The Challenge of Developing an Effective Innovation Strategy in CPG

McKinsey:

84% of executives agree that innovation is important to growth strategy but only 6% of them are satisfied with innovation performance.

Harvard Business School:

Each year 30,000 new consumer products are launched — and 95 percent of them fail.

Catalina:

Just 0.7 percent of shoppers drive 80 percent of volume for top-performing food and beverage products after the first full year of sales. 

Gone are the days when all you needed to do to be innovative is to add the word “new” on a product package. Today’s consumers are picky with their product choices. Good innovation must fulfil a range of customer needs that go beyond the functional or expected. Shoppers assess the customer experience, the ingredients a product contains, how and where it was made, and even whether the brand resonates with consumers’ ethical beliefs.

Big brands that have occupied supermarket shelves for decades have historically struggled to develop innovative products at pace, mainly due to a lack of knowledge or resources. In fact, the 2017 study revealed that the CPG industry accounted for only 2.9% of the global R&D spending, compared to computing and electronics companies that accounted for 23.1%. 

Does this mean that businesses in the CPG sector simply need to invest more in innovation research? We think the answer is a bit more complicated.

There are several things that stand in a business’ way when building a truly successful innovation strategy. Let’s see what they are.

Common blockers to building a successful innovation strategy

  • Risk-aversion

Imagine you’re an established CPG brand that has spent years crafting and tuning your portfolio. All this time you’ve been conducting rigorous market research, digging into tons of customer data, and running extensive prototype development - to the point that you’ve created the perfect line of products that are predictably high-performing. 

But suddenly, the market demands change and you have to come up with a way to deliver something different. The more comfortable option might be to stick to your current portfolio and wait out the change. 

Some CPG brands don’t take action until they realize that a more innovative competitor stands in their way, and it’s already too late for them to catch up.

  1. Lack of agility

The term agility is borrowed from the tech industry. In a space where things change every day and you have to adapt quickly, being agile is what keeps those companies afloat. 

But if we put the question of agility into the CPG context, the situation is different. Usually, in large CPG corporations, there is a long chain of procedures that occurs before the product is launched. A project can start with the R&D team, move to corporate strategy, sales, marketing and many other departments before being consumed by shoppers. 

Even if the company has a dedicated team to execute the innovation strategy, oftentimes they operate in silos and are deaf to the ideas that other staff members or their most passionate customers might have. This affects the quality of innovation and can cost the business huge amounts of time and money.

McKinsey’s senior partner Sherina Ebrahim, is certain it’s a problem about your people. She notes:

“I think the one thing that is really important to think about when we think about agile organizations is to remember that it’s not only about what we would typically think about as organization structure. To really become agile, it’s very much around mindsets and behaviours and really adopting a very different way of working.”

Innovation comes naturally to tech companies because relevant ideas necessitate communication across departments. In contrast, innovation in CPG can be isolated from other departments - and this primarily comes from the company’s culture and leadership.

  1. Lack of innovative culture

Booz & Co’s research shows that organizations with a highly aligned business innovation strategy and pro-innovation culture have 30% higher growth rates.

Culture is often treated as an afterthought which makes innovation even harder. Building an innovative culture starts at the top, with the executive team, and spreads to other parts of the organization.

But the last part is not as easy as it sounds. Deloitte’s 2016 Global Board survey also revealed that the areas where the board of directors’ understanding is weakest are innovation and R&D strategy. So the problem lies not just in the fact that executives don’t promote the innovation across the business, but also in that they don’t have enough knowledge or experience with it. 

An Example of a Failed Innovation Strategy

Innovation can sound pretty generic unless you put it in practice. So let’s have a look at a case study of a CPG brand that didn’t quite nail its innovation strategy. 

Heinz EZ Squirt Ketchup

The early 2000s were a crazy time: bell-bottom jeans were a thing and the first Shrek movie was smashing cinema records. Heinz decided to pick up on that last trend with a new take on their classic ketchup. 

After 124 years of producing America’s favourite condiment, the iconic ketchup company pivoted, launching the ‘Blastin Green’ ketchup in support of the new kids' movie. The product line which then was introduced in purple, pink, orange, teal, and blue varieties, was called EZ Squirt.

The kids and their parents came running. In fact, between 2000 and 2003 Heinz sold 25 million bottles of EZ Squirt ketchup, allowing the company to capture 60% of the US ketchup market. But the success was short-lived and the product was discontinued in 2006. 

What went wrong? Several things affected the rise and fall of EZ Squirt:

  1. Target market 

It’s hard to make innovation work in the kids market because the attention span is so short. At first, the young consumers were excited to play around with the new Shrek-inspired ketchup, but they quickly got bored and moved on to the next new thing. And parents, in turn, got tired of seeing half-used bottles of ketchup sitting in their fridge. 

The lesson? Tapping into new markets is great, but it’s crucial to consider how sustainable the initiative will be. 

  1. Product lifecycle

When you have a product that’s doing well in the market, it seems logical to continue bringing new varieties of that same project to market in order to keep people interested. But it took Heinz two years to start selling other colours of the EZ Squirt ketchup. Whether it was a manufacturing hold-up or a strategic mishap, it’s evident that Heinz missed the opportunity to build on the success of their initial launch. 

The lesson? Plan your innovation strategy and synchronize the product lifecycle and manufacturing to keep consumers engaged.

  1. Health factors

Purple ketchup isn’t made from purple tomatoes, and that’s something that parents couldn’t overlook. To make different colours, Heinz had to strip the original red ketchup off colours and add food colouring. We suspect that the company tried to compensate for this by adding extra stuff like Vitamin C to get parents’ approval. And at the time - when health-consciousness was on the rise - the presence of artificial food dye in ketchup didn’t sit well with parents, which might have led to the product’s demise. 

The lesson? Consider the preferences of those people with the real buying power (in this case, parents) and tailor your product make-up to suit.

Creating a good innovation strategy is hard, but...

… once you learn how to avoid the pitfalls we’ve outlined, you can set your CPG brand up for success. If you want to know exactly how to develop an innovation strategy that works, download our free Step-by-step Guide to Filling Your Innovation Pipeline with Profitable Ideas.

Download the guide