PGS MONTHLY Rethinking Channel Mix in a Covid-19 World - Volume 5, Issue 4 April 2021 - Premium ...
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PGS MONTHLY Rethinking Channel Mix… …in a Covid-19 World Volume 5, Issue 4 April 2021
PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World ©2021 Premium Growth, Solutions, LLC. All rights reserved. Premium Growth Solutions, LLC – Seattle, WA www.premiumgrowthsolutions.com About PGS PGS is a sole proprietorship consultancy for entrepreneurs and investment firms focused on the premium end of retail food and beverage. • I help clients plan exponential growth. • I help clients implement, evaluate and revise those plans. Take my Founder’s Quiz online right now and see if YOU are ready to Ride the Ramp! © 2021, Premium Growth Solutions, LLC 2
PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World © 2021, Premium Growth Solutions, LLC 3
PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World
Introduction
In natural/organic food, most $ sales are now occurring outside of what is traditionally referred to
as the natural and specialty channels.1 Most of us also notice that we can find natural/organic
produce and packaged food almost everywhere these days. This has led to a bizarre conclusion
among many folks in the industry (who should know better) and new founders I meet: the
differences between channels don’t mean much anymore.
I wish things were that simple. But they aren’t. Just because the same natural/organic UPCs can
be found across multiples classes of trade does NOT mean that trade classes no longer have
meaning or that shoppers aren’t affected by the structural differences in classes of retailer.
How shoppers behave in retail environments is a combination of multiple factors, which could be
debated endlessly by retail experts. In this article, though, I want to introduce the principles for
understanding ‘channels’ and ‘channel mix’ in the broadest possible fashion and challenge
everyone to ignore some received wisdom. And I roll in a discussion of Covid-endemic urban life
and how it affects the use of alternative channels in the early years.
1. What is a ‘Channel’?
Most founders I meet rarely use the term “channel” or its equivalent “class of trade.” Instead,
they think in terms of “accounts,” specific retailer names, or what industry insiders call ‘banners.’
In fact, founders are more likely to understand the difference between “independents” and
“chains” than the difference between “channels” and “banners.”
A channel is best understood as a class of retailer that shares specific characteristics that affect
how the average shopper thinks and behaves as they move around the store. Why should you
care? Because the same UPC sitting in two very different channels, visited by the same shopper
can and does frequently yield different results. Loyal Whole Foods shoppers who buy organic
produce and niche health brands at Whole Foods often don’t believe when they buy food at
Walmart later. They don’t even think to look for them. Many of such folks see Walmart as a
168% of brick-and-mortar natural/organic sales occur in channels outside of the natural or
specialty channels; Source: NBJ and New Hope/Informa 2018, PGS analysis
© 2021, Premium Growth Solutions, LLC 4PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World
retailer having a quality selection in specific categories in which they still buy legacy or
mainstream brands. It makes perfect sense to them to trade up at WFM and then, later in the
day, buy Cheerios and Gatorade at Walmart for less. This compartmentalized trade up/trade
down behavior is common to MOST purchasers of natural/organic foods. Only 8% of shoppers
in the U.S. buy premium in 50% or more of their food/beverage categories they consume
monthly.2 Most of us, therefore, purchase premium AND mainstream goods all the time.
For founders trying to map out their go-to-market strategy, I highly recommend that they think
about channels as they are perceived by shoppers open to premium, higher-priced offerings
(and believe me, even SPINS will tell you, plenty of U.S. shoppers are not). If we follow this
logic, you can think of channels as ‘shopping formats’ built around four key variables –
• premium/mainstream product mix – the rough ratio apparent to the average shopper
• shopper emphasis on premium discovery – how likely is the average shopper to be
looking for premium products/brands and/or highly open to discovering new premium
products/brands
• pricing approach – the pricing strategy of the retailer apparent to frequent shoppers
• overall size of assortment – correlated to the overall size of the store
To exemplify how this works, we can look at two very different channels with one similar
variable.
Hard discounters like ALDI offer an ultra-limited assortment, extreme EDLP pricing, a 20-25%
mix of premium/mainstream products, and limited orientation to discovering new premium food
experiences. ALDI shoppers are generally looking for familiar, habitualized food/beverage
experiences at meager prices (whether ‘natural’ or not).
Health food stores in the natural channel offer an ultra-limited assortment of highly-priced goods,
featuring a 100% premium product mix and a very high orientation to premium discovery on
every trip.
2 Source: Hartman Group Food Shopping in America 2017; Hartman group analysis
© 2021, Premium Growth Solutions, LLC 5PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World
The following are meaningful channels distinguished unconsciously by the average shopper:
• Mass: Target, Walmart
• Club: Costco, BJ’s, Sam’s Club
• Supermarkets: Walmart Neighborhood, Kroger, Safeway, Albertsons, Publix, HEB, etc.
• Natural: Whole Foods, Sprouts, health food stores, NCGA co-ops
• Specialty: Fresh Market, New Seasons, Independents
• Dollar: Dollar General, Family Dollar
• C-Stores: 7-Eleven, Wawa, independents, gas station stores
• Hard Discounters: ALDI, Grocery Outlet
There are retailer-specific qualities, for sure, but overall, the structure of demand flowing into
these channels is something you want to consider as you build your go-to-market strategy. In
my work with clients, I continually advise them against excessive channel complexity in the early
millions, in part, so that you can better understand, measure, and nurture ‘pull’ for your brand.
You can quickly build a $5-10M business in just 2-3 channels. Channel focus is almost as
crucial as product focus in my experience and lends operational benefits as well.
2. Channel and Category
The primary reason channel matters is that it affects how shoppers think about which categories
(and brands) they want to buy when they walk into a retailer.
How? The same shopper can easily change their frame of mind when they switch channels,
even on the same day. For example, specific categories are of interest in Club stores and not in
supermarkets. In this example, Club purchasing orients primarily to saving money on bulk
quantities in rapidly consumed commodities. Kid food is therefore tremendous at Costco
because parents like to purchase it by the case at a case-pack discount. At Club stores, in other
words, if you sell a premium offering in a category behaviorally oriented bulk purchasing for high
frequency consumption (e.g., yogurt, soft drinks, apple sauce), Club could be a productive
channel. That, by itself, doesn’t mean you should chase down a Costco buyer at Expo West
right now.
The intersection of category and channel also explains why a Whole Foods shopper who buys
your brand at Whole Foods may not even be looking for your category at Walmart, let alone for
your brand. They often literally don’t associate Walmart with access to high-end niche products,
for example. So…they won’t bother looking for you. This is the primary reason Walmart is
© 2021, Premium Growth Solutions, LLC 6PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World
aggressively trying to onboard premium brands (of any size); they want to increase the apparent
availability of premium offerings in their stores. The further down the trend curve in your
category you are, the more shoppers may look for you at EDLP retailers like Walmart and
Target, but this is generally correlated to your brand being $100M or more in sales volume!
3. Beyond Natural/Specialty vs. Conventional
It’s important to note that, while channel differences are empirically fundamental to shoppers,
some class-of-trade thinking is horribly outdated in 2021. The most obsolete thinking relates to
an unhelpful dichotomy between the “natural” and “conventional” channels. This perspective
was created by New Hope and SPINS in the 1990s and emerged from an era when there were
only three channels that took natural/organic brands: natural, specialty and supermarkets. In
this era, ‘conventional’ meant ‘supermarkets.’
That was a long time ago. Lumping most retail food channels together as ‘conventional’ isn’t
helpful to today’s founders in the premium CPG space. The reality is that founders need to
understand that Target and Walmart are very different from your neighborhood supermarket in
critical respects that can’t be ignored in the giddy search for new accounts. A ‘natural’ vs.
everyone else perspective encourages very sloppy sales and strategic planning.
4. The Role of E-Commerce in Channel Mix
When I first wrote this piece two years ago, we had not experienced the largest viral pandemic
since the Spanish Flu. Now, as the U.S. races to vaccinate its population and learn to live with
endemic Covid-19 variants, we are starting to see permanent behavioral transformations in
urban life. The most important one for thinking through your channel mix is the decline of full-
time on-site office work. Most white-collar companies now appear to be preparing or
transitioning to hybrid work schedules.
This means that urban restaurant, café volumes will remain permanently lower simply due to
the lack of locations in business. Many will have no demand-side reason to return or won’t
survive if they re-open. This reduces sites, yes, and it changes perhaps the ‘local’ revenue
© 2021, Premium Growth Solutions, LLC 7PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World
value of launching in foodservice vs. launching online. It may even depend on your metro area.
However, local cafes and QSR venues will remain a valuable, less risky option for brands
launching in beverages and on-the-go snacks.
For brands who are navigating what I call the ‘death funnel’ to $500K in annual sales on their
books, local, upscale foodservice, AND online sales combined represent the optimal way to
manage risk in the early years AND gain valuable exposure in local markets of interest. These
are outlets with higher gross profits for you than distribution-based retail. This will help you get
to the initial scale (where fixed costs are covered) much easier, and if DTC is a component of
your e-commerce approach, learn about your early fans.
What needs to be understood is that there is no such thing as ‘explosive’ long-term growth in
foodservice locations, in part, because the scale of the addressable market at each point of
sale is vastly lower than in brick-and-mortar retailers with their much larger shopper
populations. However, online, you can grow exponentially. Many founders have discovered this
during the pandemic. And you can also facilitate growth and discovery with online advertising
techniques relatively profitably, unlike trying to use Instagram to sell one bottle of ketchup at
Kroger (ugh).
IMPLICATIONS
• Don’t forget the concept of the channel because it does affect how likely shoppers are to
look for your brand in specific retailers.
• The more the channel skews toward EDLP, the less likely the average shopper in ANY
category is looking for premium, let alone trendy premium offerings.
• Don’t lump channels together that should remain distinct in strategic planning
• Consider e-commerce (and DTC) as well as alternative foodservice channels in the early
years to manage risk and reach your audience
© 2021, Premium Growth Solutions, LLC 8PGS Monthly Vol. 5, Issue 4, March 2021 Rethinking Channel Mix…in a Covid-19 World
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