CPG Manufacturers Called to Innovate
It’s time for consumer packaged goods companies to move
out of hunkering-down mode and get serious about product innovation. That’s
the gist of new research from the the Grocery Manufacturers Association (GMA)
and PricewaterhouseCoopers LLP.
“It will be tough to succeed using the same tactics employed during
the recession,” said Lisa Feigen Dugal, North American consumer packaged
goods & retail
advisory leader, PricewaterhouseCoopers, in a press release. “Novel approaches
will be crucial — and that includes creating new trade promotions programs
for retailers, rethinking how they spend their media dollars, targeting coveted
demographic groups like Generation Y with smart social networking campaigns,
reaching customers in more places, and tailoring their products for local customer
tastes in emerging markets.”
According to the study, Forging Ahead
in the New Economy, many CPG companies
are looking to better understand consumer priorities to develop products and
package sizes that meet the needs of shoppers. Tailoring products to local
tastes, especially in emerging markets, is also seen as key to attaining wider
distribution of products.
Discussion Question: How do you define innovation in CPG terms and where
do you see it taking place today? On which aspects of product and package design
would you suggest manufacturers concentrate?
- CPG Industry Must Capitalize on Innovation
and New Growth Opportunities, According to New Grocery Manufacturers Association-PricewaterhouseCoopers
Report – Grocery
Manufacturers Association - 2010 Financial Performance Report: Forging Ahead in the New Economy (.pdf
download) – Grocery Manufacturers Association
I give up. The same article that touts the need for innovation ends with this paragraph, hardly a reflection of innovation, probably a simple rephrasing of Philip Kotler’s missive from way back when. Read it and understand why we don’t see innovation from companies counseled with words such as these. Not to say that these words are no longer true, but rather this is what marketers should always be doing to stay ahead of the competition.
“According to the study, Forging Ahead in the New Economy, many CPG companies are looking to better understand consumer priorities to develop products and package sizes that meet the needs of shoppers. Tailoring products to local tastes, especially in emerging markets, is also seen as key to attaining wider distribution of products.”
Most companies define innovation with increased sales. After all if you don’t increase sales or brand with innovation, you didn’t do it right. A seasonal apropos example is Miracle Whip in the squeeze out tube for picnics. Most picnic goers would just go with ketchup and mustard because it’s been in squeeze out bottles for a while but now they pack the good ol’ Miracle Whip!
CPG companies need to look at the market and generational changes. Gen Y is looking for ease of life. Baby food now comes in TV dinners!?! Innovation needs to match the desire. For instance, Perdue came out with a seasonal packet to bake the chicken that you buy in the store. No fuss, put it in the pan, put the provided season pack on it and voila! You have a delicious home cooked (sort of) meal.
I think the article defines innovation very well: it isn’t just product; it’s media, marketing, segmentation, product formats, trade dollars…yes, yes, yes. I wrote about this at Forrester in my piece called “Adaptive Brand Marketing.”
I fundamentally believe the center no longer holds on a top down reach and efficiency, mass scale production and shipment model and that it will continue to break down from there.
I love what’s happening right now with P&G and Old Spice: for those of you not close to it, go on YouTube and enter “old spice” in the search window. You’ll see a series of out of the box vignettes in which the Old Spice guy personally responds to tweets he’s received by name and in context. Many people will say, “That’s not sustainable” but if you rethink spending $2m on producing one commercial and instead break that budget into $20k increments, you can sustain a lot of small viral efforts that help consumers see the brand in new ways. The brilliance of the campaign is that the spokesperson is the same guy who’s on the national TV ad. They’re not trying to speak in a different brand voice in different channels, but they’re leveraging what the different channels are good at to innovate branded communications.
This is obviously a small step but a major shift for thinking about where and when to use scale and where to turn scale on its head to be intimate. Companies like P&G and Unilever have a history of market leading innovation. With the massive shifts in consumer behavior the opportunity for these companies to form the next generation of brand management is huge…and truly exciting.
CPG manufacturers are being called to innovate but this only works if retailers are called to stop over SKU-rationalizing and begin SKU innovating:
At present most innovation is generated from very small companies, entrepreneurs, and small businesses that cannot afford the huge entrance fees charged by retailers for shelf space. The cost of entry, including programs such as pay-on-scan, are stifling innovative products from reaching the shelves.
The larger companies do not innovate in a true sense because they are not willing to take the risks and because most are too corporate and political for any sense of real innovation. I’m sorry but that is absolutely true. Been there done that!
To be fair though, smaller businesses need to seek the right help and advice to truly understand the retail environment for successful innovation launches to the retail world. Most try to do it on their own, and whereas they know their product well, they usually fail to do their homework about retail, the market itself, and they often lack the presentation skills to present it to retail comprehensively or adequately. Many times they lack even the business and marketing plan.
The innovation being requested is new-to-the-world innovation rather than line extensions given the discussion about assortment. Rather than determining what kind of innovation is necessary, CPG companies and retailers need to start with that last paragraph. Who are their most valuable consumers and what do they want or what will make their lives easier, more pleasant, or “better.”
Whether the appropriate response is line extension or new-to-the-world innovation, that is what CPG companies need to work at doing. If the innovation, whatever form it takes, is what consumers want badly enough that they are willing to pay for it, that is the type that needs to be done.
The real problem is that most companies “out-of-the-box” thinking just lands them in a slightly different box. Real innovation is revolutionary, not evolutionary. I, for one, don’t see much of that thinking on the horizon.
In my blog yesterday, I talked about optimization mania and how retailers continue to portray it as being in the best interest of consumers (while at the same time, substituting it for creativity). I agree with a point made earlier: until retailers get on board, CPG companies will not be able to press through. It’s time to graduate from the optimization obsession!
Nothing is more important for CPGs than to develop innovative products if they are to survive, much less prosper. Private label continues to grow. According to The Nielsen Company, private label in supermarkets grew 9.8% in dollars year over year in the first half of 2010, and the stat for drug stores was no less than 15%. Private label in convenience stores, by the way, climbed 18.3% in this time frame, albeit from a small base. The result of these sales trends: private label dollar share in supermarkets is 17.9% and 13% in drug stores. For CPGs, these data could be interpreted as a threatening set of statistics.
To be sure, there has been a strong response, and heavy couponing and price promotions for national brands have supported their sales, at least unit sales. But price-oriented promotions, however effective, are really only a short-term solution. Long term, innovation is the answer to these statistics.
The old definition of innovation still holds true: a product that will bring new customers and new sales to the category. An innovative product has to meet new consumer needs, bring a fresh idea or new way of doing things to the category, or provide a completely new service to the consumer. It’s a tall order, because even if the impact of national brand equivalents is blunted if and when the economy actually turns around, private label is going to be innovative too, particularly with products and labels that are intentionally unique to a specific retailer.
A modest proposal from a diabetic:
We need more things we can eat “on the go”–especially things available in convenience store channels and/or at the deli counter in grocery stores.
There are millions of us, and if nothing else, diabetes forces us to eat healthy food, which I think is something a lot of U.S. customers are looking for.
Innovation in CPG companies is represented by Golden Double Stuffed Iced Oreos. It is a very safe innovation strategy, but hardly earth shaking.
The last paragraph of the article says it all. But, that is not new direction. That has been the word to follow for decades. But, the CPG companies have not been the ones following.
Who has?
The retailers! Consider products and package sizes that meet the needs of shoppers and tailoring products to local tastes, especially in emerging markets. Now think of Costco, Whole Foods, Trader Joe’s, Fresh Direct, Wegmans, and a few others.
Historically, innovation does not come from large companies. There is much too much to lose to be the one to try that new trade promotion or new media mix. In this context “new” is defined as radical.
Innovation ultimately means developing and implementing “Reason-to-Buy” messages in stores, which increase sales. And retailers should take the lead rather than giving up their space in stores–when and where shoppers make buying decisions–to CPGs and other suppliers. And this is not enough.
The store shelves and perimeter must be viewed as the most powerful media platform for many reasons, led off with the reality that it is the only media that actually causes immediate sales lift.
The reality is, CPGs make about eight to ten times more profit per dollar of revenue that retailers make. And it’s getting worse from the perspective of retailers. We are currently doing tests that demonstrate how retailers can close this ridiculous gap and dramatically increase sales.
Wrong, wrong, wrong. Retailers continue to embarrass themselves when they listen to these poor words of advice. Success is established in driving a satisfied customer into your store, giving them great prices, in a great store environment, that strives to create an informed consumer who is happy with their purchase (and their experience) while minimizing out-of-stocks (the 3 worst words in retail).
The dollar stores are not successful right now because of the innovative products they offer, but because of their mix of product, price, and service. The same can be said for Trader Joe’s, Costco, and others. These retail category leaders aren’t pushing the envelope of innovation, but maximizing the time-tested successful recipe of customer service in retail.
Innovative products transform the category. Crest dental products include whitening, oral care, sensitivity–products based on needs and wants of consumers. And now, there are private brands offering similar selection. Across the category, sales have increased. When innovative products are introduced, the game can change–the opportunity exists to provide a new value proposition for target consumers.
Innovation from CPG companies needs to come not only from product, but also from retail as well. Faced with the daunting dual challenge of private label proliferation and drop dead pricing, the shopper experience needs to come to the forefront in a much broader way. From more robust online purchasing to their own stores, much more will either have to happen sooner or there’s going to be a whittling down of suppliers.
When CPG companies start to act like retailers vs. manufacturers, then I believe you’ll see innovation.
This article and discussion reminds me of the airline industry back when only the big players decided everything from routes to costs. Then along came Southwest and a few others saying your way is not working; you need to try it my way. The old stogies stood pat and watched as Southwest and a few others pounded them into near submission by delivering better times, better service and at lower prices.
Same thing is going to happen in the grocery field when new players come in and deliver what the consumer wants in packaging made for their lifestyle. Change will not begin with the big players in the field until new players come in and force them to get with the times.