Delivering the goods: capitalising on the growth of ecommerce
Covid-19 has led to growing demand for online grocery shopping worldwide and it’s widely expected some of that will stick once the virus subsides. But how can food manufacturers ride that wave? Dean Best reports.
"This is the coming of age when it comes to digital in food and beverages. This is here to stay. We don't expect this to slide back even after the immediate pandemic is over."
The words of Nestlé CEO Mark Schneider in October as he reflected on the jump the Swiss giant had seen in its ecommerce sales, thanks, in the main, to the way Covid-19 has reshaped shopping habits.
Ecommerce now accounts for more than 12% of Nestlé's full-year sales, up from around 8% a year ago. In 2019, the KitKat and Maggi maker generated the small matter of CHF92.6bn ($102.15bn) in annual sales.
Ecommerce on the rise
When PepsiCo announced its financial results for the second quarter of the year in July, the company remarked how, in the US, its ecommerce retail sales in the country had doubled year-on-year. The Lay’s snacks owner has also seen its ecommerce sales jump in Europe, a region that’s home to two of PepsiCo's four largest markets outside the US.
And Nestlé and PepsiCo aren’t alone. Executives from many of the world’s largest packaged food groups have revealed how their ecommerce sales have grown this year, fuelled by the restrictions on movements introduced by governments to try to contain the novel coronavirus.
Mark Clouse, Campbell Soup Co.’s CEO, said last month the US soup, sauces and snacks major had “doubled” its ecommerce sales in its last financial year (which ran to 2 August).
Ecommerce is more and more sticking into people habits and growth accelerated even faster than during the lockdown period
Meanwhile, Danone’s former CFO, Cécile Cabanis, said in October the channel accounted for 8% of the French giant’s sales. “Ecommerce is more and more sticking into people habits and growth accelerated even faster than during the lockdown period,” she told analysts.
Clive Black, the head of research at UK stockbrokers Shore Capital and a long-standing analyst of the UK grocery market, casts his mind back to underline the rapid growth of grocery ecommerce this year.
“I actually went to the launch of tesco.com in 1997 at the Café Royale when they announced they were going to introduce a web-based grocery delivery service and it sounded like something that would take you to the moon. It took 23 years [for ecommerce] to go from a standing start to 7% participation in the UK grocery market, one of the highest in the world. It took 23 weeks to go to 15%. That's the magnitude of the change we've been through this year.”
In the US, Bill Bishop, of US retail consultancy BrickMeetsClick, believes the online channel will this year have grown to account for “just tipping into the double-digits” of the country’s total grocery market.
The question is: where does the channel go from here? How much of the elevated demand the industry has seen during the pandemic will stick around once the virus disappears?
Confidence in continued growth
Broadly speaking, packaged-food companies and most industry watchers are confident the grocery ecommerce channel will continue on a higher plane than pre-pandemic. Online sales will, it’s widely believed, account for a greater proportion of grocery sales than they did before Covid-19 came along.
“There will be structural channel shifts and ecommerce is definitely one, of course,” Danone CEO Emmanuel Faber told investors and analysts in October.
Black says the UK has “gone through a revolution in social and consumer behaviour this year”, with the change in working habits for much of the population central to that upheaval. Those changes, he contends, will, in some form, persist, meaning significant changes for food distribution and consumption.
“We think our original estimate of a 20-30% reduction in footfall is probably going to be 40-50%. A lot of people, particularly who worked in offices five days a week are going to work two or three days a week. That's a massive change,” he argues. “People who are going to be based at home are going to sustain the growth in online grocery.”
The UK has gone through a revolution in social and consumer behaviour this year
Moreover, Black points out how the growth in grocery ecommerce seen this year has made the online channel, once an area where most, if not all, retail operators lost money, a more profitable enterprise.
“Retailers are now starting to get into a position where online grocery is profitable but, much more important than that, it's a high-return activity now because that doubling of participation has come in a capital-light way,” Black explains.
“Indeed, quietly some of the supermarkets would talk about a trajectory now where they see online and offline grocery being of similar margin,” he adds. “Within the next five years, we will see online probably close to 20%.”
The US, historically a less-developed market than the UK when it comes to the take-up of grocery ecommerce, has seen “fairly universal” channel growth across its brick-and-mortar retailers in 2020, Bishop says. “We’re anticipating a compound average growth rate of 19% for online grocery shopping in the US between now and 2025. 90% of the growth in grocery sales will be happening online versus in-store.”
And, over the border in Canada, there are forecasts of continued growth. “I actually see Canada as a lagging country when it comes to ecommerce. We were behind; 1.7% of our food sales retail were online before Covid. We're catching up to the rest of the world,” Dr Sylvain Charlebois, senior director in the agri-food analytics lab at Canada's Dalhousie University, says.
“I actually do see in Canada that ecommerce piece reaching 7-8% of those sales, maybe, and that would be probably enough to support many companies in that space for quite some time.”
How can manufacturers take advantage?
In the face of the expected growth in grocery ecommerce, what should packaged-food manufacturers do to ensure they benefit from that demand?
A number of industry watchers point to the importance of marketing and how vital is to invest in the right kind of communication with consumers shopping online. It’s a point not lost on packaged food executives.
“Online is clearly a long-term trend and we are well-positioned,” Grégory Sanson, the deputy CEO of France-based packaged-vegetables group Bonduelle, says. “The way to address this business is very different from the regular distribution in terms of advertising; being seen by the consumers is something we need to learn."
As online has seriously emerged as an alternative channel in the last 15 years, there has been much talk about the need for suppliers and retailers to work together in areas like promotion and marketing. This correspondent has attended numerous industry events at which collaboration has been the oft-used buzzword. In the eyes of market experts, that still hasn’t changed.
“The whole area of digital marketing is still very under-developed, so it's time to really go to school on what digital marketing means and, in many respects, how digital marketing can be used to strengthen relationships with existing channel partners in brick-and-mortar because of the synergy there,” Bishop asserts.
Cyrille Filott, global strategist for consumer foods at Netherlands-based financial services group Rabobank, says there is “a lot of value leaking away” from packaged-food manufacturers online because of the level of data held not by the supplier but by the retailer.
“The main pocket of leakage is in the connection with the consumer, owning the data and, as a result, having to pay these [retail] platforms for that connection, the new product development and coming up with the right products,” he argues.
Online is clearly a long-term trend and we are well-positioned
Filott does, however, point to a market like China as an example of where manufacturers and retailers can work together to good effect, using the consumer data the grocers have to collaborate in areas like NPD.
“I love to look at what's happening in China because they're so much ahead of us in terms of ecommerce and grocery ecommerce. You see Big Food collaborating with these platforms for new product development, and especially Mondelez is one that has done a lot with Alibaba to come up with products in terms of flavours,” he says, citing the US snacks giant’s product-development work on brands like Oreo and flavours like wasabi.
“That data element and working with those platforms to come up with new product development, that's something that Big Food actually can do very well and for small food is much more difficult because they may not have the resources. The value is leaking but it is an opportunity if you're willing to pay for it.”
Food retailers embracing targeted marketing
Australian retail media technology firm CitrusAd works with retailers and CPG manufacturers in Asia Pacific, North America and Europe on sponsored product and banner advertising on the grocery-shopping websites of retailers including Coles in Australia, Safeway in the US and Sainsbury’s in the UK.
The Brisbane-based firm has set up an online platform through which, working with anonymised shopper data from the grocers, it says it can help retailers better monetise their ecommerce websites and brand owners spend their online shopper-marketing budgets more effectively.
Kim Ludlow, head of UK and Europe at CitrusAd, has deep experience in the area, as a former executive at Tesco (where she worked as head of shopper media) and at MySupermarket, the shopping and comparison website, which ran from 2006 to 2020.
“We get given the shopper history from the retailers and we know which brands we should be showing to that shopper based on what they've previously bought. That makes it more effective for the brands because it means for their products they're not paying for that one fixed placement to be seen by everybody. If I don't ever buy Head & Shoulders, for example, it's not going to help me want to purchase it,” she says.
On a live dashboard, CitrusAd offers both brands and retailers analytics of how a marketing campaign on a grocer’s website has performed and says it can give both sides a better indication of the return on investment.
The way brand owners work with retailers on shopper marketing needs to improve, Ludlow suggests. “Fourteen years since I left Tesco, nothing has changed in terms of the media proposition for retail,” she says. “That's the same across all retailers. It's a tenancy-fee basis, typically, and you're paying for a fixed time, for a fixed spend.
“What do they get back? The answer is very little, being quite polite. It's a huge frustration because brands want to see how their media is performing but also they need the insights to then go back to their own business internally and say: 'Rather than spend all of that brand money this is a way that we can drive sales’.
“They need the proof and the evidence to be able to do that and to get the additional income. I know from my time at Tesco one of their KPIs is about the speed of completing the transaction, completing that shop and having that convenience factor.”
Recent months have also seen more packaged-food manufacturers invest in either expanding or launching direct-to-consumer services (and, in cases like Nestlé, buying up businesses).
It’s widely agreed there are benefits to investing in this emerging area including getting more insight into consumer behaviour and habits – but there is also broad consensus D2C is not suitable for every category and will likely remain a minor part of the total grocery ecommerce channel.
“I really am still reasonably sceptical about direct-to-consumer because that misses the point of why people go to supermarkets. That’s because they don't want approximately 90 vans turning up at the house every week,” Black says.
“There's undoubtedly an opportunity for higher-category specialist manufacturers and, indeed, Covid has been a bit of a revelation on that front. Speciality cheeses, speciality beer and the like I can kind of see. Why on earth would you have Kellogg's cornflakes delivered directly to your home? Or Heinz baked beans or whatever else?”
Covid-19 has led to significant changes in consumption patterns and the ways consumers shop is unlikely to revert back entirely to what they were before the pandemic across product, category and channel.
Grocers the world over have seen online orders sky-rocket and they are investing heavily in ecommerce capabilities to meet demand now and in the future. Manufacturers will have to do the same.