An overview of e-commerce for food and beverages

E-commerce compared to other distribution channels

There are options for every food and beverage business to sell products into the market. The following factors can all impact the decision as to which channel or channels are best:

• Type of product: Refrigerated, short shelf life, fragile packaging, etc.
• Desired volume: Some channels deliver more volume than others
• Economic model: Margin required to deliver a desired rate of return
• Proximity to market: Products produced close to large urban markets and retailers might not need to explore other channels
• Competition: If your competition dominates in one channel you might need to explore a different one

Internal resources also impact the selection of the optimal distribution channel. There are many tasks required to ensure the success of a product and some companies are better suited to certain tasks than others. When determining a distribution strategy, producers and processors can assess their own strengths and weaknesses. For example, you might be very good at social media and interacting with consumers online. This could lead you to put more emphasis on e-commerce than other channels. Every company has the opportunity to consider the options and find their ultimate solution.

Selling direct in person vs. selling direct online

Many producers and processors enter the market selling direct to consumers. This is an opportunity to generate direct feedback, implement continuous improvement during development during product launch and benefit from the entire selling price staying with the company. If you choose to do this in person, it requires someone from your business to be there when products are sold. This can be done right at your place of production or a venue like a farmers' market. Many hours are required and the hours need to be invested when consumers want to buy, not necessarily when it is most convenient for you or your business. Selling direct online can be done at any time and with the proper systems in place, you and your employees do not need to be present for the transaction to occur.

When selling direct to consumers in person, it is more likely you will receive a proportion of your sales in cash. This generates a higher rate of return as there are no fees like you would incur with credit cards or other forms of online payment.

Selling in person does require a physical space that is inviting for consumers. Products need to be displayed to encourage people to buy and there can be some regulations you must meet or exceed. If you choose to sell at a venue such as a farmers' market, you will have to transport your products, merchandising fixtures and all other materials. Selling online does require an inviting and effective website, but does not require the physical space for merchandising selling.

Food and beverage products can be produced in many locations. Some of these are close to dense urban populations where you will find many potential consumers. Other food and beverage products are produced in remote locations, where there are not many consumers. Online selling can equalize the physical distance from the market, as consumers buy where they are and products are sent to them.

Selling to retailers vs. selling direct online

One significant difference between selling direct online and selling to retailers is the volume of a transaction. Depending on the product and the relationship between supplier and retailer, it is possible for suppliers to deliver to one central warehouse location or direct to stores. In both models, one transaction is designed to deliver products that will be delivered and sold to many consumers. When selling direct online it can take many transactions to equal the volume of one delivery to a retailer.

In this channel, producers and processors focus most of their efforts on production and delivery to the warehouse or store while retailers focus on selling products to consumers. For this reason the selling price generated by the supplier is lower, because the retailer must earn margins to cover the cost of their operation. Table A below provides a hypothetical example to illustrate the difference in revenue for a producer or processor when selling direct online vs. selling to a retailer.

In Table A, the cost of goods sold is the same for the product ($1.95 per unit). When selling direct to consumers, the producer or processor should be able to sell for the same price as the product appears in stores. There are many delivery methods so in Table A, we assume shipping costs will be applied after the final price to the consumer ($4.29). This results in a return of $2.34 per unit. The costs of operating the e-commerce component of the business must be subtracted from the return to the producer or processor ($2.34) in this example.

If the producer or processor sells the product to a retailer, the cost of goods sold is the same ($1.95 per unit), but you have to add shipping costs to the retailer's warehouse. In our example, this is $0.25 per unit for a final delivered cost of goods sold of $2.20. The producer or processor sells the product to the retailer for $3.00 for a profit of $0.80 per unit. Some producers and processors employ brokers to manage the sales of their products and we estimate this to be six percent of the delivered price or $0.18 per unit. If the producer or processor does use a broker the $0.18 would reduce the profit per unit to $0.62. In Table A, the retailer adds a 30 percent gross margin to the product which results in a final retail to the consumer of $4.29.

There is a different return to the producer or processor, depending on which channel is pursued. Retailers generate traffic in their stores and websites, and producers and processors can sell a significant number of products in this channel when consumers see value in the offerings. Direct selling online can generate more return per unit, but usually selling to retailers is more volume per transaction.

Historically, some retailers have charged fees to suppliers that want products listed in the stores. The rationale has been it costs money to build stores, and suppliers were willing to pay extra for access to the shelf. It is very difficult to quantify these fees, as they range from one case of product per Stock Keeping Unit (SKU) per store (referred to as "free fill") to much higher fees in competitive categories where large multinational processors pay more. This is a barrier to entry and a cost of doing business in retail which does not exist when selling online. This practice is not in place in all stores, but it is common in the retail industry.

Most centrally structured retailers operate with a merchandising department where category managers are responsible for maintaining the listing base. Their role is to decide which items are included in the store offering. Shelf space is in demand and it can be very competitive to generate the space required for products. Category managers have the authority to decide which products will be on the shelf and this can be a challenge for some producers and processors. When selling online, there is no limit to the number of products you can offer and ultimately it is consumers who decide which will sell.

The sales process for selling to retailers vs selling direct online is very different. Once the category manager decides your product will be part of the listing base, your focus can shift to building demand with consumers and filling orders. When selling direct to consumers, it is one person at a time.

Selling to wholesalers or distributors vs. selling direct online

A third path to the market is to sell products to wholesalers or distributors, that in turn distribute the products to stores. In this model, the producer or processor will deliver products to a centralized warehouse where items are consolidated and then sold to the market. Similar to selling to retail stores, one delivery for the supplier affords access to many outlets.

Wholesalers and distributors provide producers and processors with access to many retail, food service or other customers. One delivery to their warehouse is a transaction that can lead to many sales for the producer or processor. Similar to selling to retail, the volume per transaction is much higher than selling direct to consumers online.

Wholesalers and distributors have expenses to cover and will charge fees to the supplier to cover their costs and deliver a return. In Table B, we have extended the hypothetical example provided in Table A, adding a column to illustrate the return to producers and processors when selling to wholesalers and distributors.

In Table B, the information in the selling direct online and selling to a retailer columns is identical to Table A. In the selling to a wholesaler or distributor column, the cost of goods sold and the delivered price remain the same as if the goods were sold to a retailer. The only difference is the product is now delivered to the wholesaler or distributor's warehouse. Retailers expect to pay the same delivered price, therefore the costs and profit of the distributor must be subtracted from the delivered price to the retailer's warehouse, which is $3.00. The wholesaler or distributor's mark-up is estimated at 25 percent or $0.60 per unit. This results in the producer or processor selling the product to the wholesaler or distributor for $2.40. With the delivered price of $2.20 and a selling price of $2.40 the return to the producer or processor is $0.20 per unit.

There are different returns in each channel. There are also differences between the cost of selling in each channel and the volume potential. Every product is different and the right solution for one will be different than another.

Comparing Business-to-Business (B2B) vs. Business-to-Consumer (B2C) e-commerce

As you explore the e-commerce opportunity for food and beverage, there are choices to make. Similar to other channels, the right strategy might be one option, a combination of options or none at all. The optimal result is the best fit with your target market, your product and your business. When selling your products online you have the option to sell direct to a business (B2B) or direct to consumers (B2C).

B2B e-commerce

Options for selling B2B

When selling B2B there are three overall categories of products and buyers:

1. Consumer packaged goods being sold to wholesalers, distributors and retailers
2. Food service products being sold to wholesalers, distributors and restaurants
3. Ingredients being sold to processors to make products

In the B2B channel, the producer or processor selling the product will list the products they have for sale on a platform and buyers will have access to the listings. It is also possible to sell B2B on your own website. Once your products are established, customers are more likely to know where to find your products and purchase directly from your website.

Your target market is a good consideration when deciding where to list your products on B2B sites. For example, if your products are developed for high end restaurants, then sites visited frequently by distributors to these establishments or the chefs themselves, would be a good choice. In another example, if your target market is companies purchasing ingredients, you can explore sites frequented by processors looking for ingredient suppliers. Your target market in a B2B transaction is a business but it is still a person making the decision to buy. More information could be found in the guide to B2B buyer personas by AliBaba.com.

Considerations for selling B2B

Buyers visiting B2B sites are often well informed about the market and the products they are looking for. Good photos and detailed product descriptions are important to these buyers. When you understand what your customer is looking for, this will help with the information to include in product listings. The right keywords for product searches increase the traffic to your listings on the websites. It is possible in the B2B environment to include minimum quantities which should be in line with what your customer is expecting. Often sellers include ranges of products which can include lower prices for larger quantities.

Logistics are an important component of your B2B listings. These transactions can be larger quantities and buyers can be from anywhere. Your shipping capabilities or limitations can be included in your listing. B2B websites can include descriptions of buyers and the geographic markets they represent. This is a component of your target market to consider when selecting the B2B sites to focus on. If you are selling internationally, there is the possibility you will require specific permits which can be investigated with the receiving country.

More informed buyers can have specific requirements, especially in ingredients. There could be certifications or standards, such as organic or Marine Stewardship Council (MSC) Certified, on food products that your buyers will request.

With B2B transactions usually being for larger quantities, clear definitions of expected product specifications and standards for all parties is beneficial. These can be documented and available to buyers to ensure both businesses are clear about the condition of the product when they take ownership. In a B2B transaction, it is beneficial for both parties to understand the ownership of the product throughout the transaction. This ensures that inspections are conducted at the appropriate time and that insurance, if desired, is in place.

Payment for B2B transactions online is usually conducted as part of the marketplace where your product is listed. There are different models, the most common is the marketplace will process the payment and retain a percentage of the total sale. This is the revenue they generate for their business. When listing products on any marketplace, there should be a detailed explanation of fees and payment terms for your review.

B2C e-commerce

Options for selling B2C

A B2B transaction online is very different from a B2C transaction. When selling B2C your product is packaged and ready for consumers and there are two platforms where the transaction can take place:

1. Your own website where consumers visit and make a purchase
2. A marketplace where your products are listed with others and consumers visit the marketplace to make a purchase; this can also include social media

Considerations for selling B2C

Selling direct to consumers requires you to be prepared to manage a higher number of transactions to achieve the same volume. Consumers are usually buying for their own needs as opposed to the B2B environment where buyers will resell the product to many customers.

In a B2C environment, it is important to encourage consumers to visit your website or the third-party marketplace - to make their purchase. In an online marketplace, it is also possible to generate sales from consumers visiting the site for other products or even your competitors, such as through suggested or recommended links that point to your products.

On your own website and on other marketplaces, good photos and detailed product descriptions increase the likelihood consumers will buy. When you understand what your buyer is looking for, this will help with the information to include in product listings. The right keywords for product searches will increase the traffic to your listings on the marketplaces.

When selling B2C, order fulfillment and shipping are important considerations. If you forecast your volume and assess the capabilities required to select orders and ship them to consumers, you can determine the right solution for your business. It is possible to include these functions within your own business, outsource them to a third party or in some marketplaces, use their fulfillment and shipping services. Regardless of the fulfillment and shipping strategy, it is beneficial to consider your approach when consumers do not get the right product or there are issues with shipping.

If you are conducting B2C transactions on your own website, payment is an important consideration. Consumers are looking for a secure environment in which to purchase. Proper online security safeguards and protection of consumer information increases the likelihood they will buy. Consumers undertake a number of actions to help them make informed shopping decisions online. A range of examples are found in the online shopping overview for consumers developed by Canada's Office of Consumer Affairs.

Selling B2C provides the opportunity for you to collect a lot of information about your consumers and build long-term relationships. It is possible these people will buy your products in different channels if you have them available there. The data and your ability to analyze and learn about consumer behaviour are valuable assets of B2C transactions.

Selling food and beverage online can include many different options. It is possible to sell your products B2B and/or B2C. There are some factors such as good product photos, descriptions and keywords for search that are common. There are also many differences between B2B and B2C transactions. Once you decide the best route to your target market you can determine the best options for your business.

Understanding the e-commerce consumer

When selling B2C online, you are selling direct to consumers so it is beneficial to understand who they are, why they buy and how they buy. Often the people who buy your products can choose to make the purchase online one week and in a physical store another week. It is the same consumer, but the buying decision online can be different.

Your target market

A definition of your target market is important to ensure you focus on consumers who are most likely to buy your products. One question to consider about your target market is; how likely are they to buy online? For example, some demographics like the millennial generation are more likely to buy online than others, as detailed in the following Canada Post article: Looking to attract the Canadian millennial shopper? Get to know them first.

If your target market is less likely to buy online, you could consider some additions to your website that explain the online buying process clearly and address some of their concerns.

Your online community

Once you have a good definition of your target market consumer and you are confident they will buy online, you can determine where to find them. For example, every social media platform has their own user profile and you can decide where your investments deliver the best returns. The following information from Canada Post is beneficial to compare the audience on different social media platforms: The most effective social media platforms to target your market.

You can interact with consumers on social media and also maintain your own database of email addresses and/or cell phone numbers for text messages. These are consumers who have given you permission to interact with them on their own devices. Any company in Canada is subject to Canada's Anti-Spam Legislation when creating and communicating with consumers online.

A well maintained database of your consumers is a valuable asset. You can communicate directly with these consumers and learn about what is important to them and get answers to your questions about who they are, why they buy and how they buy.

Factors impacting online buying

The decision to buy online is different than buying in a physical store or at your own place of production. In a physical store, they can often pick up the product and examine it, whereas online they are limited to the images you provide. In a grocery store, they can compare the product to others on the shelf and make a decision about value and which product is best for them. Online, the comparison to other products is made on a screen. Consumers compare product descriptions, photos and value propositions you supply with the other items. If consumers are buying on your website, the functionality of the website is also a consideration. If it is easy to navigate and consumer friendly, they will probably stay there longer and consider purchasing more.

Security is a significant issue to most online shoppers. With cyber attacks and theft of information online becoming more prevalent, consumers are more aware of the risks. Many consumers who are concerned about security will shop on websites that display the lock beside the website address in their browser. This lock is there because the website developer has implemented a Secure Socket Layer (SSL) certificate and they are using Hypertext Transfer Protocol (https) that ensures secure transfer of data.

Shipping costs also impact online consumers. If shipping is extra or added at the point of purchase, they will consider this as part of the value proposition. When they decide not to buy after putting your product in their virtual shopping cart, these are called "abandoned carts." Many online sellers consider this an important metric to measure. The consumer has found your website, investigated the product and they are interested enough to put the product in the virtual shopping cart, but they do not buy.

Online consumers consider shipping costs to be part of the final price. For this reason they can be interested in bundles of products where more items can be included for the same shipping costs. This is an opportunity to increase the average purchase and provide more value to the buyer.

If you are selling your product on marketplaces, some offer annual enrollments that include free shipping. An example is Amazon Prime, where consumers pay an annual fee and any items identified with Prime on the Amazon website ship free to Prime members. For consumers who subscribe to this form of membership, shipping costs are irrelevant.

Online consumers are influenced differently than consumers in physical stores. Product descriptions are very important to the online shopper. This is your chance to explain the benefits of your product and help them make the decision to buy. Online consumers also depend on reviews from other online shoppers to assess the quality and value of products. They often seek out these reviews right on the website or in other locations they trust for information.

Another group impacting online buyers are influencers. These people have their own online community who are interested in their views, products they like and other lifestyle choices. Influencers can range from micro influencers with a small number of followers to celebrity influencers who have millions of followers. These people develop relationships with products and brands and their followers can be influenced by their recommendations and posts. Some brands pay considerable fees for influencers to promote their products.

Consumers shopping online can have expectations that are different from in store buyers. They do believe if the item is listed, it should be available. They also expect the product to arrive within the parameters posted on the website. Buying online is more convenient, in that they do not have to go to the store, but they do have to wait for the product to arrive. They pay for the product when they commit to buy, but they have to be confident the website is legitimate and that they will receive the product by the expected date.

The definition of value for online consumers is different from people shopping in stores. When a person buys in a store, they have the product and it is up to them to get it home in the right condition. Online consumers will make their judgement about value once the product arrives. If there are problems with the timing of shipping or the condition it arrives in, they expect the seller to make amends. Most online sellers have well defined policies about resolution to shipping issues. Some replace the product if it is damaged and others want more proof that the issue was with the shipping and not the buyer. Every company sets their own policy.

Consumers buying products in store and online have expectations. Some of these expectations are unique or different for online shoppers.

Summary snapshot: An overview of e-commerce for food and beverages

E-commerce compared to other distribution channels

• Selling in person requires a physical store whereas online can be done remotely
• In person selling can require a lot of hours whereas online can be more automated
• Volume per transaction much higher with retailers and distributors
• The economic model is different with each channel
• There can be considerable costs to access a retailer's store shelf
• One delivery to a retailer or distributor provides access to many stores

Comparing Business-to-Business (B2B) vs. Business-to-Consumer (B2C) e-commerce

• Your target market will determine which channel to access
• Buyers in B2B channels are well informed
• Transactions in B2B channels are usually larger
• Consumer packaged goods or food service products and ingredients can be sold B2B online
• Consumer packaged goods can be sold direct to consumers from your website or an online marketplace
• When selling B2C, order fulfillment and shipping are important considerations
• Selling B2C will generate a lot of data about the transactions and your consumers

Understanding the e-commerce consumer

• Consider the likelihood your target market will buy online
• Determine where your target market will spend their time online
• You can maintain an online community within social media platforms and/or your own email list
• Consumers make the decision to buy online differently
• Consumers want to be confident you are protecting their information
• Shipping costs will impact consumer's decision to buy
• Online shoppers are influenced in the purchase decision differently than bricks and mortar shoppers
• The definition of value is different for online shoppers