How CPG companies can dodge three common innovation traps
Today’s consumer packaged goods (CPG) companies confront a strange market paradox: continued demand for new products but reduced shelf space in stores. Organizations have long used innovation as a tool to meet the shifting needs of consumers and to drive growth. In fact, in their 2020 annual reports, all ten of the highest-grossing publicly traded global CPG companies highlighted innovation as a key growth lever.
Product development is a highly capital- and labor-intensive process, and left unchecked, results in a questionable return on investment.
But the space to display this proliferation of new products is shrinking as retailers weigh costs and consumer experience, focusing on smaller storefronts with hyperlocal offerings and a less overwhelming array of choices. At wholesaler BJ’s, for example, smaller, new-build stores house 16% fewer SKUs than regular stores. Similarly, British supermarket chain Asda recently revealed plans to cut SKUs by up to 40% as it shifts to a simpler discount model for its stores. Another reason retailers are reducing shelf space is to avoid being overstocked as consumers do more online shopping. In PwC’s June 2021 Global Consumer Insights Pulse Survey, more than half of global consumers surveyed said they became more digital even in just the six-month period from October 2020 to March 2021.
The danger for a company in the paradox of more products and less space is that most new products don’t even last in the marketplace for more than a year. So companies rely on new products to replace a portion of their core volume, feeding an organizational “innovation addiction.” Product development is a highly capital- and labor-intensive process, and left unchecked, results in a questionable return on investment. Market research firm Nielsen estimates that each year, US CPG companies introduce an average of 30,000 new products. In 2019, less than 0.1% of those products contributed to the lion’s share of revenue from innovation revenue. The global pace of innovation is similar; Nielsen reports 40,000 innovations annually in five euro markets (France, Germany, Italy, Spain, and the UK).
The good news is that there are ways to curb hyperactive innovation and focus on long-term return on investment. We have identified three innovation traps, one in each stage of product development, and suggest pragmatic ways to steer clear of them.
Stage 1: Ideation
The trap: “new news” is the best news. The foil: be picky. Retailers reinforce CPG companies’ innovation addiction, agitating for “new news” that will excite consumers, drive traffic to stores, and provide incremental sales. The result can be a vicious innovation cycle that taxes organizational resources.
If you’re a CPG business leader and you find yourself approaching this trap:
• Review your portfolio strategically. You should define the role innovation will play for each brand in your portfolio. For example, it might make sense to avoid investment in new product launches for low-growth brands in stagnant categories and invest instead in medium-growth brands in growing categories.
• Create a clear prioritization framework. An objective method for evaluating innovation ideas can help you assess their quality, using factors such as commercial feasibility and manufacturing capability to determine where you’re likely to see the most return on investment. You can also use your framework to decide which innovations provide the best fit across brands and channels.
• Use other growth levers. Innovation isn’t the only way to grow. Other tools, such as price adjustments or distribution increases, can be equally effective (and less costly).
Stage 2: Development
The trap: one process fits all. The foil: tailor the development process. After companies select ideas to invest in, development processes begin to transform those ideas into reality. But many companies assume that all innovations require the same processes, timelines, cross-functional support, and granularity of planning and execution. R&D leaders often believe their company should develop a new product line in the same way as it would a major line extension or a packaging change. This mindset can encumber simpler projects and result in insufficient resources being given to more complex projects.
If you find yourself approaching this trap:
• Evaluate projects’ complexity. Audit your innovation pipeline to understand what types of projects are flowing through the system. Take account of products’ complexity drivers, such as the need for new ingredients or new suppliers, or products making new claims.
• Create tailored processes. Develop flexible development processes that make it easy to adjust timelines, stage deliverables in different ways, and assign cross-functional resources. For example, a change to the graphics on packaging might be able to move through a streamlined approval process, reducing time-to-market and limiting the resources required.
• Boldly operate. Trust your new processes, timelines, and requirements. Many innovation pipelines become tunnels instead of funnels, as innovation projects proceed along development paths regardless of performance. Don’t be afraid to hit the accelerator when needed—or cancel projects when their sales forecasts no longer meet thresholds.
Stage 3: Post-launch
The trap: innovation fatigue. The foil: prioritize long-term success. Once a product is launched and on retailers’ shelves, many CPG companies view the job as complete and move on to the next innovation. All too often, marketers who lead the charge on innovation are incentivized for short-term innovation performance and don’t have an easy way to monitor product performance over the long term and make adjustments as needed. Failure to adequately support innovations post-launch, combined with a tendency to focus on the new shiny object, results in poor financial performance after a product’s first year—and its subsequent removal from the market.
If you find yourself approaching this trap:
• Create robust, long-term launch plans. Design launch plans—including distribution, advertising and marketing, and supply chain and inventory forecasts—to ensure that resources are in place to support the initiative post-launch.
• Employ long-term tracking. Track innovation metrics (both financial and nonfinancial) closely for at least two to three years post-launch and develop a robust system for flagging and responding to performance deviations. Tie incentives to meeting or exceeding these metrics to foster accountability and strong ownership among those responsible for the launch.
More focused innovation supports long-term success
Without innovating, a company might quickly fall into the annals of business history. But by the same token, unfocused, unprofitable innovation might also lead to failure. Avoiding innovation traps at each phase of the innovation process can help you ensure that resources are allocated to those innovations best positioned to support the goals of the business.