Capturing the D2C Market: Farmers vs Packers

The D2C market will grow rapidly; will farmers or processors win this game?


This is the 2nd article in a series about D2C models and their impact in the meat supply chain.

Hypothesis 1: Direct to Consumer (D2C) business models will be a high growth sales channel for all meat & poultry companies within 5 years. Hypothesis 2: D2C business models will accelerate as a high growth sales channel for farmers.

If we look at the beef industry, there’s always been a tension between packers and producers, largely tied to what percent of the consumer’s beef dollar that each segment of the value chain keeps.

But we’ll soon enter a new competition and in this round, producers and packers won’t be competing for margin.

They’ll be competing for customers. Who will capture the D2C market?

The large-scale beef industry was built for Business to Business (B2B) relationships. The mass beef supply chain is very, very good at what it was built to do: efficiently produce, process & sell beef at low cost.

  • Cow-calf producers specialize in getting calves on the ground and weaned to sell to stockers.
  • Stockers specialize in adding weight to calves and preparing them for the feedyard.
  • Feedyards specialize in putting weight on cattle before selling live cattle to packers.
  • Packers specialize in plant efficiency to lower per pound processing costs. Then packers sell large amounts of meat to large customers at varying specs depending on the customer.

The system works well; every participant focuses on what they do best. Specialization. Economies of scale. An economist’s dream come true.

And margins shift through the supply chain based on commodity cycles. Which raises a natural tension. While processors are operating at record high margins today, producers are…not.

And with declining margins, producers are actively looking for ways to capture more value.

With the unfolding COVID-19 chaos in boxed beef & live cattle markets as well as the consumer frenzy at retail leaving empty shelves, consumers are swarming looking for alternative sources to stock up on meat. Local farmers and D2C to the rescue.

The last several years I’ve seen friends using social media to sell a few head at a time for freezer beef to friends & family, but that’s now expanding. <Pre-Covid this trend was expanding, now its exploding> Not only are more producers looking to cut out the rest of the supply chain and go direct, they’re scaling their efforts and doing it with increased sophistication. The rise of easy to use online tools for things like building a website, digital marketing, and payment processing is enabling producers to feed cattle to market weight, process locally, and sell directly to consumers.

Technology is enabling a segment of the supply chain to reorganize itself to connect cattle producers directly with consumers.

And, the Direct to Consumer (D2C) supply chain is built around the consumer. The D2C supply chain is optimized for the consumer experience.

Contrast that with the conventional beef supply chain that is optimized for B2B customers, for efficiency at scale.

There’s a Harvard Business Review article that says all businesses must pick a max of 2 dimensions from the following 3, on which to compete:

  • Better (quality)
  • Faster (speed)
  • Cheaper (price)

Packers have optimized for efficiency as they compete against one another on price. That’s the nature of a commodity business. Its also why, in the search to move away from commodity price competition, in the last few years there has been a wave of packers building/acquiring “premium” brands whether grass fed, Wagyu, etc.

But in recent years across the broader economy, there’s growing demand for companies that compete on a 4th dimension: customer experience.

Customer experience can mean a lot of things, here are a few examples:

  • Convenience – flexibility in ordering, delivery, right-sized portions
  • Wow factor – packaging, meal ideas, etc.
  • Community – is there a reason your customer would want to connect with others like them/you, and are you creating a way for them to do so?
  • How are you creating an experience your customer wants to share on Instagram?

What advantages do farmers/producers have going for them?

They have a story to tell. A local connection. A quality message. An experience to offer. Families with a picture of two adorable little cowgirls above (my nieces??), that show the love and heritage in raising beef. And they have the added benefit of simply not being a large institution, in an era of lack of trust in large institutions.

But there are challenges. Food safety liabilities, distribution, cost of customer acquisition. As more cattle producers look to sell directly to consumers and technology enables them to expand their reach, the biggest bottleneck becomes processing capacity. Let’s assume someone solves for this bottleneck though. Not only will the producer capture more margin than if they’d sold into the traditional supply chain, they’ll likely capture a higher percent of a high price.

And as more product goes directly from producer to consumer, more product bypasses both packer and retailer. The supply chain bifurcates at this point; how much beef that goes through the major packers today will instead go through local/regional processors in 5 years? 10 years?

I am, of course, not suggesting a majority of meat will sell through D2C channels. Retail, foodservice, and export will continue to dominate.

But D2C will be the fastest growing sales channel this decade. A sales channel that will demand packers engage in it. Which then creates a bifurcation point in the supply chain of how much meat sells through D2C channels in 5 years, 10 years…and more interestingly, is that additive or at the expense of the traditional retail channels?

The packers will always win the volume game, they’ll always win the competition of lowest cost to process in order to sell the “mountain of meat”.  Packers can process cattle at a much lower cost. They have economies of scale along every dimension. They have cattle supply. Those are not insignificant advantages. Are packers prepared to compete on consumer experience? Of course not.

But let’s face it, <insert packer name> doesn’t have the capability today to market directly to consumers like a ButcherBox would.

Packers and farmers will compete for the D2C market on different dimensions, likely attracting different customers with different buying motivations.

So, what will it look like for packers to compete in the D2C market?

We’ll discuss in part 3, stay tuned.

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