Hello Reader!

Finding customers as a consumer brand is a phenomenally expensive exercise.

If you’re selling in a supermarket, they’re taking somewhere around 30% margin for an ambient grocery item. If your product is $4.60 ($4 after GST), the store is taking $1.20 on every sale.

But that’s just for your product to be sitting on shelf and have the chance for a consumer to pick it up and buy it. And that’s not a given. Different categories have different dynamics, but some categories are bought irregularly and people are pretty happy buying what they’ve always bought. Other categories (like beverage) are bought regularly, and consumers are quick to trial new products: but categories like that have a lot of new product launches, so your new product sitting on shelf will get lost.

So you’ve gotta do stuff in stores to stand out. The easiest thing is to run price promotions. Maybe you drop down to 30% off for 20% of the weeks, and 15% off for 30% of the weeks. Now you’re on discount for half of the time you’re in store, doing 65% of your total volume on promotion, at a blended average discount of 20%. 65% of 20% means that you’re effectively discounting every unit sold by 13% - so now out of the $4 ex GST retail you were counting on, you’re giving away $1.72 (43%).

But there’s more levers you could pull in store to stand out. Maybe it’s an off location - putting your product on an end of aisle or a stand somewhere. Maybe it’s neck tags on your bottle or can (good news! Woolworths will charge you if you put those on your bottles, whereas foodstuffs will only charge you in liquor!). Maybe it’s floor stickers or shelf wobblers or printed hang sell displays. The only limit to what you can spend here is your imagination, and retailers are getting really good at monetising every surface in their stores with their retail media offerings. Let’s say that you’re doing something in store with your product 15% of the time, and on the weeks you’ve got something going on you’re spending 40% of sales. That’s effectively 6% on every unit, so now you’re at $1.96 (49%)

But the reality is, everything we’ve talked about is inside the store’s walls. Your customer might spend an hour a week in store, so at best you’re reaching them during 0.6% of their week. If you want them to actually notice you, feel intrigued enough to pick your product up, and be confident enough that you’re a real brand and will live up to the promises on your packaging, you’ve probably gotta reach them during the rest of their week to tell them about what your product will do for them.

For that, we could do Facebook ads, billboards, tv ads, pay a celebrity to talk about us, seed product to influencers, invest in our own organic social, or start a branded stunt programme and have someone do a parachute jump from the edge of space (cough, red bull). It’s pretty common for consumer goods brands to spend around about the same outside of store as they do in store - it’ll generally shrink as the brand becomes more established. Our fictional brand is getting established here, so let’s say we’re spending 55% of our budget outside of stores. We spend 19% in stores between discounting and promo, so we’d be looking at an additional 23%. That’s $0.92 for every unit we sell. That takes our $4 retail sale down to $1.04 after the retailer margin, the in-store (“below the line”) promotion, and the out-of-store (“above the line”) promotion.

So for every unit we’ve sold, we’ve given away $2.96 towards getting someone to buy our product. If we’re starting a new brand, it’s still a coin toss whether we acquire enough customers to survive.

This looks phenomenally expensive, right? So maybe you’re thinking that supermarkets aren’t for you. But the economics probably aren’t that much better across other selling strategies.

If you decide to spin up an ecom store and sell on your website, you’re now taking the whole retail price - congrats! But now you’re probably paying meta to run ads on Facebook. USA benchmark to get a new customer in food + beverage is around $38. Plus, now you’re sending product direct to consumers, and so your courier costs eat into the price too.

So you decide to open a retail store instead. Unless you want to spend money on ads to get people into store, you’ll want somewhere with great foot traffic. That’s prime real estate, so you’re probably looking at least $1000 per square meter per year. If you manage to get something small like 60m2, you’re looking at $60k/year, or $1100/week. How many customers are you managing to serve with your product every week? You’ll be at least a couple dollars per customer in rent just for the chance to be in front of consumers.

Look, all of these numbers get better with a great product, shrewd creative thinking making your dollars go further, existing audience pull (though, PRIME might suggest that’s still a tough battle), being a first mover in a hot category, and the like. But the reality is: getting consumers to try your product is expensive, and you’re probably renting someone else’s audience.

Maybe the only skill that really matters is, in fact, distribution.

What I'm reading

I joke that my one goal with dropping NZ grocery lore on the internet is to speedrun making myself unhireable in the grocery industry. That may or may not be the case, but I take a lot of comfort from the fact that Errol Schweizer is both more scathing of (US) grocery players, and appears to make more money than me. His piece on what it takes for an independent grocery store to succeed is great, and I'm enjoying reading through his back catalogue

What I'm watching

I'm loving this video about Dr Bronner's use of palm oil. Palm oil is a fascinating topic across consumer perception, sustainable certification, and businesses' approach to it. I'm impressed with the care they appear to take, the fact that they approached it head on, and even more impressed with how knowledgeable their team appear to be in the comments.

That's all from me this week.

Reuben