Death of the supermarket?

Rumours that Russia-based direct-to-consumer platform INS is to launch a pilot project with some of the biggest names in grocery caused more than a few ripples last week.

Supposedly backed by heavyweights Unilever, Mars and Reckitt Benckiser (worth an estimated combined might of £83bn in fmcg sales) the platform would bring about the ‘end of the supermarkets’, speculated headlines, freeing grocery from what INS’s founders describe as an “inefficient” retailer-controlled model.

No sooner had those headlines gone live, though, than RB had issued a swift denial. “These reports are not correct,” it said. “We are following up with the original media source and other titles who have incorrectly reported the agreement currently.”

Unilever UK also distanced itself, although it admits there are plans for the company to take part in a pilot project in Russia. Mars, too, backed away.

So what is the significance of the INS project? How would its model work? And how does it compare with other direct-to-consumer models?

INS insists it does have early agreements signed with Russian subsidiaries of several global firms. In an online white paper, it lists Unilever, Reckitt Benckiser, FrieslandCampina, Valio and Mars as companies with which it has signed “non-binding memoranda of understanding”. “We are in talks with manufacturers from around the world, including the UK and US,” says founder Peter Fedchenko.

What INS will offer these suppliers, he adds, is near-total control over how their products are sold. “Our platform will run on blockchain, which means that we at INS have limited say and limited power. Manufacturers decide on pricing and assortment and we have no say over which manufacturer works with the platform and which cannot. They can also run bespoke loyalty systems that reward their customers directly.”

Suppliers gain an additional sales channel, the ability to exert much greater control over pricing and margins, and valuable insight into shopper behaviour. “At the moment it’s retailers who own the relationship with customers,” says Fedchenko. “By helping manufacturers connect directly with their consumers in a personalised way, we change that.”

Shoppers, too, end up better off under a direct selling model, he claims. Because manufacturers are not incurring additional overheads associated with selling via supermarkets, customers’ grocery bills should end up lower - plus, they get to choose from a wider range of products as the INS model lowers the barriers to entry for smaller brands.

INS is now on the lookout for investment of $30m in exchange for ‘tokens’ (which can be used in exchange for goods and services on the site) and is targeting eight cities around the world, including London in late 2018 or early 2019, with its concept.

Whether it can make its direct-to-consumer model work, however, remains to be seen. INS is hardly the first to go down the direct selling route. The trend for skipping over the middleman and going straight to source has been gaining pace globally for years, with a number of direct-to-consumer efforts gaining traction (see box, right).

So far, the results are decidedly mixed. Take Shobr, the Danish direct-to-consumer grocery platform that went live in February 2016.

Initially launched with the backing of Danish manufacturers, Shobr has since had to change its business model from direct selling, under which brands were in charge of their own pricing and marketing, to a more traditional retailer model. The products are now procured and sold by Shobr; the platform sets the prices.

The stumbling block? Brand owners are not ready to commit to the model for fear of alienating the supermarkets, says Shobr CEO Lars Munch Johansen.

“The brands see direct selling as an exciting idea, but they don’t dare to deliver the marketing needed to support it,” he says. “They do most of their sales through the supermarkets, and they don’t want to risk those relationships for the sake of a channel that doesn’t account for much of their sales yet. They are talking, talking, talking but they are not yet walking the walk.”

’Brands see direct selling as an exciting idea, but they don’t dare deliver the marketing needed to support it’

So, for the time being, Shobr is focusing on expanding its direct selling model into overseas markets such as China, and plans to target smaller food brands instead of the big corporates. It also continues serving grocery customers in Denmark, Finland, Sweden and Norway using its new retail model, with about 260 brands on sale.

Despite this, Munch Johansen is convinced the consumer demand for direct selling is there, and manufacturers will ultimately get on board.

“It will come with the next generation of CEOs,” he says. “If you are a CEO close to retirement and you want that gold Rolex for good sales performance, you are not going to take risks. But the next generation will. Give it another five years.”

Others, however, are not so sure. Retailers are much more than a simple go-between, they argue. “What people want when they do their grocery shop is convenience,” says Fraser McKevitt, head of retail and customer insight at Kantar Worldpanel. “This means that intermediation by the supermarkets acting as a wholesaler is very useful to consumers. They do all the hard work for us.”

David Buckingham, CEO of Ecrebo, a point-of-sale marketing specialist that works with brands such as M&S and Waitrose, is also sceptical about how big direct selling is likely to get.

“It’s a useful additional channel, but it should be seen as complementary rather than directly competitive,” he says. “This approach will have an obvious appeal for some manufacturers like Procter & Gamble who have been doing this themselves already, but it’s premature to predict the demise of grocery shopping.”

McKevitt adds: “If you put choice in front of the consumer you’re not being revolutionary, you’re just a different kind of supermarket. INS wants to make itself the new middleman.”

None of which seems to deter Fedchenko. “In the consumer packaged goods industry 24% of cost is marketing and 70% of that goes into their trade channel. Which means that the retailer is the ultimate beneficiary.

“We want manufacturers to be able to reward their consumers directly. That’s what manufacturers in other industries have been enjoying for a while. This is consumption 2.0”.

With carefully worded denials from manufacturers already echoing the difficulties Shobr encountered, though, such grandiose statements may be premature.

A supply chain dominated by a few powerful grocers might spark revolution in the minds of tech innovators, but the fact is, before direct-to-consumer has a chance of success, it’ll require some pretty brave brands prepared to forge a new path.