The current economic landscape in the D2C sector

With inflation on the rise, we have seen a significant challenge predominantly within the D2C food and drink sector. The Consumer Prices Index (CPI) rose by 10.1% in the 12 months to July 2022, with rising food prices making the largest upward contribution to the change in CPI annual inflation rates, between June and July 2022*.

You can find some of the key learnings and themes discussed on the day below. If you want to be involved in future roundtables with your peers, subscribe now.

How are consumers responding to price increases?

Businesses are seeing some customer churn in response price increases, nothing alarming at this stage as demand is still present. As businesses are impacted by rising costs in energy and raw materials, Russia’s war in Ukraine and supply chain issues, most customers will be expecting prices to rise.

There are many strategies that businesses are considering when implementing price increases whilst also protecting their profit margins and retain their customers.

Some businesses we spoke to are considering adding delivery charges in addition to price increases. We have seen online fashion retailers such as Zara, Boohoo and Next introduce delivery fees on returns in a push to reduce environmental harm.

Tom Myatt, Sharpham Park: “Our recent launch of spelt drinks has seen the effect of these price hikes, mainly as a direct result of Russia’s war in Ukraine. Suppliers delivering specific ingredients, such as sunflowers usually sourced from Ukraine, are trying to find alternative options and are looking to make the switch to UK growers.”

How has engagement with consumers changed?

Krisi Smith, Co-Founder, Bird & Blend Tea: “We tested new channels such as Tik Tok, the results were quite favourable in terms of building brand awareness and mailing lists. We have noted an influx of the younger demographic.”

Tik Tok’s primarily younger demographic has significant potential for brands looking to target new and younger audiences.

Laura McNaughton, Partner, BDO: “It’s about people being authentic. User generated content is better in terms of conversion rates for brands. It is a platform that has a number of dimensions and has to be real and true. We have seen content views drive significant short-term conversions.”

Companies have focused their messaging on reassuring customers that their money is well spent and encouraging them to stay loyal. Brands have seen positive engagement around improving the quality of eco products without considerable price increases.

Tom Myatt, Sharpham Park: “We have worked hard on telling our sustainability story. Giving the customer more information around how their purchase effects our farmers and suppliers, this has seen conversions rise on our website.”

Conversion rates seem to be heavily dependent on sustainability and it is not looking like it is going to change.

The expectation now is that sustainability should be core and not an option. Consumers often weigh up price vs sustainability but are noticeably adopting a more sustainable approach to buying.

Laura McNaughton, Partner, BDO: “The food industry has a stronger drive around sustainability. Its about the health and wellness of the products and has a more emotional connection in comparison to other sub-sectors, such as apparel.

“There is a generational shift to sustainability which is going to have an impact on brands. Consumers are conscious about what is happening to the world and this year has been a reminder of that. Value, quality and sustainability will be key going forwards.”

What can we expect heading into the final quarter of 2022?

Heading into the Christmas and gifting period, luxury food and drinks companies will be planning for a peak in sales. There is a nervousness around what this year’s peak will bring with current consumer sentiment.

David Gammie, Beer 52: “The alcoholic drinks space should be relatively well protected, especially leading up to Christmas. You have to keep doing the basics well, discipline customer acquisition, work hard on retention and try and control costs where you can.”

Krisi Smith, Co-Founder, Bird & Blend Tea: “We attract gift givers at Christmas and aim to convert them into lifelong fans who come back and shop with us. We have seen our returning fan base and our most loyal customers spend more with us over this period. We have not gained the volume of new customers we would have wanted, and our concern is whether this will impact us negatively over the next few quarters[CT2].”

The final quarter is one that is often seen in the sector as the golden quarter. With some of the pressures in the market, brands that succeed will be those that are not only engaging with the consumer but also offering good value as consumer spending tightens.

D2C outside of the UK

Emilie Vanpoperinghe, Oddbox: “There is a different culture in Europe towards ecommerce. In France for example, generally there are less food and drink deliveries. People want to shop in store or will order online but use the "drive" to collect their shopping, instead of getting it delivered home. In addition, for food, there is more of a concept of seasonality as well as loose produce.”

Consumers and the D2C market here in the UK are very different to the consumers in Europe in the way that they behave, and similarly in the US. Food seems to be the sub-sector where that is most prevalent. Amazon has taken a real presence in the D2C market but is not as well set up for food brands as it is for other types of less accessible products.

Duncan O’Brien, Dalston’s: "At Dalston's we've focussed on Amazon Vendor as our preferred route for building online sales as we have found this the most effective, but we are also seeing good growth recently with Ocado in response to the sort of direct marketing that is not possible (yet) on Amazon."

In conclusion, D2C food business continue to face challenges but agility and adapting to the changes and opportunities in the market is key to continuing growth.  Openness to other new channels, such as Amazon, still provide growth opportunities when other routes to market are more challenging.

Shared from BDO