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Capturing the D2C Market: Farmers vs Packers
Prime Future 003: the weekly newsletter highlighting trends in animal protein
Hypothesis 1: Direct to Consumer (D2C) business models will be a high growth sales channel for all meat & poultry companies within 5 years.
Hypothesis 2: D2C business models will accelerate as a high growth sales channel for farmers.
If we look at the beef industry, there’s always been a tension between packers and producers, largely tied to what percent of the consumer’s beef dollar that each segment of the value chain keeps.
But we’ll soon enter a new competition and in this round, producers and packers won’t be competing for margin.
They’ll be competing for customers. Who will capture the D2C market?
The large-scale beef industry was built for Business to Business (B2B) relationships. The mass beef supply chain is very, very good at what it was built to do: efficiently produce, process & sell beef at low cost.
Cow-calf producers specialize in getting calves on the ground and weaned to sell to stockers.
Stockers specialize in adding weight to calves and preparing them for the feedyard.
Feedyards specialize in putting weight on cattle before selling live cattle to packers.
Packers specialize in plant efficiency to lower per pound processing costs. Then packers sell large amounts of meat to large customers at varying specs depending on the customer.
The system works well; every participant focuses on what they do best. Specialization. Economies of scale. An economist’s dream come true.
And margins shift through the supply chain based on commodity cycles. Which raises a natural tension. While processors are operating at record high margins today, producers are…not.
And with declining margins, producers are actively looking for ways to capture more value.
With the unfolding COVID-19 chaos in boxed beef & live cattle markets as well as the consumer frenzy at retail leaving empty shelves, consumers are swarming looking for alternative sources to stock up on meat. Local farmers and D2C to the rescue.
The last several years I’ve seen friends using social media to sell a few head at a time for freezer beef to friends & family, but that’s now expanding. <Pre-Covid this trend was expanding, now its exploding> Not only are more producers looking to cut out the rest of the supply chain and go direct, they’re scaling their efforts and doing it with increased sophistication. The rise of easy to use online tools for things like building a website, digital marketing, and payment processing is enabling producers to feed cattle to market weight, process locally, and sell directly to consumers.
Technology is enabling a segment of the supply chain to reorganize itself to connect cattle producers directly with consumers.
And, the Direct to Consumer (D2C) supply chain is built around the consumer. The D2C supply chain is optimized for the consumer experience.
Contrast that with the conventional beef supply chain that is optimized for B2B customers, for efficiency at scale.
There’s a Harvard Business Review article that says all businesses must pick a max of 2 dimensions from the following 3, on which to compete:
Packers have optimized for efficiency as they compete against one another on price. That’s the nature of a commodity business. Its also why, in the search to move away from commodity price competition, in the last few years there has been a wave of packers building/acquiring “premium” brands whether grass fed, Wagyu, etc.
But in recent years across the broader economy, there’s growing demand for companies that compete on a 4th dimension: customer experience.
Customer experience can mean a lot of things, here are a few examples:
Convenience – flexibility in ordering, delivery, right-sized portions
Wow factor – packaging, meal ideas, etc.
Community – is there a reason your customer would want to connect with others like them/you, and are you creating a way for them to do so?
How are you creating an experience your customer wants to share on Instagram?
What advantages do farmers/producers have going for them?
They have a story to tell. A local connection. A quality message. An experience to offer. Families with a picture of two adorable little cowgirls above (my nieces☺️), that show the love and heritage in raising beef. And they have the added benefit of simply not being a large institution, in an era of lack of trust in large institutions.
But there are challenges. Food safety liabilities, distribution, cost of customer acquisition. As more cattle producers look to sell directly to consumers and technology enables them to expand their reach, the biggest bottleneck becomes processing capacity. Let’s assume someone solves for this bottleneck though. Not only will the producer capture more margin than if they’d sold into the traditional supply chain, they’ll likely capture a higher percent of a high price.
And as more product goes directly from producer to consumer, more product bypasses both packer and retailer. The supply chain bifurcates at this point; how much beef that goes through the major packers today will instead go through local/regional processors in 5 years? 10 years?
I am, of course, not suggesting a majority of meat will sell through D2C channels. Retail, foodservice, and export will continue to dominate.
But D2C will be the fastest growing sales channel this decade. A sales channel that will demand packers engage in it. Which then creates a bifurcation point in the supply chain of how much meat sells through D2C channels in 5 years, 10 years…and more interestingly, is that additive or at the expense of the traditional retail channels?
The packers will always win the volume game, they’ll always win the competition of lowest cost to process in order to sell the “mountain of meat”. Packers can process cattle at a much lower cost. They have economies of scale along every dimension. They have cattle supply. Those are not insignificant advantages. Are packers prepared to compete on consumer experience? Of course not.
But let’s face it, <insert packer name> doesn’t have the capability today to market directly to consumers like a ButcherBox would.
Packers and farmers will compete for the D2C market on different dimensions, likely attracting different customers with different buying motivations.
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What does a more flexible meat value chain look like?
That question has been front & center this week as the impact of recent plant closures has trickled to retailers now limiting meat purchases or offering cuts that consumers are not used to seeing in the meat case. Without the flexibility to substitute products, some foodservice chains simply ran out of meat, most notably Wendy’s.
The talk about breaking up the packers to increase flexibility is…nonsense. We need highly efficient, scaled production. It will not go away and it is not at all in the cattle producer or the consumer’s best interest for it to go away! (Maybe the cattle producers and consumer groups can turn down the rhetoric, eh?)
Increasing flexibility in the supply chain has to be about AND solutions, not OR.
If processing were easy, why has almost every group of producers that bought a plant failed? Why has private equity moved into further processing at a rapid rate but stayed a country mile away from primary processing? Because it is a low margin business which means scale is the way to win.
The not-at-all-new idea getting a lot of attention is an increase in regional processing capacity.
The tradeoff between the current highly efficient, linear system and a more regionalized supply chain is higher cost. For context, in normal times it costs the major beef packers ~$225 per head to go from live animal to boxed beef. Meanwhile it costs the local custom processor $500-$650 to do the same work. Regional processing would be somewhere in between. In order to make the unit economics work at 1.5-2x the cost of the big packers, these processors would need a completely different business model for everything from the target supplier, target customer, pricing model, packaging, to customer acquisition. This model would require significant business model innovation to make it profitable, if it can even be done at scale.
I believe the best way to build flexibility into the supply chain is to build in a bit more optionality at every step of the process. Optionality in the animal protein value chain is the trend we’re exploring today.
The primary commercial path to increased optionality for producers is to participate in coordinated supply chains that increase the value of the end product while capturing the benefits of integrated systems, but without the same capital requirements. The latest example is Walmart’s Prime Pursuits supply chain that will use 44 Farms genetics, Creekstone Farms processing, FPL further processing, and sell product in Walmart stores. This model aligns the value chain in a way that should increase value to the consumer while aligning incentives from seedstock producer to retailer. Expect to see more announcements of coordinated supply chains in the next 12-24 months as companies accelerate any plans they had to explore the concept, as a result of COVID.
Technology: There’s a host of startups building great products for traceability which will be critical for initiatives like the Walmart Black Angus supply chain.
A second path to increase optionality is for farmers to capitalize on consumer sentiment right now to set up systems & processes to profitably sell direct to consumer, for most producers this will mean selling half or whole carcasses which is a limited pool of buyers with the money and space to buy. To grow this market, why isn’t anyone setting up cold storage at a retail level, like a cross between a storage unit, a PO Box, and a freezer? For urban shoppers who would want to buy a half or whole animal from a farmer but do not have the freezer capacity to store it, this could be an excellent solution.
How food companies are handling COVID
Domestic meat & poultry sales used to be split ~50/50 through retail and foodservice sales channels….in a matter of days it flipped to 85/15. The noteworthy trend that has emerged is that the retailers and foodservice companies that are winning the pandemic are those that have found ways to increase optionality in what they sell. The lines between retailer and foodservice were already blurring before COVID with retailers driving hard down the path of meal kits and prepared food, and its only continuing.
Restaurant chains, like Panera, are selling ingredients as groceries. As a consumer, you can pick up dinner and basic groceries in one stop - seems like something people could get used to.
Restaurants are selling meal kits, a space that previously belonged solely to (unprofitable )venture backed companies or retailers. My favorite examples are Fogo de Chao’s ready to grill meals or Chick Fil A’s ready to cook meals sold through its drive through.
Perhaps most interesting are Sysco’s pop up grocery stores:
“Transform your restaurant dining area into a pop up shop where your customers can shop for essential pantry items, while getting their meal to-go. Sysco Pop Up Shop has the inventory for you to offer to your customers, to meet the needs and demands that they are not finding at the local grocery store.”
1) Proof that animal ag’s innovation ecosystem is lacking? This week I spoke with multiple crop focused accelerators that are getting applicants from animal ag startups. That’s a gap in the market that goes right along with the lack of animal ag focused investors. Don’t tell me the livestock market isn’t viable, VC’s.
2) SwineTech just announced a $5M series A round to continue developing and commercializing their suite of products to improve piglet mortality. Interestingly, the announcement includes an investment by Johnsonville Ventures which means we have a new strategic investor on the scene in animal agtech. Good news!
3) For founders, this article on switching costs may be helpful:
If your primary product has a low switching cost, focus on retention by increasing the value (and therefore the switching cost) of your product or by offering other higher-value products.
If your primary product has a high switching cost, focus on adoption by reducing the friction it takes for customers to try your product or by offering other products with lower barriers to entry.
Janette Barnard works to enable technologies throughout the animal protein value chain. She leveraged her commercial experience with Elanco Animal Health, Cargill, and McDonald’s Global Supply Chain team to launch and grow two animal protein focused startups. Janette is now a principle in Rock Road Consulting, helping companies to launch, source, and fund innovation.