In June, Chai Mishra launched Movebutter, a small online grocery store with 300 products that promised shoppers more curated and high-quality choices than major grocery stores, which stock as many as 50,000. A month and a half later, the company had a waiting list of 120,000 people who wanted to place orders on its website.
Movebutter is one of dozens of grocery and food brands aiming to grab their own chunk of the $627 billion Americans spent last year on groceries, per YouGov. Online grocers accounted for $12 billion of those sales, and 27 percent of U.S. adults said they’ve shopped from an online supermarket. Big retailers like Kroger, Walmart, Albertson’s and Costco dominate 40 percent of the market. And that’s where challenger brands see an opportunity to shake things up.
With new business models and unique offerings, brands like Brandless, Thrive Market, HelloFresh and Halo Top are challenging traditional packaged-goods brands and retailers.
Mishra came up with the idea for the San Francisco-based startup after learning of inefficiencies and the high profits brands make from producers. For every $100 spent at a grocery store, only $15 goes back to producers, Mishra said. He also said that roughly one-third of the food grocery stores stock gets thrown away before it can be sold. Movebutter works directly with farmers, butchers and producers across the country to source food, and items are sealed in transparent packaging so consumers can see what the food looks like. Orders are delivered via FedEx or same-day shipping with ice packs to keep it cold.
“There was this big dinosaur industry that just never changed, and a lot of people believed that it would actually never change,” Mishra said. “It’s so ubiquitous that people can’t imagine a world beyond traditional retailers. But it’s changing—for years the argument was, ‘Who wants to buy food online?’ That’s not the case anymore. People are coming in spades.”
According to Mishra, traditional consumer-packaged-goods brands are struggling to keep up with the changing tastes of millennials, many of whom are interested in learning where their food comes from and enjoy the convenience of shopping online.
“How many millennials do I know that really care about Campbell’s Soup as a brand? These are old, existing companies, and they used to have this real sway where generations ago they meant something, but [they’ve] lost a lot of kind of brand value as we go along,” Mishra said. “2016 was the first year that Americans spent more money on restaurants than they did on groceries. The average millennial now spends $1,000 less on groceries every year than their counterparts did 10 years ago.”
However, Movebutter and other grocery and food startups have smaller marketing budgets than traditional brands, something that forced Mishra to get creative and lean heavily on building a community of food enthusiasts. For example, the brand publishes a bimonthly print and online magazine called Butter with articles about food and millennial trends. Recent headlines include “12 Foods You Should Always Buy Organic” and “Growing a Garden in the City.” Movebutter also has a Facebook page with more than 8,700 followers where the brand asks fans what products they’d like to see and talks about trends.
Movebutter is far from the only brand trying to differentiate itself from brick-and-mortar retailers.
Four-month-old Brandless launched with a simple model: Everything is $3, and there is no so-called “brand tax,” all the hidden costs of manufacturing consumers are not privy to.
Co-founder Tina Sharkey said Brandless is aimed at perennials, a psychographic of people who are changing their habits to meet changing lifestyle, dietary and belief systems. Whenever possible, Brandless’ products are organic, non-GMO and clean.
“We did an analysis of the pricing, and $3 is just not the entry price to that market,” Sharkey said. “What we really wanted to do is democratize access to awesome stuff at fair prices and try and make better everything for everyone.”
From measuring cups to crackers and vitamins, Brandless uses its own data and analytics to understand which products consumers use. Today the site stocks 250 products with the goal of offering 500 by the middle of 2018. For each order placed, Brandless donates a meal to Feeding America.
Brandless declined to share specific sales but said the company had double-digit repeat orders six weeks after launching. Every product on the site gets purchased every day, and the company has donated more than 100,000 meals to Feeding America.
Socially conscious shopping
Thrive Market is another brand tapping into consumers’ demands for socially responsible brands.
The site charges members an annual fee of $59.95 in exchange for discounts on 4,000 organic products. For each membership, Thrive Market donates a free membership to a family, veteran, teacher or student in need. Shoppers can also support other causes and make donations when they check out. The company has raised more than $125,000 for Hurricane Harvey relief since August, donating a total of more than $250,000 for the cause.
“We’ll continue our investment in developing a socially conscious business that speaks directly to the needs of an increasingly sophisticated consumer who not only wants low prices but wants to support products and brands that represent their values,” said Gunnar Lovelace, co-founder of Thrive Market.
While online grocery stores grow, companies like HelloFresh are betting on meal-kit subscriptions that package the exact ingredients needed to make a given recipe. Valued at a whopping $1.6 billion, the 6-year-old company recently went public in Europe and competes head to head with Blue Apron, which has a bigger market share.
“Meal planning and preparation is a stressful activity that you have to figure out every single day,” said Matt Fitzgerald, vp of marketing at HelloFresh. “Through a tech-enabled platform, we can use our supply chain and communication [to] deliver a better home-cooking experience.”
There are plenty of challenges unique to meal-kit services. Companies are notorious for using local and traditional marketing like subway and podcast ads to reach new customers, partly because it’s difficult to keep consumers coming back to the service after the novelty wears off.
According to extensive research from Emory University marketing professor Daniel McCarthy, an estimated 17 percent of HelloFresh’s customers continue to use the service after six months, compared with 28 percent for Blue Apron. Moreover, HelloFresh pays about $94 to acquire each new customer, compared with the $84.60 Blue Apron pays.
HelloFresh’s marketing is split evenly between traditional and digital advertising, Fitzgerald said. On the digital side, customer relationship management, or CRM, is a big focus in retaining customers, so the brand uses cloud-based tools to pull all of its data together to understand which of its messages were effective in getting someone to shop.
“It’s really important that we are there every step of the customer journey because there is this migration occurring from more food purchases going online—it’s still very new for a lot of customers [to] order ingredients and recipes through the internet,” he said.
Old store, new brands
Despite the wave toward ecommerce, about 90 percent of sales still take place in brick-and-mortar stores.
But creating new products takes a lot of time for traditional brands and requires massive research-and-development resources. And as consumers’ tastes change in favor of healthier options for things like soda, ice cream and snacks, new brands like LaCroix and Halo Top see a big opportunity to create new products.
Faced with sluggish soda sales, Coca-Cola and Pepsi are overhauling their products to include healthier drinks, while sales soar for National Beverage, which makes LaCroix. National Beverage reported $827 million in net sales last year, up from $646 million in 2015.
Halo Top, a healthy ice cream brand, has seen similar success by carving out a unique product. The company’s low-calorie, protein-heavy ice cream claims to now be the No. 1 selling pint of ice cream in U.S. grocery stores, beating staple brands Ben & Jerry’s and Häagen-Dazs. Halo Top’s sales grew 2,500 percent from 2015 to 2016.
Since launching five years ago, Halo Top has leaned heavily on Instagram and Facebook for its marketing, posting visual shots of its containers. The company’s founder and CEO, Justin Woolverton, estimated that 90 percent of its marketing is digital, compared with the 10 percent that goes toward traditional marketing (though it is starting to run more traditional advertising, including its odd “Eat the Ice Cream” spot that ran in movie theaters).
“We’ll always be a small company at heart, and that’s always going to be reflected in our advertising,” Woolverton said, “so we’ll take risks that the bigger players can’t.”
Since Halo Top’s sales started growing so rapidly, a number of other brands including Breyers, Kroger and Arctic Zero have tried to capitalize on a similar market.
“I’d say it’s pretty flattering, but I think it’s going to open the category a bit [and] grow ice cream overall,” Woolverton said. “Candidly, I’d have preferred to see a bit of diversity in terms of packaging, aesthetic, ingredients—it feels a little redundant. As for us, we’re just going to stick to being best in class … keep our voice authentic [and] just stay true to who we are as a brand.”