4 direct-to-consumer models shifting the supply chain
With more consumers purchasing directly from farms and factories, roles within the supply chain are changing.
Is the supply chain disappearing? Do intermediaries have to worry about their jobs? With the rise in direct-to-consumer (DTC) sales, producers avoid some of the middlemen like traditional retailers.
But producers still need packing and transportation help to deliver their goods. No matter how much automation increases, the need for labor is always there. And some producers will use third-party software to manage their own supply chain.
It turns out that very few companies purely eliminate all intermediaries between the producer and the consumer. The supply chain never goes away, and the middleman sticks around as well, even if the role is minimized and the middleman is not a traditional brick and mortar store.
The four models outlined below do shorten and shift the supply chain, changing the role of the middlemen.
Direct from factories
Direct from farms
Direct from ranches
Direct from the winery
Who uses this model? Multibillion dollar company Wish.
Who is buying? 300 million consumers worldwide.
Challenges: Standing out in the marketplace when selling non-branded items.
Benefits: Low marketing and shipping costs.
Selling items directly from China, Wish offers manufacturers and resellers a marketplace to display and sell their mostly low-priced brand-less goods. Shop by seller or category, but not by brand.
Wish sells worldwide to an estimated 300 million consumers willing to trade brand name and an element of trust, for low price. Their shoppers would rather buy a no-name brand sneaker for $6, waiting a month for shipment, than the latest $200 designer kicks from the local mall.
This model doesn't entirely cut out the supply chain, as it still involves picking, packing and shipping. Items are often sent direct by mail from China, with some shipping ahead of time to warehouses in target countries if they’re promising expedited delivery.
While some shoppers are thrilled with their experiences, there are frequent reports of items arriving late (which is a relative term when sent from China, but some arrive outside the estimated window), in strange packaging or receiving different items than ordered. Sizing isn’t always explained on the site and items may not have directions. Returns may be difficult, though some retailers refund without requiring a physical return.
Price is a benefit for Wish and its vendors; they don’t have the same marketing costs when selling products with no brand name and no patents. These brand associations drive costs up. The vendors also benefit from cheap shipping to the U.S., which opens up new markets to them. Wish vendors often use the U.S. Postal Service's ePacket program, so shipping is no more expensive from China than from the U.S.
Who uses this model? Community supported agriculture (CSA) programs.
Who is buying? Customers wanting local produce, as well as heirloom breeds and unique varieties they can’t get elsewhere.
Challenges: Competition from meal prep home delivery products and DTC produce boxes.
Benefits: Eliminating middlemen allows farms to compete on price with wholesalers.
The CSA model is one of the most traditional direct sales models, with customers getting consistent deliveries of produce from the farm, whether delivered to their doors or an alternate location.
The USDA says that 115,000 U.S. farms used DTC marketing to sell their food in 2015, including produce, dairy and meat, resulting in $3 billion in annual sales. That marketing includes CSA, farmers markets and their on-site farm stores. While no one knows the exact number of CSA programs in the country, Guillermo Payet estimates there are around 7,000.
The median CSA program serves 50 subscribers, and an average one about 100. Around 300 CSAs have more than 1,000 subscribers, said Payet, president and co-founder of Local Harvest, which sells CSA software to farms and runs an online directory of CSA programs.
Many of these farms sell directly to stores and restaurants. "If you don’t have the wholesaler middleman, the local farm can compete on price with the wholesaler," Payet told Supply Chain Dive. Some grocery stores stock local produce as a marketing gimmick to draw in customers. The farm name is often not featured in those promotions. Farms selling directly to consumers and stores without an intermediary account for only half of a percent of total food and beverage dollars spent by consumers.
While this model does not cut out the supply chain completely, it does simplify it. Running a CSA is complicated, requiring marketing, packing supplies, labor and transportation. While some CSAs have their own refrigerated vehicles for delivery, a lot of companies use refrigerated van delivery service. "It’s cost prohibitive for a lot of small farms to have a truck and a driver," Payet said. CSA deliveries used to be at a drop spot, but Payet estimates that slightly less than half his customers now do home delivery. His software helps with coordination, so customers can put orders on vacation hold and get electronic reminders for deliveries.
The CSA market took a hit with the advent of meal prep home delivery products and DTC produce boxes. Some CSA programs went under and others lost customers. The meal prep services compete in the same space, but with hundreds of millions of venture capital dollars behind them. "We’re now at the tail end of that," Payet said. Some meal kits promise organic and sustainable ingredients, but they can’t compete on price and still use small farm or organic produce. Instead, Payet said, they use just a small amount of the promised organic foods, and mostly use cheap wholesale ingredients.
CSAs have never been money makers for farms, said Payet, though they do often require payment up front. They’re offered as way to spread the word about the farm. The CSAs that are growing provide a high quality community experience, allowing u-pick days and throwing parties at the farm, to keep subscribers involved. While locally grown handcrafted food is expensive to produce, "restaurants are willing to pay a premium for really good quality fresh stuff. It’s a great market for small farms."
Who uses this model? Meat box companies, such as Crowd Cow and Butcher Box.
Who is buying? Consumers who want a higher quality of meat or specific animal raising and feeding methods.
Challenges: Crowd Cow sells a cow at a time and doesn’t ship until the whole cow is sold.
Benefits: Less paperwork and a simple, streamlined supply chain.
In the last few years, meat box companies entered the market to offer protein directly from the ranch. Crowd Cow allows consumers to buy cuts of meat from specific ranches, while Butcher Box is a subscription service sending meat regularly from hand-picked farms. These companies are the middlemen, but unlike buying meat from a traditional butcher or grocery store where consumers likely don’t know the producer’s name, the ranch is highlighted – it’s one of the reasons for the purchase.
"We have a very simple supply chain — the meat goes from rancher, to butcher, to us," Crowd Cow co-founder Ethan Lowry told Geek Wire. Crowd Cow and Butcher Box then ship to customers. Crowd Cow also sells to wholesale customers.
Fans tout the higher quality and better tasting meat that’s not grown at an industrial farm. Consumers appreciate knowing the origins of their meat. Ranchers benefit from less paperwork. One rancher, selling most of her cows to Crowd Cow, found that this model leaves her more time to run her ranch.
Who uses this model? Vineyards and middlemen like Casemates.
Who is buying? More consumers are buying directly from wineries.
Challenges: Additional costs in shipping less than truckload and small orders.
Benefits: A greater connection and relationship with the customer.
The vineyard to consumer connection isn’t new, but it is growing and changing. In 2017, the value of wines sold directly increased 15%, to a high of $2.69 billion. Middlemen like Casemates sell access to wineries and special deals, though consumers buy by the case or go in on a case with a friend (or with newly found local friends on their forums). Wineries take the actual orders and a separate company fulfills them.
Selling direct might seem like a good way to offer customers a discount on your product. But selling wine online means additional costs, like shipping less than truckload, warehousing, selling and processing small orders, website hosting and transaction fees, and that can raise costs by a few dollars a bottle.
Some wineries want to avoid the wholesale consolidators. Cameron Hughes, whose model is buying surplus wines from top wineries and bottling them under his label, left traditional distribution to sell his wines online, as five companies control 60-70% of the wine sales, he told the Washington Post last year. He wanted to focus on his customer relationships and not worry about getting the distributor’s attention.
Follow Deborah Abrams Kaplan on Twitter