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Keeping innovation fresh in today's food business

Keeping innovation fresh in today's food business

As most industry observers would agree, food innovation has gone more than a little stale.

  • min


Keeping innovation fresh in today's food business

As most industry observers would agree, food innovation has gone more than a little stale. Bain & Company research shows that since 2001, food and beverage companies -once the leading innovators in consumer products -have fallen seriously behind the field. In the late 1990s, the top food and beverage innovations outpaced those in personal care, with first-year sales that were 50 percent higher on average ($150 million versus $100 million). Now, first-year sales for food innovations lag behind those of personal care innovations by a good 20 percent.

The food industry's growth is hovering in the unappetizing three-percent range; margins have been tailing downward for the past few years. With challenges coming from three sides-privatelabel penetration; fragmentation of consumer demand along ethnic, channel and geographic lines; and rapidly changing consumer health-related trends-the need for innovation has rarely been greater.

No, keeping products fresh is not easy in a business where product margins are slim and competitors can quickly knock off new ideas. But for those who get it right, the rewards are sweet.

Our research shows that the likelihood of gaining share is a full 60 percent higher for brands that consistently innovate, compared with those that are either non-innovators or pay it little attention.

They can begin by adopting the practices that personal care companies have used to take the innovation lead—and by following the strategies of a few cutting-edge companies in their own industry. Those innovators do four things right:

  • They are fast to launch (or latch onto) new trends-and just as fast to leave them if they peter out.
  • They get big inside to get small outside. This means they create the capacity to serve diverse and smaller customer groups from just a few large platforms.
  • They focus on creating new CATEGORIES of products—not just line extensions.
  • They increase investments in research and development when others are trimming back.

Identify and act on trends early. Consider the emergence of the organic category. US sales of organic food have grown 17 to 21 percent every year since 1997, according to the Organic Trade Association. This compares with growth of just two to four percent for the food category as a whole. The organics category is expected to leap from $10.9 billion in sales in 2004 to $31 billion by 2007. The players that have moved into this category swiftly with new products- firms like Hain and Dean Foods-have captured the largest gains in growth.

Recognizing when a trend has lost steam-and making a swift exit-is just as critical. Consider what happened to one snack maker with the low-fat trend: Its cookie line, introduced in 1992, sold briskly through 1995. But as the trend peaked, the company missed the turn. As sales began to flag in the late 1990s, the snack maker tried nearly doubling its low-fat cookie advertising budget to spur demand. That investment failed because low-fat diets had become passé. Food companies that are still riding the low-carb wave would do well to remember that lesson.

Get big to get small. Winning food companies use broad platforms to quickly customize products for narrow segments. Those platforms may be brand platforms, go-to-market platforms, packaging platforms or technology platforms.

Hershey, for instance, has used its Reese's brand platform to broaden and freshen its product line, expanding it from peanut butter cups and Reese's Pieces to everything from granola-like SnackBarz to cookies. The result: Revenue for Reese's products more than doubled, from less than $500 milopinion lion in 1994 to more than $1 billion in 2004.

Nabisco's "Go Paks" is an example of a packaging innovation that is now deployed across a host of brands. The Kraft division first introduced the portable crush-proof containers, which fit in car cupholders, with Oreos in the summer of 2002. They allowed Nabisco to achieve attractive price points: Cookies sold for 15 cents more per ounce in Go Paks than in regular bags. Since then, Nabisco has rolled out Go Paks for nine product lines, ranging from Mini Chips Ahoy to Ritz Bits to Cheese Nips.

Create new categories. In recent years, most innovations in the food industry have been line extensions, not the new categories or technologies that set off a large growth surge, as Crest Whitestrips did in the personal care field.

Drinkable yogurts, for instance, like Yoplait's vitamin-fortified Nouriche, have been a growth star in the dairy industry. "Value-added produce" has been another bright spot, experiencing growth of 10 percent a year. Fresh Express, which pioneered this category with its prepackaged salads, has taken the lead in this market, seeing its own sales rise to $1 billion. Recently, Chiquita Brands snapped up Fresh Express, in one of several steps it has taken to fight flat sales and declining profits in its core business. Those include innovations ranging from technology that extends shelf life, thereby allowing the company to sell bananas in higher-margin, nontraditional retail locations, to Chiquita Dippin-Licious fruit dips.

Boost investment in R&D to stay out in front. One reason personal care companies have outpaced food and beverage companies in innovation is that they have invested more in R&D. As of 2003, the last year available for comparison, food and beverage companies were spending almost 40 percent less onresearch and development than personal care companies. The averages for the two industries were 1.6 percent of sales for food and 2.6 percent for personal care.

 In an era of private label penetration, food companies cannot afford to starve R&D. Across all consumer product categories, private label penetration is lower in categories with high innovation—only eight percent in categories where more than 20 percent of the volume of products were introduced in the past five years.

That compares with a full 30 percent penetration rate in categories with virtually no innovation, where less than one percent of the products were introduced within five years. Personal care categories constrained private label look-alikes to an 11.9-percent penetration rate in 2003, while the food and beverage industry suffered a 16.5-percent onslaught.

To do that, they must identify trends quickly, and focus on creating new categories and big platforms they can customize across segments and categories. And they cannot lose momentum, as they've collectively done in the past few years.

One food company that seems to realize this is Chiquita. It has hired a Honduran scientific organization to produce new varieties like bananas with apple, strawberry or vanilla flavors, which already occur in nature. It's searching for diseaseresistant varieties, which could lead Chiquita into the premium-priced organic market. As Chiquita CEO Fernando Aguirre recently remarked, growth "is all about innovation."

If food companies make sure their diet includes a steady flow of new ideas—the right ideas—they can improve their health and bolster their immunity against competitive threats.

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