Appetite for Convenience (eBook)

Introduction

Overview of the DTC Channel

This book considers the DTC channel for frozen and fresh (refrigerated) foods. While these can be the same, in most cases, they are not. Unless otherwise stated, any explanations of the DTC supply chain pertain to frozen foods. For fresh foods, this book identifies how and why the supply chain changes.

The focus of this book concerns three aspects of the DTC business: supply chain, marketing, and strategy. This book offers some history to provide perspective. DTC sales have come a long way from door-to-door salespeople and the Montgomery Ward and Sears Roebuck catalogs of many decades ago.

Sales Channels

There are two primary sales channels when selling consumer food products: sell through retailers or sell direct. Under the category of sell through retailers, there are several variations:

• Producer sells and ships directly to a retailer, restaurant, or other institutional end users. The critical factor here is the volume per sale. Many farm-to-table food producers will deliver direct. Others will employ a specialized distributor to pick up food from multiple farms for delivery to restaurants several miles away. Alternatively, the producers will ship the food to a logistics center, and the logistics center will consolidate the shipments of several producers and ship to restaurants via either a common carrier (FedEx, UPS, etc.) or by a temperature-controlled truck (reefer).
• Producer sells to a distributor who resells the product to a retailer, restaurant, or institutional end user. Sysco, US Foods, Cheney Brothers, UNFI, and many other food distributors serve this function.
• A blurring of the DTC and retail sales channels occurs in high-population density areas of the country. (This is more hypothetical today than reality yet.) People can purchase cars, carpets, vacations, and many other products and services through buyers’ clubs (Costco, Sam’s, BJ’s). Why not food products that these stores cannot or do not stock? One can question whether food sold in this manner should be a retail sale or a DTC sale.

DTC sales also include numerous variations. There is no requirement that the internet play a significant role. Given its ubiquity, however, virtually all sales employ the internet in one form or another.

• Digital sales: A producer advertises products for sale on the producer’s website using various digital techniques. These may include search engine optimization (SEO), pay per click (PPC), remarketing (those ads that follow you from website to website), banner ads, and other purely digital techniques. All serve to steer the potential buyer to the company website.
• E-mail blasts: A producer has or obtains a list of emails. They may issue millions of email messages a month to direct a reader to the company website.
• Direct mail: This is similar to an email blast, except it uses a paper mailer and the postal service. Expensive? Yes, but it can be cost-effective.
• Catalog sales: Yes, catalogs still exist, although there are not nearly as many as in decades past. Almost all now permit a customer to place an order online and avoid speaking with a sales rep.
• Amazon: XYZ Corp. can sell products through its own website or sell through a third-party website. Amazon is the largest e-commerce retailer in the U.S. by a wide margin but does not (yet) offer fulfillment for frozen or refrigerated food. The producer must handle the supply chain. Amazon’s massive daily audience of buyers forces a DTC seller to consider adding Amazon to a sales outlet portfolio.
• Other third-party sites: The food business includes multiple sites dedicated solely to selling specialized food items. Companies such as Walmart and others sell food on their websites, along with many other products. When it comes to food, most of these companies will sell other company’s products but require the producer to provide shipping. Most of these companies do not stock specialty foods. This allows them to sell thousands of items with no inventory costs. The name for this is drop shipping.
• Assume ABC has a large customer base that correlates well with XYZ’s target market. ABC agrees to list XYZ’s products on its website. A consumer finds XYZ’s product on the ABC website and decides to purchase it. The customer pays ABC for the purchase. ABC sends delivery instructions to XYZ, telling them what, where, and how to send the purchase. ABC retains 25% to 35% of the sale price for their marketing services and sends the balance to XYZ.
• Influencers: Assume XYZ sells food for hardcore athletes, children’s birthday parties, or some other specialty purpose. People known as influencers have social media followings in these specialty areas that can number in the hundreds of thousands and sometimes millions. They can be compensated for a favorable mention on their websites, blogs, social media sites, or personal appearances.
• Social media: There are numerous social media platforms. These are excellent places to both advertise and stay in touch with existing customers. Every DTC company should pick a social media platform as its primary means of communication. The cost of maintaining conversations on half a dozen platforms can become considerable.

Why Sell DTC?

Apart from DTC sales made through third-party websites, including Amazon, companies that sell DTC establish direct relationships with their customers. Producers gain access to their customers’ names, physical addresses, email addresses, phone numbers, and purchase histories. A customer who buys through Amazon may never recognize the product provider. As far as the customer is concerned, the item purchased came from Amazon. Should XYZ attempt to contact this customer, the customer is likely to regard the note as spam.

When food is the product, unless the product is a once-in-a-lifetime purchase, one can anticipate repeat sales. A company’s ability to contact past customers allows the company to encourage repeat sales through purchase incentives. “Take 15% off your next order of $60 or more,” “Free shipping” (more on this in the DTC Marketing chapter), and other programs can inspire consumers to reorder. Companies offering products via subscription programs may employ different offers to encourage dormant customers to re-engage. Those lacking customer information cannot target this valuable group of consumers.

Once a company has a relationship with a consumer of its products, the benefits can be considerable. Companies can solicit consumers to become product testers. A company can produce multiple variations of a single product and solicit feedback. The same holds for packaging options. Companies can align themselves with religious, ethnic, cultural, health, activity, or other groups to improve relationships with targeted communities of interest. Companies can use their name and address lists to launch new brands that target specific groups of consumers. Products that may never receive shelf space at a major retailer cost relatively little to stock in a warehouse.

Most companies selling primarily through the DTC channel do so because this channel is a high-margin/low-volume sales channel relative to retail sales. In comparison, selling through retailers is a high-volume/low-margin business. Both sales channels can yield the same return on investment (ROI).

Consider the DuPont equation:

Return on Equity (ROE) is the product of profit margin (net income/sales), asset turnover (sales/total assets), and financial leverage (total assets/average shareholder equity). For purposes of this simple discussion, disregard the financial leverage term in the formula. It is not dependent upon the sales channel employed.

Consider the following circumstances:

XYZ sells DTC — a product for $7 that costs them $4 to make. They sell 250,000 units per year on an asset base of $2.5 million.

RSE sells through retailers — a product for $5 that costs them $4 to make. They sell 900,000 units per year on an asset base of $3 million.

The bottom line is that a company can trade volume for profit while earning the same return on investment. The amount of capital to invest in the project is one factor in determining which channel to employ.

Given a choice between the two sales channels, the DTC option is usually the least capital-intensive. It also simplifies operations. Production, storage, and fulfillment can be outsourced, allowing a company to focus on sales.

Another huge DTC advantage is that the producer does not need to acquire retailer shelf space. In the retail supply chain, the retailer is the decision-maker. The retailer decides the terms and conditions about what to sell, where it sits on the shelf, how much it charges, how it markets the products it sells, and how it chooses to buy the item. If the retailer accepts a product for store sales, it will often charge a slotting fee, which usually amounts to a 2% incremental cost.

The playing field is considerably more even when a major CPG company sells to a major retailer. Often, a large CPG will have a long-term “lease” on specific shelf real estate within supermarkets, based on store design and size. When small company...