Hey readers! Welcome to the AdExchanger Commerce newsletter. I’m senior editor James Hercher, and this week we examine a few new-age food and drink companies as they make the jump from DTC brands to retail product sellers.
DTC brands bring sharpened audiences and keyword targeting to search-based grocery platforms. But can they beat the CPG giants at their own game?
Call it: the Pantry Wars.
The growthery business
Digitally native food and beverage brands are reliant on social media, particularly Meta. So they’re disproportionately affected when data privacy rules hurt the social media advertising flywheel.
But those effects are marginal, compared to changes in how people shop and discover grocery brands nowadays.
For instance, a mom who buys sugar-free juice or soda (sparkling water, rather) is still looking for the “Juice” aisle in a store. But the same shopper on Instacart or Target’s site is doing a direct search for, say, “zero-sugar drinks.”
Winning on a physical store shelf is one thing. Breaking into the new search-and-prompt style of grocery shopping, such as Instacart, Amazon Fresh or the Kroger site, is a whole new problem.
Juice and soda brands bear “the weight of baggage,” as Eliza Sadler, Ocean Spray’s head of brand elevation, told me earlier this year.
Pepsi, Coca-Cola, Ocean Spray and other brands are trying to do two things: first, rehab terms like “juice” and “soda” so they don’t simply mean “sugary drinks.” At the same time, they need to launch new drink brands unburdened by those old associations.
Coca-Cola acquired the seltzer brand Topo Chico in 2017. Within a year, Pepsi acquired SodaStream and launched a zero-sugar soda brand called Bubly. It is not a coincidence that Pepsi’s newcomer brand name is a common online grocery keyword (“sugar-free bubbly drink”) that mostly trafficked people to other sodas.
DTC vs. CPG
One up-for-grabs question is whether new grocery shopping patterns benefit digital natives or legacy brands.
Overcoming legacy CPGs in retail is hard.
Do you know the condiments maker Sir Kensington’s? It’s best-known as a ketchup brand, having made the first serious run at Heinz in the past half century. But Sir Kensington’s no longer makes ketchup after Unilever acquired the company in 2017 and folded its ketchup line this year. Womp.
But search-based grocery platforms are a way around the CPG brands that control store shelves.
And while legacy brands have deeper pockets and can sometimes wait out unprofitable startup contenders, those challengers often have higher price points and VC backing, which means they tolerate higher customer acquisition costs, said Ethan Goodman, EVP of commerce at the Mars Agency (unrelated to the Mars candy brand). Legacy brands don’t do unprofitable things for years on end.
Winning social media is easy, in a way. A brand can create a fast-growing consumer set based on social media behavioral targeting and creative skills. Earlier this month, for instance, I profiled Barry Hott, a social ads consultant and head of growth at a new candy brand, Rotten, which makes low-sugar gummy worms that come in compostable packaging. The packaging also features thumb-stopping imagery of limbs, ghouls and creepy crawlies.
Rotten is built for social DTC, where wild creative experimentation and keywords like “compostable packaging” can lead to all sorts of interesting audience segmentation. It is not meant for Target shelves, where the packaging would – seriously – lead to customer complaints, and where “compostable packaging” is an ineffective branding hook.
But other brands are coming for the kings in their respective categories.
The cereal case study
The coming year will be a big test of whether cult-favorite DTC cereal brands are the real deal..
Three newcomer cereal brands, Magic Spoon, Three Wishes and OffLimits, were founded in 2018, 2019 and 2020, respectively, and are each transitioning from DTC only to brick-and-mortar brands carried by the likes of Target, Kroger and Whole Foods.
Magic Spoon is gluten and grain free but isn’t vegan or plant-based. OfflImits and Three Wishes are vegan. Magic Spoon is sugar free, though, while the others are only “low sugar” or “no sugar added.”
On the web, these designations carry great significance, both in terms of honing a brand on social media and how shoppers are trafficked by online grocery platforms.
But now they must get people to pay twice as much for a plant-based or zero-sugar cereal when it’s alongside brands consumers know in the store – and which could be labeled, say, “reduced sugar.” For a customer walking by, there may seem little difference between “zero sugar” and “reduced sugar;” but a $4 box of cereal compared to a $9 box of brand-name cereal is, well, a lot to swallow.
To win in- store, these keywords must be embedded in people’s brains, not the platform’s metadata.
In the same way DTC cereal brands are currently pushing “zero-sugar,” “plant-based” or “grain free” terminology, 20 years ago saw major consumer pushes around trans fats, high fructose corn syrup and the good old “organic” label.
Can DTC brands survive, though, if they’re chased into narrower and narrower audience niches?
Coke and Pepsi have embraced the zero-sugar sparkling beverage phenomenon. And now they’re owning those search terms.
But would (or can) zero-sugar DTC brands launch sugary varieties to compete with Coca-Cola for its core customers? Unlikely, when the brand’s identity is closely tied to those social stances.
One option is to build new niches where startups are incumbents – adaptogenic or prebiotic sodas, for instance.
The true test whether that idea has staying power, however, is if Coke and Pepsi copy it and take on the DTC brand.
“At the time [Sir Kensington’s] launched, taking high fructose corn syrup out of ketchup was considered innovative — now it’s expected for any new food product launching today,” wrote Scott Norton, co-founder and former CMO and CEO of the company, when the ketchup was shuttered in February.
The whole world wins when over-sugared, processed foods are replaced by healthier alternatives.
But does every DTC brand want to die a martyr or go on to actually live on in store shelves?
