Claiming a piece of the pie: what’s left for traditional food and cooking giants?

As new players like Delivery Hero, HelloFresh and Whisk flood the digital dining market, consumers’ habits have started to change. And with COVID-19 sending even more of us online, traditional grocery retailers, home appliance OEMs and food manufacturers have been forced to rethink their competitive position. The heat is definitely on. But will the new kids on the (chopping) block get to eat their fill, or can incumbents still claim their piece of the pie? In the second article of our three-part series, we examine why traditional food & cooking companies struggle to defend their lead and how they can react to the trends towards the digital kitchen.

 In our last article, we looked at how digital challengers are turning the market upside down by capitalizing on new consumer preferences and digital opportunities. This time, we take a closer look at the challenges for established businesses, how some have met these head-on, and what others can learn to stay ahead.

With more new entrants emerging, the food and cooking market has become more diverse, and during the past few years, “establishment” companies have consistently underperformed the market. At the same time, challengers have been more than happy to eat into their share (see exhibit 1) by catering better to changing consumer needs, often enabled by digital technology. So why are the big guys struggling?

As all good chefs know, more often than not, success is all about the preparation – and many of the big food companies were simply caught off guard by the extent to which consumers’ needs and expectations have changed. To avoid widening the disconnect, they must now take these into account, which means:

1.    Being present at every stage of the food journey. It’s not enough now to simply stock the right groceries. Today’s digital chefs want to find inspiration from sources like food blogs or communities, learn how to cook new recipes, and have the relevant ingredients delivered to their door. Here, many traditional food manufacturers have maintained a reliance on their heritage, using conventional advertising to boost brand awareness, and as a result they lack presence where it’s most important.

2.    Opening the door to consumers. Many established companies, especially the largest ones, often sell B2B, rather than direct to consumer. Supermarkets are a good example of this: they act as the “middle man”, dealing directly with manufacturers to stock their shelves while forming their own direct relationships with customers. This model leaves producers with little or no direct link with consumers, or the ability to understand their needs and wants, while today’s consumer wants to be understood, listened to, and to share experiences within selected communities.

 3.    Offering customization and bespoke solutions. Younger consumers especially valued personalization pre-COVID and, having experienced the pandemic, shoppers still want authentic, personalized interactions with the companies that serve them. In this environment, focusing on a global consumer that doesn’t exist and relying on new production lines to drive growth don’t allow for the flexibility that’s needed. And mass production isn’t the differentiator it was any more, as it’s much more accessible even for small companies through production-as-a-service models or online platforms like Alibaba.

 New challengers are forging the way ahead here by prioritizing customization and “segment-of-one” offerings designed for the specific needs of single target groups. One example is the startup VeganNation, which is an online, community-driven platform that supports the vegan lifestyle. It offers products, services, meal-sharing, meetups, content and even its own digital currency. By combining e-commerce with personal beliefs and values in a one-stop-shop, VeganNation has created a strong link to customers by appealing to their principles. Food and cooking are becoming something much more than just eating to be full; they now say a lot about who we are and what we believe in. If you need any proof of this, VeganNation raised $10 million in funding in 2019.

Is the table bare for the old guard?

While industry veterans have started to recognize the need for change, few have yet to master digital.

Some seasoned businesses, like the German grocery retailer Rewe, have chosen to found their own subsidiaries. Rewe Digital combines a user-friendly app with a consumer-friendly delivery service, which was one of the first in Germany, and has been expanding since 2011. Today, it has a 31% share of the German grocery delivery market – double that of Amazon Fresh – and its delivery service contributed €200 million to the group's revenue in 2018. This shows that existing brands can successfully establish a strong digital presence even against “Big Tech”, if they are willing to take a risk and listen to changing consumer preferences.

Lessons from the front-runners

To avoid being out-maneuvered, those who want to catch up need to choose their “must-win” battlefields and reinvent their value propositions. By studying those already disrupting the industry, we can see that new strategic approaches to innovation and investment are the key to success:

1.    Choose business model innovation over product innovation. Instead of attempting to meet new consumer needs by extending existing production lines, companies should focus on transforming their business model by systematically identifying opportunities that go beyond single solutions, keeping the customer front of mind, and using data as the basis for building and scaling new ventures.

Another necessary shift is to focus on building new capabilities, e.g. by using ecosystem partners, rather than on taking products to market and reaching mass production quickly. Walmart did exactly this by launching a partnership with Shopify to grow its marketplace rapidly, with the goal of adding 1,200 Shopify sellers this year. In return, participating brands will be exposed to Walmart Marketplace’s 120 million monthly visitors.

2.    Choose “arms length” investments over acquisition and integration. Instead of the traditional M&A route, investments in potential future disruptors now look like the wiser choice. One example is the home appliance group BSH’s investment in Kitchen Stories, an app that provides high-quality recipes with videos and step-by-step photo instructions, and allows users to upload their own content. Rather than pursuing a full takeover, BSH chose to run Kitchen Stories as an independent subsidiary, and is working to integrate the Kitchen Stories app with its own smart kitchen appliances – allowing consumers to have their fridge check whether they have all the ingredients or automatically setting their oven to the right temperature for a particular recipe.

Unilever has also followed this approach. It founded Unilever Ventures in 2002, and currently holds assets of €450 million, with a portfolio of more than 50 startups. One of these, Sun Basket, is a particularly strong success story. It provides meal kits and delivers pre-measured ingredients and recipes to customers following a gluten-free, paleo or vegetarian diet. According to the its CEO Adam Zbar, Sun Basket is able to deliver meal kits to 98% of the U.S., after opening a facility in the Mid-West. Despite Series E funding delaying a planned IPO in 2019, the company reported accelerated growth, and its compound annual growth over the past three years stands at 80%.

Knives and forks at the ready

In addition to the above principles, it’s crucial for those whose heels are being nipped by new challengers to adjust their strategy to the new digital reality to avoid losing more market share. Any company now facing increasing “heat in the kitchen” should follow these essential steps:

1.    Explore market opportunities, developments and business models in a systematic way

2.    Assess which business fields offer the opportunity to create an “unfair advantage”

3.    Understand new developments – including technologies, market dynamics and new entrants

4.    Choose which business fields to enter and how to implement them within the organization

5.    Identify assets, control points and value propositions to guarantee future success

6.    Scale new business models using the most appropriate execution mode

Next time, we’ll explain just why disruptors like Home Start, Instacart and Whisk have been so successful, how their business models are whipping up a storm in the kitchen, and another.

Read more on our expertise in this area on our website and find out how we can help you explore, build and scale your own digital business models.

 Authors:

Sebastian Schoemann, Partner, Munich

[email protected]

Isik Aysev, Principal, Vienna

[email protected]

Martin Malek, Manager, Vienna

[email protected]

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Max Kilian, Manager, Munich

[email protected]