PITTSBURGH — The presentation that Kraft Foods Group executives made at an analysts’ gathering in February 2013 was blunt. The Illinois food giant, the slides said, had been among the “worst” consumer packaged goods company for investing in new products.
“Kraft is where good ideas … go to die,” was a quote pasted next to an image of a cemetery.
A new innovation drive had changed things, according to the presentation. The company had gotten focused on a limited number of “big bets” that would get the right marketing support.
And, indeed, Kraft Foods Group captured the top spot on a 2014 list of successful new product launches with its Lunchables Uploaded, an addition to a 25-year-old line that produced $143.2 million sales in its first year, according to Information Resources Inc., a market research firm in Chicago.
The consumer packaged goods industry — both food and non-food companies — is obsessed with innovation. Companies invest in test kitchens and innovation centers; they experiment with new flavors and package sizes; and they send teams to expos where smaller companies are showing off their own ideas.
By one estimate, more than 2,000 products could be introduced this year, often bumping out existing versions of similar things. Many will not do much for sales. IRI research finds failure rates range from 60 to 80 percent.
Competition for shelf space in stores and pantry space in homes keeps the pressure on to try anyway. If companies don’t innovate, they risk being bumped out by some other fresh product. And the larger companies grow, the harder it is to show the kind of dramatic sales gains that investors like without an exciting new product.
Earlier this year, there was a depressing period when a string of earnings reports came out one after another. “It was just one food company after the next that was reporting real dire results,” recalled Jim Hertel, managing partner at consulting firm Willard Bishop in Barrington, Ill.
H.J. Heinz Co., based in Pittsburgh, stood out as one that managed to produce a profit, but the gains seem to come more from cost-cutting than customer interest in Smart Ones frozen meals or Ore-Ida fries. Total sales fell from the previous year.
Heinz, which was acquired in 2013 by a joint venture of Brazilian investment group 3G Capital and Warren Buffett’s Berkshire Hathaway, in March announced plans to merge with Kraft.
Pressure on
Moody’s Investor Service last month lowered its projections for earnings growth in the packaged foods industry over the next year, because of shifting priorities there.
“More cost-driven M&A in packaged foods will force other companies in the sector to slash costs to stay competitive and avoid becoming takeover targets themselves,” said Brian Weddington, Moody’s vice president, in the report. “This trend is going to have a chilling effect on new product innovation that these companies need to drive long-term sales growth.”
Businesses like Heinz and Kraft were once startups themselves, shaking up their sectors with innovations. Now like many mature businesses, they are challenged to be nimble. Heinz CEO Bernardo Hees, who is in line to become chief executive of the new Kraft Heinz, told analysts in March that the company planned to reinvest savings from cost initiatives into the brands “we think we can most profit from it” and to refocus its strategic vision on innovation.
“In the past, innovation effort has been too diffuse and diluted, introducing lots of products to see what works with no focus on profitability,” Hees said. “Our goal is to be an industry-leading innovation in the consumer food space, and we aim to deliver on this goal by focusing on big, bold bets.”
Among the latest bets he called out was a new push to get Heinz mustard into retail stores, new flavors of ketchup “expanding penetration on new occasions, especially breakfast and cold sandwich,” and new hot sauces in Europe.
“Those are big and bold innovations,” Hees said.
Next new thing
The split in new product launches tends to be between line extensions — things like Honey-Nut Cheerios to add to the Cheerios line — and entirely new products that change the category — like Greek yogurt.
Line extensions typically account for 85 percent of new launches in the consumer packaged goods business in any given year, according to Susan Viamari, editor, Thought Leadership for Chicago-based IRI.
As the Lunchables Uploaded proved, those can tap into a brand’s power and drive new sales.
But game-changing products open up new markets, according to a recent Willard Bishop study. “Disruptively innovative products” attracted 10 times as many new shoppers to a category as did line extensions, according to Hertel.
It’s not easy cooking up the next Keurig single-serve coffee cup. That’s one reason for the buying and selling seen in the food business, just as it is in tech industry where Google and Yahoo! want to capture the next revolutionary idea from a startup company.
Still, at a time when the trends are toward natural and organic food products — a backlash against the kind of corporate food production that helped bring convenience and low costs to previous generations — it can be hard for older companies to adapt.
Hertel noted that General Mills’ acquisition last year of Annie’s Homegrown was greeted with charges that the smaller business had sold out and the larger one would not stick with the same organic foods standards.
Another issue for companies whose researchers are whipping up lots of ideas is determining what ones have the best chance for success and should get the support required to really reach a broad audience. Viamari said new items that start slower than companies expect are sometimes abandoned before they have a chance to get established.
Not surprisingly, social media is being used to help companies make better, faster decisions. Los Angeles market research automation firm Instantly launched a Product Watch tool this year to tap into crowd-sourcing techniques.
Karyn Hall, vice president of insights at Instantly, worked at Kraft for several years and is familiar with the stressful process of developing and testing new products. “At Kraft, it was like, you create this baby and you throw it out there to the world and you were just waiting. Did people like your baby?”
