Big players in the FMCG sector want to get deeper into the thriving direct-to-consumer channel – and acquisition is becoming their immersion method of choice
Businesses that use the direct-to-consumer channel to sell their products have performed relatively well during the pandemic – a fact that has not gone unnoticed by the giants of the fast-moving consumer goods (FMCG) industry. Some of them – Heinz and PepsiCo, for instance – have created their own sites to cut out the middleman and let online shoppers to buy some of their favourite brands directly.
Others have taken the acquisitive route. Mondelez has agreed to buy a controlling stake in protein-bar brand Grenade, whose D2C turnover is up 34% on the previous year’s total. Nestlé, meanwhile, has sought to profit from the rise of home-cooking recipe kits by gobbling up Freshly in the US and both SimplyCook and Mindful Chef in the UK.
Not all such M&A attempts have been successful. In January, Procter & Gamble was forced to abandon its planned takeover of Billie, a new brand of beauty products in the US. The Federal Trade Commission blocked the move on the grounds that it would “eliminate innovative nascent competitors for wet-shave razors”.
It’s not hard to see why many of the industry’s big names are investing heavily in the D2C channel, according to Elliott Jacobs, director of commerce consulting at LiveArea. “The reason they are adopting this strategy lies in the data,” he says.
Once their products are sitting on the shelves in supermarkets, manufacturers have to rely on their retail partners to feed sales information back to them. By selling to consumers directly, they can “own the entire customer journey and can develop a 360-degree understanding” of how their brands are performing, Jacobs explains.
What’s more, by acquiring D2C start-ups, they are in many cases bringing fresh marketing ideas, technology and expertise into the fold.
Working towards an exit
Even after the high street returns to normal levels of activity, many consumers will continue to enjoy the convenience of buying directly online. The acquisition trend is therefore likely to continue as the FMCG behemoths try to keep up with the forward-thinking new enterprises based on the D2C model.
For the start-ups themselves, investment from an acquirer can be a lucrative chance to push their businesses up to the next level.
One such enterprise is London-based company Vieve Protein Water. The firm experienced supply management problems during 2020, reports its founder and CEO, Rafael Rozenson. The closure of production and distribution facilities, combined with rising demand for its products, meant that it struggled to maintain sufficient stock levels at times. Despite all that, it still achieved a year-on-year revenue growth of 350% in its D2C channel.
“Our biggest challenge now is getting the capital to fuel our growth and drive our D2C segment,” he says, adding that such investment would “help us to develop new products and expand into new categories. Our ambition is to become the number-one protein water brand in the UK and Europe.”
Vieve, which is expecting its sales revenue to increase by 50% year on year in 2021, is planning to expand into the US in the medium term. The firm’s potential market there is 20 times larger than it is in the UK, according to Rozenson. He’s under no illusion that this would be a huge task, but it could be key to attracting interest from potential buyers.
“Ideally, we’d like to work towards an exit, be it through a private equity buyout or an acquisition by a larger player,” he says.
When being acquired doesn’t align
Ceding control of the business to a bigger player isn’t necessarily on the menu for all new D2C players, of course. Helsinki-based Alvar Pet is another ambitious start-up, but its plan for growth differs from that favoured by Vieve.
The company, which has developed a range of zero-emissions dog food made from sustainable ingredients, only started trading in April 2020, but it still turned over about €1m (£860,000) that year. Revenue is forecast to increase by more than 300% in 2021.
“The online channel’s share of pet food sales has nearly tripled during the pandemic,” says Alvar Pet’s co-founder and chief marketing officer, Hanna Lemmetti. “As people have spent more time at home with their pets, they’ve been putting more thought into what their pets consume. Both of these factors have been in our favour.”
The company has already capitalised on its rapid growth by extending its operations from Finland into Germany. Its goal is to become the leading sustainable dog nutrition company in Europe. In doing so, it wants to “change the direction of the pet food industry towards a more eco-friendly future”, Lemmetti says.
Many pet food brands have started selling products with higher-quality ingredients that would be safe enough for humans to eat. But such is the demand for human-grade food that, in countries with high rates of pet ownership, the sector is responsible for up to a quarter of all greenhouse gas emissions associated with meat production. With this factor in mind, Alvar Pet believes that selling out to a big FMCG player wouldn’t align with its values.
“We don’t believe that a large incumbent would be the right partner for us,” Lemmetti says. “We want to disrupt this industry.”