You might not have noticed but our shopping habits in the UK have changed quite a bit recently.
We used to go to superstores (large stores with lots of choice and SKUs) usually once per week, usually at the weekend and “did the weekly shop”.
This was a major innovation over our parents and grandparents who used to shop in their local community and make frequent trips to shop.
We have now seen our shopping habits further change with the introduction of the discounters (Aldi & Lidl) who have a limited selection of SKUs and a large percentage of own-label items. We are both shopping more frequently in these locations and they are also enticing new customers (Aldi wine is acceptable at dinner parties!) to this retail category.
This means that emerging FMCG brands have limited ability to gain consumer trial due to limited space within discount retailers (frequently using short-term promotional space). So how do you launch a challenger brand in this landscape?
We strongly believe that direct to consumer can fill this gap, building strong consumer relationships on lower cost models, encouraging trial and investing marketing spend directly in customer recruitment rather than “brand marketing”
Perhaps use online to test product/market fit and look at retail to deliver the mass market consumer once your brand is well established.
As 2017 draws to a close and we wait for 2018, I think it’s a great time to reflect on our performance and goals in 2017.
When we bought Diet Chef back in 2015 we planned to make it more of a lifestyle business, but we have really grown to appreciate the expertise, infrastructure and knowledge we have within the group.
We have accelerated the brand creation in 2017 and we are particularly excited about partnering with entrepreneurs at an early stage to provide our infrastructure, knowledge and technology platform to remove some of the hurdles in the early stages of business.
We would love to do more of this in 2018, along with equity investment in FMCG related ideas that have a strong direct to consumer model.
So in 2018, we are considering launching a more formal program for this if this would be of interest to you let us know.
Over the last week or so Hello Fresh became a public company on the Frankfurt stock exchange. This follows Blue Apron listing on Nasdaq earlier in the summer. Both companies (along with Gousto in the UK) have raised many. many millions of investment, mainly pumped into customer recruitment.
I do agree that FMCG will move – more and more online – as consumer habits change from large central supermarket purchases to more local smaller retailers (such as Sainsbury’s Local or Tesco Metro) but I don’t agree that any of these companies have yet grown into their current (and sagging) valuations.
Customer recruitment costs continue to increase with stiff competition and poor retention and margin statistics does not suggest that growth will continue.
There is a business here, but I think trying to force growth with more discounted offers and higher recruitment cost is only good for new customers – not for shareholders.
Some consolidation may well happen to remove duplication over geographies and headcount – but until then I will stick to shopping for myself either online or at my local store.
If you need to know more check this video out on marketing as a percentage of sales
We launched our latest brand Parsley Box around 8 weeks ago. In this age of digital media and engagement we have seen a lack of digital channels that work for this demographic but have rejoiced in moving back into traditional media (print, direct mail, catalogues!).
Today most digital media talks about response rate, click through rate and conversion rate – all skills that have been prevalent in traditional direct response for many years before it was taken over by digital.
Having recruited more than 1,000 customers in this short period we are using old mechanics like the catalogue to engage in the same way that we use email in many of our other brands.
The majority of our orders are taken on the telephone and we are hearing great stories from our customers that we plan to use in future media.
Finally, TV is going to play a part – and next week we plan to shoot our first TV ad for Parsley Box.
While recipe box companies pile into competitive areas hankering after the aloof millennial we are sticky to the knitting and using direct marketing techniques to broaden our customer base.
Stay tuned for our latest advert once it’s complete in the next few weeks
Amazon (AMZN) announced on Friday that it was acquiring Whole Foods (WFM) in a move to extend its reach into Grocery.
We have long said that Grocery is one of the last areas of e-commerce penetration and although many have tried (Ocado for example) most have failed with a pure play e-commerce offering. This is mainly due to the complex nature of the supply chain and the fact that a large part of the product base is perishable.
We have followed a number of “foodtech” businesses for the last 5-10 years and competing with the integrated nature of traditional store based retail has been very hard.
The market view is that Whole Foods give Amazon access to both local distribution hubs (historically called stores) and a very integrated and unique supply chain. Whole Foods has a strong presence in North America and a few stores in the UK but has great coverage in the US in demographically richer neighbourhoods (Whole Paycheck).
But for FMCG brands the creation of Amazon as a retailer and a potential competitor will be an interesting area to watch. We suspect a number of brands may have to increase there own technology investment and this might be based on so called “acquihires” of struggling startup in the sector.
Good news for brands – but not fantastic news for investors who have paid high multiples to fuel the burn within a number of these companies.
Long term we think this is great for the consumer, great for Amazon shareholders and fantastic for brands that have well developed e-commerce capability – allowing them to leverage the investment that Amazon is making in this sector. Not great for Walmart though!
Blue Apron (www.blueapron.com) one of the US leading meal kit companies filed its S-1 on Friday giving us some insight into the burgeoning meal kit delivery market.
Although we like the sector, in general, we still feel that churn is the major enemy within this area. Working on around 30% gross margin is fine but 3-year cohort data shows $939 of LTV. This offers around $280 dollars of contribution before marketing costs.
2016 marketing costs seemed to come in around $144 per customer making a post-marketing contribution (before overheads) of $136. This is spread over 3 years so the cohort is delivering $93 per annum, giving marketing payback at around 18 months.
Everyone in this sector has raised vast amounts of investment and with around $745m in revenue in 2016 Blue Apron is definitely a business of scale. Losses have narrowed but to keep the churn rates in check the business needs to keep investing heavily in marketing.
At Movefresh we are obsessed by Amazon – they are a great role model for thinking long term (this isn’t that popular in the current economic environment)
I am still amazed that sophisticated investors can’t get their head around Amazon as a business and investment opportunity. Firstly, having been born around the dot com boom, it is certainly associated with the many businesses that failed within this cohort.
Secondly, investors really struggle to understand businesses that can continue to find ways to effectively invest their cashflow/profit. Many investors look at Amazon as a business that is “marginally” profitable, I see a business that can actively invest in the future and give bigger returns to shareholders who are willing be part of that.
I always recommend reading the Amazon letter to shareholders that have been published annually. The 2015 shareholder letter makes some interesting reading.
1. “The fastest company to reach $100 billion in annual sales”
2. AWS reached $10 billion pretty quickly too
3. “Customer obsession rather than Competitor obsession”
4. “Willingness to fail”
5. “Patience to think long term”
All of this is contained in the first paragraph – it is totally clear that that the business knows how to invest its cash flow.
They also included a copy of the letter from 1997 (reprinted from the 1997 Annual Report). They haven’t really changed their strategy since this original letter – something that I admire greatly.