Speculation: who buys ButcherBox?

Prime Future 148: the newsletter for innovators in livestock, meat, and dairy

The founder/CEO of the D2C meat subscription company ButcherBox, Mike Salguero, was recently interviewed on The 20 Minute VC podcast. The episode was a fantastic discussion for anyone interested in new business models in food & ag.

There's an irony to Mike being on a VC podcast since Mike’s been pretty outspoken about why they did not take venture capital in the company's early days. Mike highlighted that since they bootstrapped the company (grew the business out of profits rather than outside capital), they have the luxury of thinking long-term which is important because most of the great food companies are 100+ years old. So Mike says that's how they are thinking about ButcherBox, with a 100-year time horizon.

But just for fun let’s do a little unsolicited speculation by thinking through possible exit paths for ButcherBox, in the event they are acquired before their 100th birthday.

ButcherBox generates ~$600M in revenue annually. Before we get to who might buy the business, here’s what an acquirer would be getting from a ButcherBox acquisition:

❌ Processing. BB owns no livestock and no shackle space. They own no processing capacity, either primary processing (slaughter) or further processing (cutting, portioning, etc). All meat is sourced from supplier partners.

❌ Warehousing. Again, partners.

❌ Transportation fleet. Yep, partners.

The not having these capabilities is generally a feature of ButcherBox, not a bug. The not having is part of what made the business capital efficient from the outset.

✅ Commercial capability to build a subscriber base to support $600 million meat purchases built on a marketing DNA of brand building and customer acquisition.

At first glance, it might be easy to dismiss a commercial capability like this as easily replicated. But that would be a mistake. ButcherBox built the bulk of its subscriber base at the peak of influencer marketing and social media advertising, particularly on Facebook. The problem is that those early customer acquisition channels have largely dried up, meaning customer acquisition costs through those channels have gone up drastically relative to lifetime customer value. The CAC:LTV ratio is what matters here if profitability matters more than growth rate.

Fast forward 2, 10, or 50 years from now. If we ignore the private equity route, I see 3 interesting options to the question…

Who could/should/might own ButcherBox?

Option 1: a mega packer

I think it would be either Cargill or Tyson, as a way to supercharge their limited D2C capabilities. One superpower of the large packers is not just geographic diversification, it's channel diversification. This is part of why they were able to respond so quickly to covid changes. Adding ButcherBox to their portfolio would provide an additional capability, perhaps even a blueprint that could be used to then geo-expand?

Also, that commercial capability is interesting because it is a largely missing capability for most packers who don't have strong consumer marketing and/or direct marketing capabilities because they didn't need them in the past. A ButcherBox acquisition would give them a new capability.

Option 2: an aspiring mega packer

IMO, the likeliest candidate from this category is poultry integrator Perdue Farms, as a way to own not only some higher value 'better for you' brands but also an (almost) entire distribution channel built around those types of brands. This seems like a pretty natural bolt-on to their previous acquisitions of Coleman Natural Foods and Niman Ranch. Since these brands fit the ButcherBox MO, this is a way to own your distribution.

While a Perdue Farms has better marketing capabilities than most of their competitors, and their own existing D2C platform, they do not likely have the breadth that ButcherBox does. In this case, an acquisition would be more about capacity building than capability.

Option 3: a retailer

This one is where it gets really interesting because there are a few different paths.

Maybe it's a well-run regional retailer looking to expand its footprint without opening new stores, like Wegman's or HEB.

Or maybe it's a national retailer looking to own more of the national food dollar. The obvious suggestion is Whole Foods, given that a ButcherBox sits at a similar Whole Foods/Amazon-style intersection of higher-margin food and e-commerce.

But if Amazon is a potential suitor, then Walmart has to be in the consideration set as well considering they are both chasing the same end game albeit one from a position of strength in physical retail and the other from a position of strength in e-commerce.

Because of the many options within this bucket, a retailer acquisition of ButcherBox could be in pursuit of either capacity or capability, depending on the acquirer.

Any of those paths seem viable. But the broader context at the moment matters, because general D2C has lost a lot of its sheen. Mike pointed out in the podcast that despite all the capital that has gone into broader D2C, there is little to show in the way of profitable companies. Now that the venture market is shifting amidst a higher interest rate environment, a lot of companies are struggling to raise more capital. Especially companies with a non-recurring product, like mattresses.

In the podcast, Mike said that one of the disconnects of the many D2C food delivery companies, like Blue Apron, that raised many venture capital dollars is that they tried to bring everything in-house, including the capabilities that other companies have spent 100+ years doing really well. Mike pointed out the hubris of thinking as a startup that you can do something better than the company that's been doing that thing for 100+ years, especially when it’s a secondary capability and not your core capability. The cost of that hubris is high...paid for in dilution and the risks of being on the venture train.

In contrast, where others built in-house capabilities, ButcherBox partnered. From processing to warehousing to distribution, Mike referred to this as the power of outsourcing, which enabled ButcherBox to scale the business in a capital-efficient way.

This all made me think that an interesting thought exercise is to look at venture-backed companies and consider what the bootstrapped version of that business would have to do to be successful. (By no means is bootstrapping always the better option, but equally true is that sometimes cash constraints lead to better ideas that likely wouldn't have been identified otherwise.)

Alternatively, what could ButcherBox be today if they had raised some venture capital? Could they be doing $1B, $2B, $3B revenue and doing it profitably? Or would they be just another high-growth company with no line of sight to profitability?

One other idea stood out, that much of the rationale for D2C companies raising large amounts of venture capital was that hypergrowth was necessary in order to capture winner take all markets. But as Mike pointed out…

…most markets are not actually winner take all.

This was also a takeaway from the Agtech 1.0 / farm management software discussion. If the parallel from Agtech 1.0 to meat D2C 1.0 holds, then perhaps ButcherBox is the winner of meat D2C 1.0, but likely meat D2C 2.0 is yet to come…which would influence the above equation about who acquires what capacity or capability.

Who do you think would be a smart acquirer of ButcherBox?

Btw, I asked ChatGPT who likely acquirers were for ButcherBox. It suggested Blue Apron, Hormel Foods, Hello Fresh, Amazon, and Kroger. Not bad. Tho I think ButcherBox would be far more likely to acquire Blue Apron or Hello Fresh than the other way around, but still unlikely.

So I backed up and asked ChatGPT, what characteristics typically lead to successful acquistions in meat & dairy? It came back with this generic but grounding response:

Successful acquisitions in the meat and dairy industry often share several key characteristics. Here are some of the factors that can lead to a successful acquisition:

1. Complementary products or services: The acquiring company should look for targets that offer complementary products or services that can enhance its existing offerings. This can lead to synergies and cost savings in areas such as production, distribution, and marketing.

2. Access to new markets: Acquiring a company that has a strong presence in a new market can help the acquiring company expand its reach and increase its customer base. This can be especially important for companies looking to grow their international presence.

3. Economies of scale: Acquiring a company that has a similar or complementary production process can result in economies of scale, which can lead to cost savings and improved profitability. This is especially important in the meat and dairy industry, where production and processing can be expensive.

4. Brand recognition: Acquiring a company with a strong brand can help the acquiring company increase its brand recognition and reputation in the market. This can be especially important for companies looking to compete with established players in the industry.

5. Strong management team: The target company should have a strong management team that can help integrate the acquisition and ensure a smooth transition. This can be especially important in the meat and dairy industry, where production processes can be complex and require specialized knowledge.

These are just a few of the factors that can lead to a successful acquisition in the meat and dairy industry. Ultimately, the success of an acquisition will depend on a variety of factors, including the strategic fit between the two companies, the strength of their respective management teams, and the ability to execute on the integration plan.

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The future of D2C was actually the topic of the very first edition of Prime Future back in March 2020:

A D2C Revolution Is On Its Way

Hypothesis: Direct to Consumer (D2C) business models will be a high growth sales channel for all meat & poultry companies within 5 years.

I wrote that sentence 3 weeks ago.

3 weeks before the whiplash shift in demand from ~50% of animal protein sold through foodservice to ~85% moving through retail sales channel amidst the global COVID-19 pandemic.

3 weeks before we saw meat cases empty as quickly as grocery store workers could fill them.

COVID-19 doesn’t change my hypothesis, it accelerates its race to reality.

In this first of a three part series, we’ll look at the proof points supporting the hypothesis above.

At a recent meat industry conference for packers & retailers, I asked around about what folks think about ButcherBox and similar D2C models. Responses ranged from “never heard of them” to “remind me what they do?” Except for those paying attention to ButcherBox who responded with raging enthusiasm.

That same week, I asked my Instagram followers if they’ve used ButcherBox or the like and feedback on the product & experience. Of ~100 people who saw the question, ~40 had either used ButcherBox themselves or had a family member who had.

Here’s what this highly unscientific research tells me:

1. Consumers are dialed into companies that allow them to buy what they want, when they want, how they want.

2. Packers are dialed into selling meat the way we’ve always sold meat, through retail, foodservice, or export channels.

Now with the pandemic among us and grocery stores often sparse, even consumers who’ve never bought food through delivery apps are doing so, or through D2C services. (If ButcherBox were publicly traded I’d be buying stock right now based on what I assume can only be massive explosion in sales over the last 10 days.)

What is ButcherBox? It’s a subscription service for meat & poultry. You sign up online, you select the composition of your box, you receive a box at your doorstep.

Look up ButcherBox on Crunchbase, a company that tracks all funding rounds for startups, and you’ll see that ButcherBox raised $210,000. Five years ago. (In the pre-corona world, this is like saying they raised 2 nickels.)

What does that tell us?

1. ButcherBox is growing.

2. ButcherBox is growing profitably. In the world of startups and D2C business models, profitable growth is the holy grail.

Contrast the ButcherBox story with Blue Apron, one of several meal kit delivery services whose growth was largely fueled by venture capital then effectively dismissed by public market investors looking for profitable growth, not growth at all costs. Caveat: Blue Apron is having a COVID-19 renaissance as consumers are re-activating an appetite for meal kit delivery. Is this a permanent trend or just a moment in time? We’ll find out.

Bottom line: ButcherBox has proven the D2C business model works…at scale.

They’ve proven there is consumer demand for D2C meat & poultry and that at least some consumers are willing to pay for this service. More interestingly, multiple variations of this business model have popped up recently: we’re in the early Wild West days of D2C in animal protein.

And the experience many consumers are having amidst COVID19 of seeing meat cases empty at the grocery store will leave a mark; a mark that is likely to drive many consumers further towards either wanting to fill up a freezer with meat OR have a reliable subscription service that will deliver meat even when the grocery store’s meat case has been picked clean.

So back to the beginning – why did a conference full of packers & retailers not know anything / not want to talk about the rise of D2C business models?

That’s easy, it’s the Innovator’s Dilemma.

When big companies are disrupted by upstarts, many assume it was because the big co didn’t see what the upstart saw, e.g. Kodak, Blockbuster. But author Dr. Clayton Christenson argues that big companies see the early trends just fine, they just are not positioned, structured, or incentivized to act on early trends. Leaders at established companies have to focus on market share and profitability of today’s largest customers. For packers, that means ignoring ButcherBox and its peers who represent a fraction of a percent of total meat dollars at present, in order to focus on growing market share and profitability with large retail and foodservice customers. This is rational behavior.

The trick will be, how quickly do packers jump on the growing trend of D2C? Wait too long and there’s the risk of “disruption”. Jump too early and the market may not be fully developed, leaving an unprofitable sales channel in the short run.

Further complicating the matter is that D2C companies stand to not only disrupt packers, food retailers are also at risk.

And with a trend that’s been building for years now compounded by consumers being quarantined in their homes for weeks, potentially months?

Demand for D2C will accelerate. The only question is how the meat industry will capitalize.

Check out the rest of this series.

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