🎁 Future of snack box industry

Hey hey 👋,

Welcome back to Consumer Startups. Starting this week, I am going to experiment with a new type of content - I will break down the current trends shaping different consumer niches in an attempt to answer a simple question:   

Where is the future of {X} heading? 

Over the last year and a half, I have had the opportunity to chat with many of you and learn more about providing the most value with this newsletter. Most of you mentioned that you loved finding new startups from Consumer Startups and getting a glimpse of the future of the B2C space. 

I want to double down on these two value props by introducing more startups and providing deeper analyses on emerging consumer verticals.

Today’s research report is about the snack box industry. (Full disclosure - I am a PM at SnackMagic, a significant player in the space. A lot of the analyses and insights from this piece come from my experience working at SnackMagic)

Take it with a grain of salt!

Everyone loves snacks, especially in the US. It’s also a growing trend, partially catalyzed by this pandemic, as people turn to snacks to deal with stress and have a quick bite between Zoom meetings. 

A recent poll conducted by one of the biggest snacks companies, Mondelez International, revealed that 46% of American adults say they are snacking more during COVID. This increase in snack consumption is especially salient among younger Americans, Gen Z, and Millenials, for whom snacks have almost replaced meals. Here are a few interesting facts:

• 90% of people snack multiple times daily

• 7% eat no meals

• 92% replace one weekly meal with snacks      

🚀 The rise of snack boxes

The snacks market is massive. It’s a $100B+ market in the US alone and $400B+ globally.

However, what accelerated the rise of snack boxes is the surging e-commerce adoption induced by the pandemic. Before COVID, most consumers bought snacks from grocery stores or got them for free by working in offices. However, COVID has complicated this behavior as consumers started buying snacks online. 

Snack box has become a popular business due to this e-commerce trend and the fact that it’s also a fun way for consumers to discover and try different snacks. If you google snack boxes, you will probably find 100+ such services that offer some variations of a snack box. 

At first glance, the barrier to entry is non-existent - anyone should be able to buy snacks in bulk, package them in a cardboard box, and start selling. This is a quote from a high school snack box entrepreneur in a New York Times article:

In reality, selling snack boxes is not easy. Without a differentiated product, you are unlikely to create a BIG business. Many CPG companies, such as General Mills and Walmart, attempted to make a snack box business in the past, but most of them failed.

For example, General Mills incubated a subscription snack box business called Nibblr and launched in the US in 2013. They wanted to create a product that could tap into the working professionals segment. Nibblr offered over 59 different non-branded snack combinations, from dried fruits to crackers. However, it was shut down in two years. Bad timing and the lack of e-commerce adoption contributed to Nibblr’s downfall, but another reason was that the snacks Nibblr offered were not differentiated enough to entice consumers. 

Beyond getting the product side right, you also have to solve two other significant challenges - unit economics and long-term customer retention.

1. Unit economics 

Unit economics is challenging for many e-commerce companies. It can be especially challenging for a snack box business due to the lower average order value. Let’s assume a snack box is 20 dollars - if you buy snacks from bulk, the gross margin after the cost of goods sold is probably around 50%. However, after labor, packaging, and shipping, the contribution margin per box can very well be in the negative. It will only become profitable at scale if the order value is big enough.

I ran some quick math below:

2. Retention

Another challenge in the business is customer retention. Snacks are not like groceries, which people buy every week or once every few days. They are more like impulsive purchases. In addition, people don’t want to have the same snacks every time because snack purchases are mainly based on craving, which is different depending on the mood or time of day. 

Retention is where most of the B2C subscription box business models suffer the most. Poor customer retention rate decreases the lifetime value of a customer. If you don’t have an extremely efficient customer acquisition playbook, the business will become a leaky bucket and probably won’t last long.

💸 The snack box business

Companies are tackling this industry from very different angles. There are mom-and-pop Amazon sellers and venture-backed players. For the sake of this piece, I wanted to highlight the latter and focus on two of the more exciting business models I have seen - the consumer subscription box model (B2C) and the corporate gifting snack box model (B2B).

The consumer subscription box model is what people might be more familiar with. You select which snacks you want, buy a monthly subscription, and wait for a snack box to arrive at your doorstep every month. Some popular subscription snack box companies include Universal Yums and Bokksu. 

Another model is the B2B corporate gifting snack box. The main use cases include employee appreciation and virtual events. For example, the Head of HR at McKinsey might want to treat all their employees in the US, so they will find a B2B snack box gifting company, such as SnackMagic and SnackNation, to send their employees a snack box. The end consumer doesn’t pay for anything.

I will dive into both of these two models and dissect some of the opportunities and unique challenges.

Subscription snack box

The subscription snack box business is a typical direct-to-consumer(D2C) play. In the D2C world, there are two paths to building a big, scalable business: 1) sell something that has a super high order value, such as mattresses, to recoup the customer acquisition cost right away, or 2) to sell something sticky and ideally a high-frequency item, such as coffee, that allows you to recoup the customer acquisition cost over a short period. 

The subscription snack box is in an awkward spot because it sits somewhere in between. On the demand side, most consumers don’t want to pay for a weekly snack box since snacks are not necessities at the end of the day. In addition, it is difficult to charge consumers more than $50 for a snack box. The cost has steadily been rising on the customer acquisition side, especially on the performance marketing front. Here is a chart showing the cost per click for Facebook ads in 2020:

The implication is that to build a sustainable business in the B2C subscription space. You have to create an efficient customer acquisition channel and look for opportunities to expand into other non-snacks verticals to grow your share of the wallet and purchase frequency (thus increase LTV).

Bokksu is a snack box company that has done an excellent job decreasing customer acquisition costs by building a solid brand and increasing LTV by expanding to other verticals.

Case study - Bokksu

Bokksu curates the best Japanese snacks. The business started in 2016 and grew to over 16K subscribers, and $5M revenue by 2019 as the demand for Japanese imported items rose tremendously, especially in North America and Europe.

The key to their success is that they are very focused on winning this niche ethnic snacks market. This niche approach has allowed them to create a differentiated product and a strong brand that resonates with many Japanese snacks lovers. I am not familiar with their CAC number, but from what I have found online, they seem to have a well-loved product based on their Instagram engagement (106K+ followers) and 17K+ 5 star reviews. This strong brand has likely allowed them to acquire customers at a cheaper cost (e.g., via word of mouth and referral) than its competitors who don’t have a loyal customer base.

To increase the frequency of orders and share of wallets, the Bokksu team has recently launched a marketplace offering. People can now purchase hard-to-get ethnic items (not just snack boxes) from their curated marketplace. Suppose the Bokksu team can execute this strategy correctly. In that case, this marketplace model will likely become a much more significant part of Bokksu’s business since they will tap into a bigger total addressable market (e.g., lifestyle items, teas, toys, etc). 

Corporate gifting snack box

Corporate gifting is somewhat of a confusing term. It covers two main use cases - internal gifting for employees and external gifting for clients and customers. This intersection of e-commerce, B2B, and gifting creates interesting dynamics for companies in the space, both good and bad. 

There are a few intrinsic positives to this corporate gifting model. First, the order size in corporate gifting is much bigger than that of B2C subscription boxes since companies have a bigger budget than individual consumers. For example, if the Head of HR at Google wants to send an appreciation box to 100K+ employees in the US, it can easily be a high 7 digits single order. You can also upsell B2B buyers by offering different customization options, significantly expanding the margin.

Another exciting element of this gifting world is that there is a built-in virality to the business model. When people receive a gift from someone else, they might also use the same platform to gift something to someone else in their life (similar to the book gifting concept). For example, the same Head of HR at Google is sending out a snack box to all employees for Christmas, a portion of that 100K+ people will also use the same platform to send a snack to their friends for the holiday. 

On the other hand, there are some inherent challenges in this model. First, the gift buyer is different from the end consumers. The gift buyer might prioritize ease of use and convenience while the end consumers care more about the snacks themselves. As a result, there is an added level of complexity, because you have to satisfy both the buyer and the end consumer.

The second challenge is retention. A company might be willing to try your snack box for one of their holiday events but it is challenging to convince them to keep using your product for future events. Product differentiation is even more important for B2B buyers. 

The implication for this model is that the winner in this corporate gifting space needs to create a good product for both the buyer and the gift recipient and it has to give companies a strong reason to come back again. 

SnackMagic is one of the leaders in this space and has done a good job addressing those two challenges.

Case study: SnackMagic 

SnackMagic started last year as a result of a pandemic pivot. Prior to COVID, it was a group lunch delivery service for offices called STADIUM. Colleagues in the same office could pick their favorite dishes from different restaurants on STADIUM, order them together, and the dishes would get delivered at the same time. However, the office lunch delivery business went away due to the pandemic. 

Within 3 weeks, the team pivoted to launch SnackMagic by applying the pick-your-own concept to the snack box space and selling to the same corporate customers who are looking for more ways to connect with their employees and clients/customers. SnackMagic grew from 0 to 22M in run-rate revenue in eight months last year and the grown has further accelerated in 2021. 

SnackMagic has successfully created a delightful experience for BOTH the buyers and the end gift recipients.

Gift givers:

1. Ease of use - The user flow is so easy that most orders, even many $10k+ ones have been placed directly on the website without any help from the team. SnackMagic makes corporate gifting 10X easier. 

2. International presence - The ability to fulfill snack box orders anywhere in the world attracts many global enterprise customers.

3. Analytics - Gifters gain more control by being able to track treats redemption dashboard and total spending, along with other data.

Recipients:

1. Personalization - SnackMagic still stands as the only snack box company that provides consumers the ability to choose and pick each snack. Each box is 100% customizable by the recipient.

2. Fun - all the snacks come from more novel and niche snack suppliers, helping consumers to discover new snack brands.

This deep obsession with both sides of the gifting experience has helped the SnackMagic team to develop a product loved by startups and fortune 100 companies. This delightful product experience has also helped the company to see tremendous retention so far. On a daily basis, around 50% of the revenue comes from repeat customers/gift-givers. 

Another way SnackMagic is trying to increase retention is to give B2B buyers more reasons to gift. Besides snack boxes, SnackMagic is soon launching two other verticals, SwagMagic, a way for companies to gift personalized swag, and Department of Superior Dishes, a way for companies to gift well-known regional dishes. These new gifting verticals will allow SnackMagic to become a horizontal corporate gifting platform and B2B buyers will be able to send different types of gifts to employees, clients, and customers. 

Check out my in-depth analysis here if you would like to learn more about SnackMagic’s story.  

Future of the industry

B2C -> B2B

As the remote work trend continues to dominate, I have noticed that many of the traditionally more consumer-focused snack box companies are pivoting or at least expanding to the corporate gifting space. With the companies switching to remote work (possibly staying), a ton of in-person office budgets are shifting online. Many snack box companies have started to realize the attractive market opportunity in the massive B2B space (e.g. better economics and higher retention). For example, SnackNation, a more B2C-focused snack box company, has spun out a separate brand called Caroo to specifically target corporate gifting. Bokksu has also started to offer corporate gifting options for its customers. Almost all of the B2C companies I listed in the market map earlier have made a push in the corporate gifting space. 

Leveraging data

Another interesting trend in the space is that companies are trying to leverage the data they have accumulated from selling snack boxes to provide insights to CPG brands. Currently, CPG brands mostly rely on retail data from third-party data providers such as Nielsen and SPINS; however, not only are those existing platforms expensive, but the data quality they provide is also questionable since they hire agents to go to retail stores to gather data through either surveys or observation. 

Snack box companies have the opportunity to disrupt this industry by providing more real-time and better quality data to brands. For example, SnackMagic is working on a CPG data insights platform called CPG Pulse, which will be the platform to help brands answer their top-of-mind questions such as - who should they target? How should they iterate their products to better meet the changing consumer preferences? What is the best way to quickly sample new products? 

That’s it for today 👋! Please leave some feedback and also let me know what are some other niche industries you would like me to explore next,

Leo