Thursday, 17 July 2014

FarmDrop - The Online version of a Farmer's Market. Will it work?

 FarmDrop aims to connect producers and consumers using all the latest  online retailing ideas. It is a digital version of the traditional stall found at farmers’ markets, and has been set up by Ben Pugh a former city worker, and Ben Patten. Currently the business is trying to raise £400,000 through a crowd funding initiative, and has already received £301,000 in pledges from 105 investors.

Is FarmDrop a good investment? Will it, as the two Bens hope, turn out to be “the food system of the future”.

At first blush it all looks very simple. Consumers sign up to their local FarmDrop, order their goods on line, and pick them up at a fixed central point on the same day every week.

Producers fulfil the orders and deliver them to the central point.

And a “Keeper” mans the pick up point, ensuring that customers are given their goods.

Money wise, producers receive 80% of the retail price, the Keeper 10% and the brains behind the idea also get 10%.

At present there are 17 Drops either open or in development.

The FarmDrop website summarises the benefits of the idea as follows:
Consumers receive local produce, and the satisfaction of knowing they are supporting farmers. Keepers also support farmers and earn money in the process. Producers receive the lion’s share of the retail price.

The business model raises some issues. Its definition of local is broad with producers needing to be within 100 mile radius of the central point. Some might feel that this is not very local at all. Wholesalers can be used, which adds a further layer of complication, and is at odds with the idea of wholeheartedly supporting producers.

The biggest issue is that FarmDrop has underestimated the pivotal role of the Keeper without whom the idea collapses. The Keeper is charged with signing up producers to support the Drop, recruiting the customers, and troubleshooting any problems that might emerge either from producers or customers. Their financial return from putting in all this effort is modest. The example quoted by the operation says that keepers could earn £640 per month for 7 hours work a week, 5 hours manning the drop and 2 hours on admin. That comes out at £23 per hour and takes no account of the time, petrol, or telephone costs spent setting up the drop, enrolling producers, and signing up customers, work which is likely to be ongoing as some customers and producers will inevitably drop out of the system and need to be replaced.

The return to the operators of the business is the same as the Keeper’s but their involvement seems to be limited to setting up the website, and doing some training. The founders assert that “we stand for fairness”. The allocation of reward for the hard pressed Keeper does not sound at all fair.

It would be good if FarmDrop could reassess the way the model works, for a successful method of enabling producers to reduce reliance on supermarkets is to be welcomed.

Unless they address either the load being put on the Keeper’s shoulders, or increase the financial return the Keeper receives, FarmDrop will  remain a very small business, and investors will be disappointed.

Friday, 11 July 2014

Not Only Consumers Love Aldi and Lidl - Suppliers Do Too

You might think that discounter retail prices are so low that suppliers’ profits from serving them are thin to the point of non existent.

Not so. Yes it is true that Aldi and Lidl negotiate hard, and a recent article in the Financial Times suggests that margins are of the order of 5-10% lower than for traditional supermarkets. But the discount model means that there are many upsides.

The keys are the limited range of products on offer and selling at the same price every day. Aldi and Lidl stock around 3,000 lines compared with a standard supermarket range of 40,000-50,000. This means that suppliers can manufacture long runs of product instead of incurring cost by stopping the line to change to another variant. Everyday low pricing means that volumes are consistent and easier to forecast, as opposed to volatile and unpredictable, which is the case when goods are sold on promotion. Because there are few promotions there are few demands for add ons like promotional support. And listing fees seem to be a rarity.

Aldi and Lidl tend to be loyal to their suppliers and the narrow range and everyday price mean that suppliers need fewer people to manage the account, and waste little time in meetings.

Discounters operate efficiently and this philosophy benefits suppliers. No costly chopping and changing in manufacturing, no cash draining peaks and troughs in volumes, no wild and expensive ideas about promotions, no rug pulling at the last minute when an activity seems to have been agreed, and minimum numbers of meetings – it all adds up to a financially beneficial relationship.

Add to that the enormous growth potential that discounters offer, and it becomes clear why suppliers find that dealing with the likes of Aldi and Lidl a satisfactory experience.


Tuesday, 8 July 2014

Online Grocery Shopping - Being Realistic About Growth Prospects

The Institute of Grocery Distribution has just updated its 5year growth forecast for the UK grocery market., and predicts a slower rate of growth than in the last 5 years, down from 19.5% to 16.3%.

It remains, though, exceedingly bullish about the prospects for online, convinced that sales will more than double by 2019, an average increase of nearly 18% per annum.

What will power this growth, they say, is the roll out of grocery click and collect to more locations, greater competition to raise standards since Morrisons entry ( a tribute to the strategy that Morrisons have adopted), lower delivery charges, and more delivery subscription schemes.

The projections seem optimistic.

For starters, growth rates in online grocery shopping are falling. Ocado, which is an online only retailer reported growth slowing from plus 18% in the first quarter to plus 12.6% in the second. They also reported a modest reduction in the value of an average order, down from £117.99 to £117.53. Sainsbury’s online sales growth has dropped to 10% in the last quarter. Tesco’s Philip Clarke indicated at a recent conference that their online sales at Christmas were growing at around 10%.

Secondly, the projection seems to ignore the various forms of competition that online faces.

There is internal competition as parent supermarkets invest in making their bricks and mortar stores more attractive places to shop.

There is competition from discounters who continue to see growth accelerate, and who, if they can pull off the trick of offering ever more up market food with rock bottom prices may exceed the near doubling of sales forecasted by IGD.

And the trend towards convenience store shopping shows no signs of stopping.

Thus the shopper is being offered an ever more attractive selection of ways to buy their groceries.
As they ponder the best way of feeding themselves and their family they will be working out what best suits them at a particular time. It may be they want to browse the shelves in a supermarket and see immediately the quality of what they want to buy. It could be that they want the lowest price possible, or maybe a trip to the local convenience store for speed. Or it could be that tapping a shopping list into their smart phone is the easiest way to shop.

In this increasingly multi channel world, online shopping can only grow at the high rates projected if the numbers of people shopping that way doubles (and they spend roughly what is being spent now), or the same number shop online as now and double their spend, or some combination of both. All of which looks stretching.

This is not to suggest that offering shoppers the opportunity to shop on line is a waste of time, for clearly it has its attractions.

Rather it is to suggest that any forward projections, particularly if they involve heavy financial investment, should take a realistic view of likely sales growth.