The digital shelf: CPG food startups in the era of online grocery

Editor’s note: Josh Hechtman is an analyst intern on AgFunder’s investment team. Atomo Coffee, Black Sheep Foods, Lavva, and SIMULATE appear in this article; all are portfolio companies of AgFunder, the parent company of AFN.

The digital shelf is here to stay. From music to finance to healthcare, food is in the midst of the next wave of industry digitalization. Accelerated by Covid-19, the food sector has shifted from being an industry built around in-person experiences to one that is increasingly driven by online interactions.

Take online grocery. Once an emerging trend, it is now routine for shoppers. According to Boston Consulting Group, “e-commerce’s share of individual grocery categories is expected to be as much as three times higher than pre-Covid-19 levels and two times higher than forecasts before the pandemic.” The same research also states that 35% of Americans who tried online shopping for the first time in March plan to continue shopping from home post-pandemic.

The ‘Internet of Food’ presents unparalleled convenience: fully prepared meals can be delivered weekly through subscriptions, restaurant delivery and pick-up have never been easier, and groceries are brought to doorsteps in two hours or less. But perhaps what is less known is how consumer packaged goods (CPG) startups in the food space are shifting their business models to survive and succeed in this new era.

Online grocery stores, while simple for shoppers themselves, hold underlying complexities for the brands and products they sell. Scrolling through pages and pages of similar items is tedious for buyers and defeats the main purpose of online shopping: convenience.

Market research from GlobalData indicates that, while 61% of offline grocery shoppers actively look at new brands, only 40% of their online counterparts do the same. Just 23% of online shoppers consider buying from a brand they don’t normally purchase.

Online shoppers tend to stick to the products they know, using ‘recently bought’ or ‘buy again’ features to their advantage to maximize efficiency and minimize time. This creates additional challenges for CPG startups as they enter a market where potential customers are lost simply due to the nature of the online shopping experience.

To offset this low level of digital discovery, CPG startups are coming up with new ways to acquire customers, generate sales, and make their brands known to the public.

Building a brand in online grocery

Storytelling

It’s human nature to tell stories – fictional or factual. Stories allow us to share, to communicate, to inform, to connect.

Food, in and of itself, reveals a story. What we eat echoes who we are, where we come from, and what we believe; it is a driver of identity. Whether home-cooked meals passed on from generation to generation or packaged products lining the shelves of grocery stores, some of the most powerful stories are spoken through food. And CPG companies know this: “[Food] is the most emotional product on Earth,” plant-based burger maker Impossible Foods contends, “so brand and storytelling are absolutely essential to being a successful food company.”

Food CPG startups are increasingly leaning on personal messaging to relate to consumers on a more human level. It seems to be working: consumers are 22 times more likely to remember a story than a fact. But in online grocery, a bland stock photo and a brief description doesn’t fulfill that storytelling need; according to GlobalData, 68% of online shoppers believe product listings have insufficient detail.

Ryan Bethencourt, founder of biotech accelerator IndieBio and plant-based pet food company Wild Earth, says that startups can’t rely on online grocery stores to highlight or tell their stories, so they must do more if they want to attract a sustainable amount of customers in today’s marketplace.

Moreover, startups should want control over their narrative – how people view, react to, and purchase their product. They want to tell their own story and articulate it in a manner that reaches customers effectively. For Bethencourt’s startup, as well as many others, ‘direct-to-consumer’ (D2C) is that storytelling platform.

D2C has seen tremendous growth since Covid-19 started. In agrifoodtech, Impossible Foods and Beyond Meat recently launched D2C channels to sell their plant-based meat alternatives.

According to Lexi Cotcamp, general manager of D2C at Impossible Foods, “the decision to launch e-commerce was influenced by the intersection of a consumer need at the onset of Covid-19, along with a brand and mission-driven goal to make Impossible Burger ubiquitous across the US.”

With its D2C site, Impossible Foods “wanted to create an experience that made it effortlessly simply to get [our] products delivered directly to your door,” she says.

Beyond reaching a larger customer base, Impossible Foods leverages its D2C channel to convey its narrative. With recipes and a cookbook, engaging graphics on the science behind its products, and an impact calculator that tells you your environmental footprint when eating its burgers, consumers are able to obtain a thorough understanding of Impossible’s reason for existence — perhaps something that was unachievable in physical retail.

As shoppers remain at home, startups are beginning to shift focus from physical retail sales to developing an online strategy that helps keep customers connected to the brand – even when they’re under lockdown or shelter-in-place restrictions.

Atomo Coffee uses pop art figures to explain how conventional coffee is unsustainable, and what steps the startup is taking to address this problem. According to founders Andy Kleitsch and Jarret Stopforth, Atomo utilizes these characters as storytellers “to help build a visual connection with customers.”

Ben Pasternak, founder and CEO of plant-based meat startup SIMULATE, echoes that sentiment. “Being D2C enables us to be really close to our users.”

For SIMULATE, establishing its own sales channel has proven more effective than conventional retail — where the only mechanism to educate shoppers is through packaging. Online, the startup has the freedom to portray its narrative in the most effective manner for its target audience, utilizing humor, gamification, and alluring photography to amplify the company’s message.

“In D2C, companies have this infinitely large canvas, where they can put all the art they want to educate consumers on why their product should exist and why consumers need it,” Pasternak says.

That’s not always enough, though. Black Sheep Foods‘ founder and CEO Sunny Kumar asks: “Once you’ve told your story, can you inspire me with it?”

Lavva‘s story certainly does just that. Through educational sections and a space for blogs on its website, shoppers learn that the plant-based yogurt company’s base ingredient is the pili nut – a superfood that founder and CEO Elizabeth Fisher discovered while following a strict keto diet during her recovery from cancer.

Knowing that concern for personal health is growing, Fisher wanted to share the potential benefits of this lesser-known nut with as many people as possible.

Aligning with consumer values

The concept of CPG companies aligning values with consumers began in the 1950s and 1960s, with companies like Procter & Gamble, Unilever, and General Foods developing strategies to distinguish their products from those of competitors.

With mascots, phrases, and other unique selling points, brands were selected off shelves for reasons beyond price point. Through such tactics, these companies were able to form a connection with their audience, resonating with the lifestyles of those who consumed their products.

Now those strategies have evolved to take on a different meaning, emphasizing the company-consumer alignment of more personal values – social, ecological, and ethical.

While the ‘Internet of Food’ may be a trickier sales environment to nail down, it does allow companies to build a relationship with their end consumer, a key value that shoppers — especially younger ones — look for today.

A report by VC firm S2G Ventures showed that roughly 50% of consumers have switched brands because a company did not align with their values. It appears that a change in the marketplace is emerging, where younger consumers are not identifying with tried and true corporate brands and instead are aligning themselves — and their pockets — with startups. This trend does not just resonate with Gen-Z; 83% of Millennials, 50% of Gen-X, and 21% of Baby Boomers stress the importance of aligned values.

On the flipside, when a company dissociates itself from the values of its consumers — intentionally or otherwise — it certainly isn’t ignored. This recently happened with plant-based milk maker Oatly, which suffered a backlash and boycott threats from activists and consumers alike after receiving funding from private equity firm Blackstone. Those who spoke out on the issue believed that doing a deal with Blackstone wasn’t aligned with Oatly’s core values, primarily due to the investor’s ties with several Brazilian companies that are reportedly linked to deforestation in the Amazon.

Thanks to social media and the speed at which news is disseminated today, consistency in messaging and action is becoming more important than ever before for CPG companies. However, these realities also provide new and exciting ways for brands to identify with consumers, be it through product, mission, or engagement.

Hungry for content

As consumers become progressively hungrier for content, CPG startups are ramping up their social media efforts to drive traffic to their brand.

Covid-19 has made this even more crucial. Since in-person taste tests at grocery stores aren’t currently possible, Black Sheep Foods is improvising. It relies on social media ‘micro-influencers’ to try their product and promote it. “Consumers are more keen to order from you if influencers are trying your product,” Kumar says.

SIMULATE is also utilizing influencers to push its first product, NUGGS. With Bella Hadid as one of the many celebrity friends of the brand and nearly 70,000 Instagram followers, NUGGS has built an extensive digital marketing platform that could offset the lack of in-person discovery offered by physical retail.

It’s applying the same fundamentals as software companies by updating and improving its product on a regular basis. It releases new ‘versions’ of NUGGS in limited numbers.

“Constantly updating and improving our product is a great way to build products that people love, creating an incredible community of loyal consumers,” Pasternak says.

“Being transparent on product improvements allows our users to feel more involved in product development, and they are able to see the tangible impact of their feedback.”

According to Pasternak, NUGGS has gone from a 97% dissatisfaction rating for its first version to a 92% satisfaction rating for the current one.

Meanwhile, Atomo is developing name recognition through active online communication.

“What’s going to be important is having a meaningful conversation – having some form of controversy to keep you relevant,” CEO Kleitsch says.

“LinkedIn and Twitter have been great platforms for us to connect with the industry and have vital conversations as well as debates with concerned customers surrounding our mission and methods.”

For Atomo, these discussions are a tool to drive mind share in the near term and market share in the long term, involving people in a purposeful exchange about the sustainability of the $425 billion coffee industry.

As with NUGGS, Atomo will leverage scarcity around their ‘molecular’ cold brew coffee in the early stages of its release.

“You’ll have to be a part of our club or buying group,” Kleitsch says. While this limited supply will be due to production capabilities, it builds upon the successful business model of many high-end clothing brands: boosting popularity through exclusivity.

Approaching retail

While D2C has seen a surge in popularity since the pandemic began, establishing a strong and viable online channel presents both strategic and logistical difficulties for early-stage startups.

“You have to become digital marketing experts,” says Bethencourt, who listed out three key metrics that he believes will help startups excel in this evolving market:

1. Look for keywords: What are shoppers looking for and how can you meet their needs and interests? How are you going to describe your product so that it stands out from its competition?
2. Find opportunities to advertise: “It’s time to rethink product discovery,” Bethencourt says. “In the past, consumers would notice new products on the grocery store shelf, but when the aisle is infinite you have to find your consumers where they are in the real world. We have to rethink the entire product discovery process to differentiate our products from the noise.”
3. Discover mechanisms to drive reviews: ‘Social proof’ describes the psychological phenomenon wherein people base their decisions on the collective actions of others. As the number of positive reviews of your product increases, the likelihood of ‘social proof’ occurring does as well, driving more attraction to your product.

Rather than launching a D2C platform right away, Lavva opted for a different route: going straight into the largest grocers in the country. With products in nearly every Whole Foods store, Lavva has made its mark in the plant-based yogurt market despite not having a D2C presence.

Fisher says that lots of companies of Lavva’s size and smaller have tried to do D2C but most fail because they do not have the infrastructure to deal with demand from consumers and logistics companies. Another difficulty with a D2C-first approach is building a robust enough platform that drives people to a brand’s own website — to learn about its products and purchase them — rather than one-stop-shops like Amazon Prime, Walmart, or Instacart.

A further obstacle, according to Impossible Foods, is that “consumers are increasingly blurring the line between physical and digital spaces,” utilizing both retail spheres and complicating the sales dynamic between them.

As a result, Impossible and other CPG startups are mixing and matching strategies to maximize brand awareness and sales in the delicate balance between e-commerce and physical retail.

What is acknowledged throughout the industry, though, is the eventual need to be omnichannel – maintaining a strong presence in physical retail while also disseminating consumer awareness and storytelling through a D2C platform.

What’s next for CPG companies?

Covid-19 has revealed gaps in our supply chain, new trends, and uncertainty about what the consumer of the future will look like.

It also appears to have advanced online shopping to the point where e-commerce acceptance and growth will continue to accelerate in post-pandemic times. This is forcing CPG businesses to build a resilient physical and online infrastructure that optimizes discoverability and growth, all while developing a compelling brand story, possessing values that align with those of consumers, and producing content that instigates action.

Impossible Foods is reimagining the global food system. Black Sheep Foods is rekindling the importance of ‘word of mouth.’ SIMULATE is taking tips from the world of software to engage with consumers. Atomo is furthering conversation around deploying technology as a means for sustainability.

Each with their own mission, but each leveraging the power of food to bring company closer with consumer. That’s the future of CPG on the digital shelf.

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