Issue #10: CPGs in Restaurants

Welcome to all the new subscribers - thank you for joining us on this journey to explore the future of retail. Each week you will get an email highlighting trends and tools in the space. As always, I would love to chat with anyone building, operating, or investing in the space. Plus, stay tuned for a special issue summarizing the first ten weeks hitting your inbox this week!

Trend of the Week:

Lately, Chipotle has been in the headlines for all the wrong reasons. However, this week, Chipotle-related headlines were exciting. In partnership with two up-and-coming CPG brands, Chipotle announced new beverages were available at all its locations. In light of better-for-you trends, Chipotle added two flavors of prebiotic soda Poppi. Second, with customers hoping to reduce plastic bottle consumption, Chipotle added an aluminum water bottle from Open Water. For the brands, this partnership is a huge opportunity to gain a national presence and align themselves with brand like Chipotle, which adds legitimacy, despite recent controversies. For Chipotle, it gets to partner with some up-and-coming exciting brands, while also meeting consumer demand for current trends (better-for-you products and less plastic packaging).

This scenario is not just a win-win partnership. It also represents a major business opportunity for brands to capitalize on. Brands should be thinking about a restaurant strategy in addition to their other channels. For instance, at Chipotle, there are three other sodas (Mexican Sprite, Mexican Coke, and Coke Zero) and zero other still waters available on the menu. Compare this product mix with your average convenience store or grocery store, where there are tens, if not hundreds, of competitors all vying for the same customer. This lack of competition in restaurants is a huge opportunity for brands to get customers to try the product. If you want a soda, you have to have that soda, there are no other options. There is a reason Coke and Pepsi spend so much money to be the exclusive on-premise beverage providers at certain chains. Additionally, from a financial perspective, this lack of competition enables the brand to charge more for the product and also sell more units than it typically would, leading to more money going to the bottom line. My take is brands and restaurants should be focused on partnering up, not just for the marketing buzz, but also because it makes financial sense. If you are a startup brand, you need to have a restaurant strategy to go with your retail strategy.

News of the Week:

Positive:

1. Experiences Continue to Rise - eCommerce is growing, so why would someone want to come into a store? The answer is because of the experience retail offers. Touch and feel, instant gratification, community, personal interaction, and more! All parts of the experience that you can’t get online. Brands are noticing it too. This week Whole Foods announced a new small location in Hell’s Kitchen. This store will be the second small square footage, experiential-focused location Whole Foods has built. While this experience-focused move was pretty straightforward, another news item intrigued me about a huge opportunity to grow the business by adding more experiences. Reports came out this week that private equity firm L Catterton is thinking about buying toy maker Mattel. Mattel is known for brands such as Barbie, Hot Wheels, and American Girl. Outside of American Girl, there are not many experiences in the Mattel universe. With Netflix moving into experiences, and Disney already being so successful in experiences, I think any acquirer would be wise to add more experiences to Mattel’s portfolio. Whether you are doubling down like Whole Foods, or adding it like Mattel should, either way, experiences are smart for any brand to invest in.

2. June 2024 eGrocery up 8% YoY - Given the current macroeconomic conditions, one would assume that customers would not want to pay extra to get their groceries. While that has been true for some areas, eGrocery has surged up 8% / ~$600M year over year (YoY) according to Brick Meets Click. Pickup revenue remained flat, which is surprising, but delivery was up ~$400M and ship-to-home was up ~$100M. For pickup, people were ordering less frequently and fewer items. On the delivery front, more people were using that modality. Finally, ship-to-home continued to grow due to high average order value (AOV). Despite these positives, a couple of factors show this may be a temporary blip. Most of the customers that ordered were lapsed users, not net new users, which can be interpreted in multiple ways. It is good that people are returning to using delivery, but bad that new users have not been trying it out. More concerning, there were fewer people using grocery delivery frequently (4+ times a month) than before. These people are the power users driving most of the revenue. Finally, Instacart and Walmart ran heavy promotions in June. These promotions could affect the numbers since the orders could have originated from people who normally don’t order delivery, but took advantage of the promotion and ordered. Hopefully, these metrics indicate that delivery is here to stay, but it seems like there will be less delivery use in July than in June.

Negative:

1. Back to School Shakeup - Back-to-school season has always been a big time for retail and ecommerce, as people are stocking up on supplies and getting back into their routines. With Prime Day in early July, Walmart and Target sales in mid-July, consumers are making their back-to-school purchases earlier in the summer to take advantage of the deals according to the NRF. Deloitte found that by the end of July parents will have spent 66% of their back-to-school budget, slightly up from 59% last year. Additionally, the amount they are spending is less, down to $586 per child from $597 per child. August tends to be a strong month for retail sales due to back-to-school season, so this trend is worrying for retailers. My take is August will be a slower retail month than normal and retailers who succeed in this month will need to show value to customers to get them to make a purchase. In the future, retailers should account for this shift in behavior by adding back-to-school events throughout the summer.

2. The Downside of Retail Cash Flow - When you are buying an item in a retail store, it typically has gone through many intermediaries to get to you. On the physical product side, it has gone from the manufacturer or supplier to the distributor to the store, with lots of stops at warehouses and logistical facilities in between. For the payment, just because you swiped your card to buy an item does not mean the brand gets paid right away. Instead, retail brands are typically paid 30 days after the retailer receives the item. Smaller brands without the leverage of strong sales can be forced into much longer payment terms, as much as 90 days. This week a couple of brands took to Linkedin to express their frustrations with Sak’s Fifth Avenue’s delayed payments, despite a recent purchase of Neiman Marcus. Cash flow management is crucial for retail brands, so any delay can really mess up operations. For startup brands, it is vital you have good payment terms, are on top of who is delinquent, and are able to diversify your income streams. If one retailer declares bankruptcy, you don’t want all the eggs in that basket. Cash flow is key to the success of any brand or retailer.

Startup Tool of the Week: Sutro

• Summary: Create an app without code using AI via prompts you are guided to put in by the software

• Founder(s): Tomas Halgas

• Amount raised & investors: $8M from Peter Welinder and Eniac Ventures

• Why should you use this technology?: People spend an average of 3.5 hours per day on their mobile devices, which is why creating an app to be connected with customers on the device they spend significant time on is valuable.

• Pricing: Freemium model with additional features available via paid subscription

• My take: While it doesn’t seem like they can support purchases yet, for brands looking to differentiate from the competition and maintain a relationship with customers, it is a low-effort, high-impact opportunity to connect with customers where they spend a lot of time

• Interested? Book a demo here

Link of the Week: Feast & Fettle COO, Kyla Hanaway-Quinlan, shares why you should do last-mile delivery yourself (read more here)

Additional Links:

1. Amazon Fresh opens new store in suburban Chicago (read more here)

2. 30% of Gen Z consumers shop by voice every week (read more here)

   • My take: Wow! Something people need to consider further when building ecommerce brands!

3. Luxury brands are cutting prices to get more buyers (read more here)

4. Furniture store Conn’s is closing stores (read more here)

5. Birkenstock opens first store in France (read more here)

6. Best Buy revamping brand, what do you think? (read more here)

   • My take: No holograms please

7. Department store Belk has reduced debt by $1B (read more here)

8. TikTok famous L’occitane is opening a store on UWS after closing others in the past (read more here)

9. CVS will route all pharmacy callers to AI first before being sent to a live agent (read more here)

10. Arts and craft supply store Michaels is now live on Doordash for local delivery (read more here)

11. Starbucks and Mercedes Bez partnering to utilize Starbucks real estate to add electric vehicle charging (read more here)

    • My take: Is Starbucks now a retail platform to sell their real estate as advertising/partnership opportunities with others?

12. Happy first birthday to the startup tomato sauce brand Sauz (read more here)

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