Pioneering US startups are starting to shake up the grocery sector by providing customers with regular home delivery of high quality produce on a subscription basis.

Subscription Economy Eats into Food Retail

In recent years increasing numbers of companies have switched over to a new business model based on the principle of subscription. Basically, instead of selling your customers goods or services as a one-off purchase either online or in-store – the transaction-based business model – these firms seek to create a lasting contractual relationship, whereby the customer regularly receives goods or services on the basis of a periodic payment plan. This is exactly the same way as you would pay for your newspapers or telephone, and this business model is now being tried out in a wide variety of sectors. The software market was one of the first to go this route, followed by entertainment products, with films and music leading the way. Rather than buy a CD or DVD, many consumers today prefer to take out a monthly subscription to Spotify or Netflix. Now the latest area of the economy to join the trend is the food sector, the most recent initiative here being the announcement from iconic coffee shop chain Starbucks that it is launching a new service to enable coffee-lovers to receive, for a subscription of $288 a year, sample packets of coffee from special premium batches.

Many start-ups that offer customers subscription-based services are supplied by small producers

Regular home delivery of quality produce

With this initiative, Starbucks is looking to compete with the many e-tail sites already on the market, such as Craft Coffee, Stumptown Coffee and Peet’s, that offer their customers a regular get-together around a cup of coffee. The basic principle is always the same: enabling the more demanding customer to discover new tastes. These e-commerce platforms also highlight the fair trade aspect, claiming to buy their stock from small producers. One of the great advantages of the subscription system is that retailers know in advance how many customers they have and what their expectations are, and can therefore target their products very accurately, without the risk of running out or conversely being left with too much unsold stock. Tea has joined the movement – unsurprisingly in the UK – with the London Tea Club, and also in the United States with, among other brands, Simple Loose Leaf and Tea Sparrow. Another major trend at the moment, boosted by Michelle Obama’s determination to encourage her compatriots to eat in a healthier and more eco-friendly manner, is towards online grocers which home-deliver fresh produce on a weekly basis together with a recipe plan. One of the best known providers in this field is New York-based Blue Apron, which launched in 2012. With 500 employees and sales of foodstuffs for over a million meals every month in the United States, it uses a simple, effective formula. Each week a customer receives at home a box containing all the ingredients, in the right quantities, for planned balanced meals, together with recipes that can be cooked quickly and easily, which are sourced from local producers running environmentally-friendly operations.  The United States, although better known for hamburgers and hot dogs than for seasonal fruit and vegetables now boasts a large number of similar initiatives. From Chefday!, which adds a charitable dimension – for every meal bought one is donated to the New York food bank – to Love with Food, which delivers small packets of fruit and cereals for healthy nibbling, and Hello Fresh, which provides vegetarian dishes. Nor have alcoholic beverages missed out on the trend, with wine from Club W, champagne from Fat Cork , beer and, of course, whisky from Taster’s club.

The surge in food delivery startups reflects Americans’ increasing preoccupation with what’s on their plates

Advantages of the subscription model

The current popularity of these initiatives is first and foremost due to the economic situation. The slowdown in the economy, together with a number of high-profile scandals in the food retail sector, are encouraging many consumers to try out high quality, environmentally-friendly food products. People also like to think they are establishing a long-term relationship of trust with a company. However, the subscription economy has some more solid advantages, notably the fact that this business model is efficient and potentially reliable. This at least is the view of Dave Frechette, Vice President of Worldwide Sales Strategy and Execution at California-based Zuora, which provides a commerce, billing, and finance solution for subscription-based businesses. In an article on the Force Management site, he argues that ‟Wall Street loves this model. It’s predictable. Companies that implement this model correctly are able to predict revenue and profitability with a lot more certainty and focus.” Another argument was recently set out by John Warrillow, founder of the Value Builder System, in the US business magazine Inc. He pointed out that companies obtain regular, reliable revenues from their subscription databases. Moreover, as customers pay their subscriptions upfront and there is no need to maintain high stocks, these firms enjoy greater liquidity. It is therefore easier to invest and benefit from the corresponding growth. Subscriptions are also a good way for retailers to conduct marketing studies at virtually no expense, testing which products do or do not find favour with customers. All in all, the subscription economy appears to be beneficial for both companies and their customers. So who would bet against it becoming the standard business model?

By Guillaume Renouard