purchase survey a question related to ‘Which grocery stores do you shop at? Using Google Analytics to provide map overlays of the geography of the customers compared to where the retail store locations are’)
Will grocery shoppers be aware of the brand? Provide data on how much the brand spends on marketing, and how many people see the ads. This will help convince retail buyers that their grocery shoppers will pick your brand over competitors (eg: Show monthly impressions on FB ads)
What is the quality of the product? Provide data on why consumers prefer the brand over alternatives (eg: show customer and influencer reviews).
Is the product proven? Provide data on online sales growth and the rise of branded search terms relative to competitors.
This is how online-first brands can bypass the usual step of starting out in farmers markets or local speciality grocery stores, and straight into distribution with a nationwide natural grocery chain (eg: WholeFoods).
"Building an online story that can be shared with potential retail buyers is key. Everything from showing sales, performance within the category online, and positive reviews are all important metrics that can accelerate your brand to the top of the list.”- Matt Davis, SVP of Sales @ Kettle & Fire
What normally took retail-first brands 3-5 years to build a compelling growth story, can now be achieved in 1-2 years from online-first brands.
Step 4: Competing Directly With Incumbents via Product Expansion
At this stage, if sales are strong within the Natural grocery chains, brands can continue to use sales data from both online & retail to get into more mainstream conventional grocery chains (eg: Krogers).
However, since the brand started with a niche product category to establish a beachhead, there is a ceiling of how much the brand can grow. In addition, by piggybacking on an emerging trend, there’s a risk that the trend becomes a fad and declines in popularity.
So unless the niche is growing at a rapid rate (eg: Vital Proteins capitalizing on Collagen becoming a mainstream trend), many brands that reach this stage will shift their growth strategy towards product expansion.
This entails spring boarding from the niche category into a much bigger category. Fortunately, at this point the brand has accrued many benefits that will help with moving up to a larger category to finally compete against the incumbents.
By starting off in a ‘niche’ category, the brand is likely at a higher price point, and has a premium positioning. Plus, the brand will already have relationships with the buyers at the major grocery chains, thus reducing the barrier to entry to get a new product on the shelf.
This makes it easier to pivot into mainstream categories as a premium “better-for-you” alternative on the shelf (eg: low sugar, gluten free, organic ingredients)
Ultimately, these benefits increase the probability of success for the brand to finally expand into a more general category. By doing so, the niche challenger brand is able to compete directly with the incumbents as a premium alternative to the staple food category, with a much larger addressable market.
Examples of this include:
Kettle & Fire: Expanding from the “bone broth” category and into the “soup” category as a premium option made with “better-for-you” ingredients (bone broth base, organic vegetables, grass-fed beef, free range chicken, etc).
Primal Kitchen: What started as a “paleo friendly” salad dressing brand now has product lines across all condiments and maintains a premium positioning.
Nuggs: They started selling soy-based chicken nuggets online, and they’re now expanding into chicken patties & hot dogs. They’ll have retail distribution in both the natural and conventional grocery stores with all these product lines.
Four Sigmatic: Started online-first with mushroom coffee mixes and expanded into retail. Eventually they expanded into the grounded coffee category with a premium option.
SUMMARY
There are always different ways to grow a business. There are no hard rules and what is most important is context, which is unique for every single business.
However, one of the main ways to compete against the incumbents is to piggyback off emerging trends to create a niche product category. Due to the niche market size, it’s more efficient for brands to start online-first to gain initial sales and traction.
As online-first brands begin saturating the online market, the next phase to unlocking growth will be entering grocery stores. To get into nationwide grocery chains, it’s important to build a compelling sales story based on ‘online data’ to convince buyers that the product would sell.
What normally took retail-first brands 3-5 years to achieve by showing sales data via farmers markets and local grocery chains, can now be achieved in 1-2 years by online-first brands.
If successful, eventually the niche brands should consider expanding their product line into a more mainstream category, thus finally competing directly with the incumbents. Fortunately, at this point, the challenger brand has accrued relationships with buyers, and a premium brand positioning.
This makes it easier to pivot from a niche trend, into a more broader mainstream health trend (eg: low sugar, gluten free), and as a premium alternative to a staple food category.
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Great article Wilson! Thanks for putting this together.
this is fantastic, thank you