Modern Retail+ Research: CPG startups’ retail distribution analyzed — from Harry’s to Poppi

For many founders of DTC food and beverage startups, the goal since launching has been to one day fulfill customers’ immediate needs for goods through widespread retail distribution. But external pressures and constraints has many buzzy brands testing out sales models initially avoided – turning to national retail partners to share the burden of distribution costs and to get their products in front of customers.

Emblematically, plant-based smoothie brand Sweet Nothings decided to shutter website orders for its frozen smoothie line in March. Co-founder and CEO Jake Kneller said the company decided on that course of action once DTC sales quickly started taking a backseat to retail. “Now that we’re in enough doors, we can point people to nearby stores where they live,” Kneller said. “Building out velocity with partners is important, so we’re channeling the DTC revenue to retailers.” 

Other startups within household and body care categories, which traditionally have less same-day demand, are continuing to rely on their DTC models – but they’re also using popular retailers to introduce new customers to their products. Partnerships with big-box retailers like Target and Walmart can allow them to reach new customers before other brands do. And grocery retailers, including premium grocers like Sprouts Farmer Market and Whole Foods, can help put startup CPG brands’ more premium products in front of key customer demographics.

For this report, we analyzed the presence of 20 digitally-native startup CPG brands at Costco, CVS, Erewhon, H-E-B, Kroger, Sprouts, Target, Walgreens, Walmart, and Whole Foods. These brands were selected by Modern Retail’s editorial team after an analysis of Modern Retail’s and other publications’ coverage of the largest retailers and their recent brand additions. The team also considered leading CPG startups and analyzed whether they have expanded to retail distribution. 

The team intentionally included an array of product types to prevent the analysis from skewing too far in the direction of one retailer or store section. The brands selected:

Consumers have likely noticed numerous food and beverage startup products lining the shelves at grocery stores, including premium grocers like Whole Foods and Erewhon, in recent years. According to analysis by Modern Retail+ Research, food and beverage startups have partnered with a large number of retailers, with food most popular in mass grocery and beverage most popular in premium grocery. The trend points to growing headaches in shipping and fulfillment processes and shifts in shopping trends post-pandemic.

Beverage brand Swoon co-founder Jennifer Ross previously told Modern Retail that her company decided to move away from DTC primarily because of the rising costs of fulfillment. “Selling a beverage and shipping it is very expensive because of the weight,” Ross said. “So it was hard to continue to make that [DTC] channel profitable while meeting consumer expectations and how quickly they want the product.”

Alternative meat company Simulate also no longer sells its line of plant-based nuggets, Nuggs, through its brand site. Company founder Ben Pasternak said he still believes e-commerce is a good marketing channel that creates awareness, “even if it’s not converting consumers on the spot.” But, according to him, the company “considers the DTC site an R&D and marketing expense, the real volume comes from in-store sales.”  

Annie Atwell, director of marketing at hard kombucha maker JuneShine, said that post-pandemic most of JuneShine’s customers are buying its packs via same-day delivery services or at stores, instead of ordering from the brand’s website. “They’re buying it closer to the time of consumption and as part of their weekly grocery shop, so we’re investing in those channels appropriately,” she said.

However, not all startups are eliminating DTC altogether. Eleven out of the 14 food and beverage brands included in the study continue to sell some form of their most popular item on their own DTC website. All sell larger packs, such as a 12-pack case of 12 oz. cans, rather than the single-serve options available in stores. Selling in larger packs on a brand’s website offers better margins on each sale, which is important as CPG is a very capital intensive game, and profitability is increasingly important to investors over gross revenue. 

New beverage brands, in particular, are expensive to scale due to rising costs for materials like cans and bottles, high shipping rates for heavy liquids, and an increasingly crowded field that’s making it hard for startups to compete for retail shelf space. 

Digital fulfillment in the frozen food space has long been fraught with challenges, including high shipping costs, the risk of damaged packages and even tough competition for dry ice. Sweet Nothings stopped selling its plant-based frozen smoothies and squeezable smoothies through its DTC site. Although the brand first gained success with these two very popular items, the company has since decided to only sell non-refrigerated nut butter bites through its DTC site.  

Shelf-stable foods are easier to package and ship to customers. Still, similar to beverage startups, companies like cereal makers Three Wishes Cereal and Magic Spoon continue to sell larger multi-packs (6 boxes) on their DTC sites, to have higher units per transaction.

Among the retailers analyzed for this report, Target and Whole Foods offer more emerging food and beverage brands than other retailers, with each carrying 12 of the 14 food and beverage startups included in this report.

These mass retailers have also opened up national distribution options for these smaller brands. Target supports online ordering and delivery for nine out of the 12 startup brands the retailer carries in stores. However, Target carries these brands in limited regions and store locations. For instance, Three Wishes Cereal announced in June that three of its flavors would be available at 230 Super Target locations across the county, as well as online. 

When introducing a startup brand to customers, Target first tests products like Three Wishes in a few locations or regions of the country and then expands distribution into additional locations as the brand grows. This is helpful for younger brands looking to scale up distribution at a manageable pace. And Target plays a role as a leading retailer in developing startup brands, according to Bryan Gildenberg, retail consultant and CEO of e-commerce agency Confluence Commerce. “Target is always looking for brands that can make their shelf look different than everybody else’s, so they’re constantly on the lookout for emerging brands,” Gildenberg said. 

In April, Target announced the 2023 cohort of participants for its Target Forward Founders program, a 10-week program that teaches startup brands how to scale into retail through an extensive network of resources, including mentorship and a monetary stipend. The chosen brands came from a variety of CPG product categories, including hair care brand Barb and condiment brand Spice Sisters.  Sparkling water brand Sanzo — one of the brands analyzed for this report — is also one of the 91 alumni brands Target lists on its website as having received mentorship from the company in 2021. According to Modern Retail’s analysis, Target’s attentiveness to growing startups like Sanzo makes it a key partner for expanding brands seeking to develop their retail strategy. 

Similarly, Whole Foods has committed to distributing over half (12) of the emerging brands that were considered in this study throughout its stores nationwide, with only six brands limited to certain regions of the U.S. Ten of the 12 brands Whole Foods carries in stores can also be ordered on the company’s website. Because Whole Foods is a subsidiary of Amazon, Whole Foods’ customers have access to a quick distribution and delivery powerhouse. According to Modern Retail’s analysis, Whole Foods’ ability to deliver online orders rapidly makes it an optimal choice for newer CPG brands that need a strong distribution partner. 

Retailers Erewhon and Walmart are expanding their online delivery options ahead of in-store distribution, offering more brands online than are available in stores. 

Erewhon, an upscale supermarket, carries a large array of emerging beverage brands. While Erewhon only has physical stores in L.A., it services the rest of Southern California through online deliveries. This type of delivery partnership exposes Erewhon’s many more affluent customers to trendy startup brands and helps those smaller brands scale up at a manageable pace. 

Of the three brands in this study that big-box retailer Walmart carries, two are available in stores, and both have limited online regional distribution. (The third brand is available only in stores.) Walmart has such a massive customer base, however, that even limited regional distribution is helpful for small brands that are looking to bring in new customers – especially if they are not yet ready to distribute at all Walmart stores across the country.

As a major player in the premium grocery space, Whole Foods is a stand-out partner for specialty brands, according to Modern Retail+ Research, especially because startup brands are often priced higher than legacy brands in order to achieve higher margins. This becomes a challenge for those startups when they appear on shelves next to lower priced brands at more affordable grocery stores like Kroger and Sprouts. In premium grocery stores, however, startups sit among other premium brands in a similar price range. With less pricing competition on the shelf, a startup can focus on its branding and product differentiation to capture customers. 

However, because of its status as a more premium environment, Whole Foods doesn’t excel at showcasing brands to the masses. Amazon hinted in its shareholder letter last year that it planned to look into investing in a mass grocery store model, suggesting that Whole Foods did not currently fit that need. Brands seem to have come to the same conclusion, seeing a need to diversify distribution across a range of retailers from premium grocers to discount wholesalers. This is where mass grocers like Kroger, H-E-B and Sprouts emerge as strong retail partners for greater scale and broader market penetration.

H-E-B and Sprouts grocery stores are located only in certain regions of the U.S., but they’ve committed to distributing startup brands across all of their stores, both in-store and through online delivery. Sprouts carries seven of the startup brands we included in our report; H-E-B carries three. While Kroger and its subsidiaries, on the other hand, are located across the country, it limits the distribution of three of the seven startup brands it carries to certain regions of the U.S. Of the seven startup brands Kroger carries, six are sold both online and in-store. 

In total, the presence and market share owned by these three retailers in regions across the U.S. provides prime real estate for young brands looking to expand their brand’s retail footprint. But this wider exposure comes alongside the danger of unfavorable price comparisons if these brands are not conscious of the lower costs of less premium alternatives in these mass-market environments.  

CPG startups outside of the food and beverage category, such as household or body care, with less same-day demand from customers for order fulfillment than grocery products, continue to prioritize sales through their own brand websites and subscriptions. Instead of using online and store retail presence to drive sales, they use those placements to reach new customers. To do so, they offer a limited line of products at retailers to introduce the brand. Many brands use the new network to emphasize their straight-to-your-door subscription memberships on the brand site. 

Among brands and retailers that responded to Modern Retail’s Q1 2023 survey, retailer websites and physical stores came third and fourth as investment channels, after owned digital platforms. Almost half of respondents (48%) focused the most on their own DTC website.

Household and personal care startups show a similar level of interest in entering both big-box and mass grocery stores. Thirty percent of household care startups’ retail partnerships are with big-box stores and mass grocery stores; and 29% of personal care startups’ retail partnerships are with big-box stores and mass grocery stores. 

Uniquely, personal care startups are also entering drugstores at a similar rate at which they’re entering big-box and mass grocery stores — 29% of their retail partnerships are with CVS and Walgreens. While household and personal care brands have a wider range of retailer partners than food and beverage brands due to their entry into drugstores, many of the brands only offer a limited selection of their products at these locations – the biggest difference between their strategy versus food and beverage companies.

Personal care brand Harry’s and household care brands Grove Collaborative and Blueland are available in many mass retailers like Kroger, Target, Walmart and Costco. However, the available products vary within each retailer. Grove Collaborative is available at six out of the 10 retailers included in the study: Costco, CVS, H-E-B, Kroger, Target and Walmart. While the company’s most popular items are cleaner solution concentrate tablets, Walmart, a massive national retailer, only carries a limited line of the brand’s hand soaps. Similarly, supplement brands Ritual and Care/of are available at limited retailers and only offer a few products: Ritual, available at Target and Whole Foods, only sells age 18+/50+ multivitamins or prenatal vitamins in stores. The two prioritize their owned DTC sites as a main way for consumers to access the whole product line and use retailer sites as a way to introduce the products. 

Natural body care brand Curie takes a different approach by focusing distribution through specialty retail and department stores, such as Nordstrom and Anthropologie, while it has yet to enter into grocery, wholesale, drugstore or big-box retailers. Rather than using retailers as a way to market the brand and drive customers to the brand’s site, Curie uses its digital platforms to direct customers who want to get their hands on products to retail partners like Nordstrom. In preparation for a massive launch in retailers this month, Sarah Moret, founder and CEO of Curie, told Modern Retail her team is anticipating some sales pipeline changes. “We might not have growth this quarter on direct-to-consumer, and that’s OK,” said Moret. “Because at a high level, if people are buying Curie products, I don’t care where they are buying them.” 

These brands are creating online DTC strategies that use their retailer presence as a springboard. While some, like Curie, have built brand sites that easily direct customers to department store doors, others lure customers to the brands’ sites after purchasing at a retailer to discover more products and potentially sign-up for a subscription service. With inflation rates rising, many brands are marketing their subscription models as “money saving” and they’re urging customers to lock-in subscription rates before in-store prices rise. “As a subscriber, customers are signaling to a business that they intend to return,” said Katie Spies, founder and CEO of raw dog food brand Maev. “In exchange, we can give a better price at the outset because we can afford a longer payback period on marketing costs than with one-offs.”

Wholesale stores are becoming a larger part of the startup CPG playbook. Many startups are entering wholesale as worsening economic conditions drive even more affluent customers looking for affordable groceries to club stores like Costco. Young brands can benefit from the unique customer base at wholesale retailers, as customers search not only for deals, but also new product finds. 

By offering multi-packs or bulk versions of popular products, brands can also increase velocity through higher volume orders and re-purchasing rates for their CPG products, such as cleaning or personal care items. Sarah Paiji Yoo, founder of cleaning brand Blueland, told Modern Retail that placing products in Costco was “a natural move for our business,” given the repurchase rate of cleaning products. Customers tend to buy two or three pouches of the brand’s toilet bowl cleaner at a time. “Many of our DTC customers tend to buy in bulk and we already provide a discount on those purchases,” Paiji Yoo said. Over 20% of Blueland’s direct-to-consumer customers purchase three-pack hand soap tablets, which create 30 bottles of soap when mixed with water.

Of the eight brands currently partnered with Costco, seven are sold only in store and in limited regions of the U.S. The only brand available to order online is a 13-count mega-pack of Harry’s razor blade refills. By selling only in-store, small brands can protect brand value by not advertising their products at cheaper wholesale prices online, while slowly scaling up distribution.

While more DTC brands looking for the next phase of growth are turning to wholesale channels, it can be difficult for a small digitally native brand to manage multiple wholesale channels. Confluence Commerce’s Gildenberg told Modern Retail that for brands there’s always a trade off between wholesale and DTC. “Wholesale is less profitable than consumers coming to your website and buying your own stuff most of the time,” he said. “And then the second thing is, you have less control over the customer brand experience.” 

Effective storytelling can be difficult on a crowded grocery store shelf as well, as Chinese condiment brand Fly by Jing discovered when entering Costco. “On DTC, we really try to show our customers what the product is,” said founder and CEO Jing Gao. But wholesale distribution does allow Fly By Jing to provide samples for customers to try before they buy and educate customers on its Chinese flavors. These sampling sessions have been a great tool for startup consumable brands to reach new customers. 

In our study, only two out of the 20 brands are available at drugstores. CVS carries the Harry’s and Grove Collaborative brands, while Walgreens only offers Harry’s products. Combined, this makes up only 4% of the retailer partnerships included in this study. Comparatively, 37% of retailer partnerships were with premium grocery stores and 28% were with big box stores. 

While Harry’s and Grove Collaborative have ventured into drugstores, other startups are hesitant to join them. That may be because drugstore shoppers are often not looking to discover new brands while shopping and tend to be more sensitive to price. That’s a bad mix for a startup brand, often sold at a higher premium price. As in the case of mass-market grocery, it is difficult for startup brands to appear on drugstore shelves alongside non-premium legacy brands, especially in a convenient “grab-and-go” shopping format. For instance, someone looking to quickly pick up laundry detergent while they grab their prescription will most likely reach for a familiar, less expensive mass-market brand, like Tide.  

While many CPG startups are hesitant to enter drugstores, pioneers like Grove Collaborative are using the retail partnerships to bring greater exposure to their young brands. Presence in drugstores can grant a new normalized and mainstream visibility to these startups. “By growing our distribution, we’re making it easier for consumers to shop for planet-friendly, high-performing products that do not rely on plastic packaging,” said Stuart Landesburg, co-founder and CEO of Grove Collaborative. “Our latest retail expansion is a testament to our ongoing growth as an omni-channel company.”

Food and beverage brands move to physical retailers to distribute, winding down DTC.

• With rising shipping costs and increased demand for same-day grocery delivery, food and beverage brands are prioritizing traditional retail over online sales through owned sites. 
• Brand sites are now more focused on complementing retail strategies by providing more marketing and content tools for site visitors, rather than direct sales.
• Some frozen food brands, like Simulate and Sweet Nothings, have shut down their DTC sales completely, opting to avoid high shipping costs and instead use retail partners’ reliable distribution methods and freezers.

Target and Whole Foods support emerging brands with national distribution and online delivery options.

• Target and Whole Foods have the most startup partnerships, with 17 out of 20 brands available at Target and 13 out of 20 brands available at Whole Foods. 
• The retailers have committed to distribute most of the brands they carry to all regions of the U.S., both online and in-store. 
• Target Forward Founders program teaches startup brands how to scale into retail through an extensive network of resources, including mentorship and a monetary stipend.

Mass grocers with more brand pricing competition means slower expansion for startups. 

• Brands see a need to diversify distribution in a range of retailers from premium to discount. Mass grocers like Kroger, H-E-B and Sprouts emerge as strong retail partners for startup brands. 
• H-E-B and Sprouts grocery stores are located only in certain regions of the U.S., but they’ve committed to distributing startup brands across all of their stores, both online and in stores. Sprouts carries seven of the startup brands we included in our report. H-E-B carries three. 
• Kroger, and its subsidiaries, are located across the country but limit the distribution of three of the seven startup brands Kroger carries to only certain regions of the U.S. Of those, six are sold both online and in-store.

CPG startups outside of grocery continue to prioritize their own DTC channels. 

• Emerging CPG brands with less same-day delivery demand from customers, such as household cleaners and body care brands, are entering retailers with limited product lines to introduce new customers to their brands.
• These brands continue to prioritize subscription-based models over traditional retail to ensure more repeat buyers. 
• Household and personal care startups looking for more product exposure turn to both big-box and grocery stores. Thirty percent of household care startups’ retail partnerships are with big-box stores and mass grocery stores, respectively; and 29% of personal care startups’ retail partnerships are with big-box stores and mass grocery stores, respectively. Uniquely, personal care startups are also entering drugstores at a similar rate, with 29% of retail partnerships with CVS and Walgreens.

Wholesale is becoming a large part of the startup CPG playbook.

• Startup brands are entering wholesale club stores in order to attract new customers at higher sales velocities. 
• New startup brands are sold only in stores and limited to certain regions of the U.S. This is better for young brands looking to slowly scale up production of bulk-size orders.
• Brands have gotten creative with their packaging and storytelling to effectively communicate marketing messages. Offering product sampling at club stores like Costco has greatly benefited food and beverage startups seeking to reach new customers.

CPG brands have a more difficult time competing in drugstores.

• Only two of the 20 CPG brands included in the study were offered at CVS or Walgreens — Harry’s and Grove Collaborative. None of the food and beverage startups included in the analysis have partnered with either drugstore. 
• It is difficult for startup brands to appear on drugstore shelves alongside non-premium legacy brands, especially in a convenient “grab-and-go” shopping format.  
• While many CPG startups are hesitant to enter drugstores, pioneers like Grove Collaborative are using the retail partnerships to bring greater exposure to their young brands.