Demand Without a Brand: Online Grocery Store Eliminates “Brand-Tax”

You may have heard of Brandless, the e-commerce startup launched this year. The San Francisco-based company, founded by entrepreneurs Tina Sharkey and Ido Leffler, flaunts online groceries and essentials with an enticingly simple pricing model: everything is $3 or less. Why is it called Brandless? The inspiration for this online grocery store, Sharkey says, was the so-called “brand tax” (additional costs for shipping, warehouse space, etc.) on traditional consumer packaged goods (CPGs). In addition, Sharkey makes the claims that millennials don’t want to buy their parents’ brands and that there is an overwhelming variety of choices in grocery stores today. She says consumers care more now about the attributes of their groceries–gluten-free, organic, non-GMO–than they do about the flashiness of a certain brand. By focusing on qualities people care about (e.g. organic, non-GMO) rather than brand, narrowing down their selection to just a couple hundred essential items, and bringing the products directly to the consumer, Brandless claims it can offer its goods at 40% less than comparable products on average. It seems too good to be true, right? What’s the catch? Does this model work and will it work in the long run for Brandless? And is it truly a better deal for consumers?

There are several reasons that point to this online grocery store being a success. For one, the limited number of products does save on costs for Brandless, and looking at the website myself, they seem to cover a good range of the essential non-perishable groceries, as well as other common household CPGs. This means that if a vast range of choice isn’t important to you as a consumer, or if the overwhelming number of options even plagues you, Brandless can supply you with many of the essentials. To prevent their selection from getting stale (no pun intended), Brandless introduces seasonal products and specialty items; right now, they have an assortment of maple snacks, as well as maple hand soap and lip balm.

Brandless probably makes up for the low price in part with their two-part pricing method: if you pay for an annual $36 membership fee, you become eligible for free shipping at a lower price threshold. For those curious, it’s $48 versus $72 for non-members; if you don’t hit the free shipping threshold, shipping is $9.

The trickiest part of Brandless, and why it seems so enticing, is the pricing model. Price is more elastic–flexible, less subject to change in demand–when goods are cheap. Think about it–a $1 candy bar doesn’t seem so much worse than a $0.50 candy bar, but what about a pair of shoes that cost $100 versus $50? Both are twice the price as the cheaper one, but we’re much quicker to hesitate when it comes to the shoe purchase. Fifty cents won’t affect your life that much after you buy the chocolate bar. On the supply side, however, the producer just earned twice as much money for the same candy bar and, on a grander scale, can make huge amounts of profit off of this. This is why $3 might seem like such a great bargain on some of these goods, but it’s much easier to not notice that the comparable product in a grocery store is actually cheaper because $3 sounds like so little. And even if $3 is a deal on some of the products that Brandless offers, it is overpriced for the other products on their site. For example, one reporter reviewed Brandless by buying a few food items along with a couple of household items. The foods he reviewed–cookies, peanut butter, mac and cheese–were all organic, for what it’s worth, but the products seemed to be average or lackluster in quality despite the higher cost compared to typical supermarket prices. The simple, across-the-board $3 price tag leads you to add item after item to your cart, thinking it’s a simple bargain. Sharkey herself says, “We really wanted something that was very simple, so you almost psychologically don’t have to think about it.” And that is exactly what they’re banking on you doing: buying $3 “bargains” without really thinking about the price of comparable goods. By doing so, you believe you’re getting a good deal, when you’re really not.

Disregarding the quality and price of these goods, if the home delivery aspect is what’s appealing, many grocery stores already offer this service, typically outsourced to a grocery delivery service like Instacart. The fees vary from service to service, however, and you may find a grocery store with a much lower or a much higher delivery fee (which would be equivalent to Brandless’s $9 shipping cost in this situation). The only way I can see this being worth it is if you are someone who buys these essentials frequently (perhaps a busy parent) and you are familiar with which products are actually a good deal (i.e. cheaper than similar products) at $3. The membership wouldn’t hurt either.

Much of the worth of this service lies in the yumminess of the food itself. That’s why, for my piece next week, I’ll be ordering and taste-testing several staple products from Brandless and comparing them to brand-name, organic, non-perishable groceries I buy with frequency. That will give us a bit more insight into a crucial piece of this grocery store: the quality of the products.

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