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Aussie Farmers Direct’s collapse wasn’t about the two big supermarkets

AussieFarmersDirectOnline grocer Aussie Farmers Direct’s (AFD) sudden collapse is a clear demonstration of the harsh reality of failing to understanding the market it was working within and the customers it was serving.

While AFD management was quick to blame the two big supermarkets, other important factors contributed to the collapse.

Problem 1: Niche to mainstream

Driven by an ethos of supporting local farmers, AFD began as a milk-delivery franchise business, launching later into local fresh fruit and vegetables – again, delivered direct from the farm gate. The online grocer targeted consumers seeking to consume ethically and support local farmers. In doing so, it clearly positioned itself as “different” to Coles and Woolworths, and insulated itself from the impending period of intense price competition.

As the business grew and more franchisees were recruited, AFD expanded its offer to include meat and seafood, bread and bakery goods, coffee, deli and organic products. While ringing up losses of a $1 million a month through 2015, in 2016 it launched into a full grocery offering, predominantly Australian-made pantry items and other dry goods. The move pitted it head-to-head with supermarkets – and not just Coles and Woolworths, but others like Aldi, Foodland, IGA and others.

Despite continuing losses, AFD last year launched into the growing market of “meal kits” with its Simple & Fresh Dinner Box. This move again took it another step away from its core “milk and fresh produce’” online delivery business and lockin horns with established players like Hello Fresh and YouFoodz. Expanding the range and essentially moving from a niche business model to a mainstream online grocery and meal-kit business was its first main problem.

Problem 2: Big market, little margin

On the surface, the Australian food and grocery market seems substantial. Food and grocery sales represent about a third of all retail sales in Australia, at slightly more than $100 billion a year. Yet profit margins are tight.

For example, Woolworths announced its supermarket division banked $900 million in first-half profit, however it had to sell almost $20 billion in groceries to do that – that is about 5 per cent profit (EBIT). At the same time, Coles announced a 14 per cent slide in profit to $790 million. Its Bunnings Warehouses made more profit ($864 million).

Of the $100 billion sector, online groceries represents less than 2 per cent, and this was the size of the market in which AFD was working. While growth is good, the size of the pie is small. The challenges to market entry, growth and success tend to be perceptions of quality and establishing trust. Deliver poor-quality fresh produce that does not last, and you have lost the customer for good.

When times become tough financially, businesses sadly look to mitigate losses by cutting corners, holding on to perishable products a little longer and delivering less quality.

Logistics costs are also problematic if you cannot scale up, as is speed of delivery – no-one wants to order their groceries and wait until the next day for them to arrive. With their online offer, Coles and Woolworths only make it work through their fleet of stores and are only now slowly and carefully venturing into dark stores.

Other pure-play companies, like Kogan Pantry, survive by selling other more highly profitable products. Hence, the second problem, a small market, thin margins and increasing costs.

Problem 3: A franchised model

Franchises can be notoriously tough to run, let alone an online grocery business. A case in point, Retail Food Group may be forced to close 400 outlets this year. Running costs are fixed or increase, but rarely go down.

To begin with, owners shell out tens of thousands of dollars to buy an AFD franchise. Then they need a refrigerated delivery truck, which needs regular maintainance. Then there are the ongoing franchise fees. Franchisees can quickly accumulate $100,000 in business debt before their first delivery.

Add to those initial outlays are the ongoing costs, which continue to rise, like fuel, insurance, registration, training, leasing, maintenance and food licensing. Franchisees are then confined to offering their service in an exclusive area, which can limit their ability to grow. Then, somewhere along the way, they need to pull out a salary. They also have a mortgage, school fees and bills to pay.

Accordingly, the third problem – a franchised model entails significant revenues, a clear point of difference and low costs to work. When you are selling groceries online, the numbers don’t stack up.

Problem 4: Ethical intentions

Loyalty is only as deep as your wallet. Shoppers genuinely want to support local farmers and producers, they want to create jobs and support the local community; however, there are often barriers between their ethical intentions and their ethical behaviours. These barriers can at times be purely financial.

For example, the increasing cost of living – we want to support farmers, but when faced with $2 supermarket-branded milk and $4.50 local dairy farmers’ milk, it is hard to justify paying more than double the price. As living costs like fuel, health insurance, electricity, utilities, public transport and the like keep increasing, shoppers will look to save money where they can, and groceries are a weekly cost they can lessen.

The fourth problem, while AFD management levelled the blame at the supermarket price war, it was in fact price-conscious consumers that struggled to see value in the company’s offer.

Problem 5: Shopping habits

Do you know what you are having for dinner tonight, or for lunch tomorrow? How about Sunday morning, for breakfast? Herein lies a problem: we are shopping more frequently at supermarkets, top-up shopping, buying smaller basket sizes, seeking produce that is fresh daily and moving away from meal planning.

When it comes to fresh, shoppers are aware that fruit and vegetables delivered on Monday afternoon will not be of the same quality by Friday night. This presented the fifth and final problem for AFD: shoppers do not plan – they just pop into the supermarket on the way home.

Was the writing on the wall?

In July 2016, shareholders were forced to fork out $14 million to keep AFD afloat after the company announced a $15.5 million loss in the previous year, and almost $28 million in the previous two years. While the company expected to return to profitability last year, I cannot see how it would have determined this forecast based on the market conditions.

A possible strategic alliance with Metcash (Foodland/IGA) to initiate an online channel may have been an option, with Metcash providing product through its supermarkets and AFD franchisees providing delivery. Alternatively, maybe AFD should have simply stuck to its knitting and not have diversified into a full-grocery offer and meal kits.

As one online business says, “Small is beautiful”. The Fruit Box distributes boxes of fresh, seasonal fruit to more than 8000 business in Australia. Just fresh fruit.

Gary Mortimer is an Associate Professor in Marketing and International Business at Queensland University of Technology.

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