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Innovating For The New Consumer Reality

Mon, 11/30/2009 - 4:15am
George Young, Founding Partner, Kalypso

After nearly two years, the worst financial crisis since the Great Depression appears to slowly be coming to a close, but don’t expect consumer spending to return to pre-recession patterns anytime soon.

Buyers have been shell-shocked by the inability to hang onto their homes, the worst job market in more than a generation, and decimated retirement funds that will take years to rebuild. What remains as the dust settles are consumers who scrutinize every spending decision and demand more value for every purchase.

The food and beverage (F&B) industry is impacted greatly by this new consumer reality. The ability to adapt will determine who will emerge as the industry’s post-recession winners. Moreover, fundamental changes to the processes and technologies that enable, manage and measure product innovation throughout the lifecycle will be required.

Let’s take a look at four questions that today’s consumers are asking when they go to the grocery store and what the implications are for F&B companies.

What am I getting for the price?

Overall consumption has shrunk 6 to 10 percent since 2007. Coupon clipping is up, as are the purchases of private brand products. The days of “trading up” to pay extra for the latest and greatest enhancements are gone. However, that doesn’t mean buyers are universally choosing the cheapest products; they simply want greater value for the cost—whether it’s more volume, more ingredients, or more convenience.

Companies are lowering prices to widen the price range of their products in order to reach more consumers. P&G cut prices across 10 percent of its global product line, and Unilever is cutting prices as much as 3 percent in some categories. Another strategy to help contend with price-conscious consumers is offering intentionally inferior products, such as P&G’s Tide Basic, which lacks in performance compared to Tide—but costs 20 percent less.

The continued success of private brand products has shifted the focus of innovation to developing value products. Understanding what value means to consumers requires closer collaboration between F&B manufacturers and retailers, who offer front-line insights into the types of products, packaging and promotions creating the greatest consumer demand. According to a consumer packaged goods survey we recently completed at Kalypso, just 12 percent of respondents are engaging in this type of collaborative innovation, meaning 88 percent are missing important opportunities.

F&B companies also should seek to preserve their margins—and profitability—through analysis of how to optimize product valuation and pricing. Consumers will pay a little more for an item if they can recognize clear value over the lower-cost alternative.

Is it healthy?

The global discussion about health and wellness has more consumers selecting products that improve nutrition and combat obesity, diabetes, and heart disease. And consumers expect F&B companies to play an active role by offering healthier products and nutritional benefits. A recent food study by Ketchum indicates that 75 percent of respondents want F&B companies to place a greater emphasis on creating foods that reduce the risk of major health issues in the future. This has companies like Mars in Australia—which reduced the weight of chocolate bars by 10 percent—grasping on to the idea of responsible nutrition.

Many consumers now include foods and beverages that offer health benefits, disease treatment and prevention as part of their diets, increasing the demand for functional foods and nutraceuticals. The promotion of vitamins and nutrients is spurring demand for nutritionally enhanced water, fruit beverages, teas, and sports drinks—at some expense to traditional soft drinks. The addition of probiotics has expanded beyond yogurt to include granola, candy bars, frozen yogurt, cereal, juice and cookies.

Many of the new health-oriented offerings aren’t replacing existing products; they’re augmenting them. That means greater complexity in managing product SKUs, ingredients, packaging, and labeling. More than ever, F&B companies need the processes and systems in place to control supply costs, rapidly introduce products to market, and determine which items are truly profitable—as well as which ones should be brought to end of life.

Is this safe?

Over the last two years, it seems like hardly a couple months go by without another food contamination crisis: ground beef, spinach, cookie dough to name a few. In fact, 2009 has the dubious honor of producing one of the largest food calls in history with the peanut industry’s salmonella outbreak. It killed 8 people, sickened another 575, affected some 2,100 businesses, and cost the industry more than $1 billion. Consumer confidence was shattered, and sales of peanut-based products dropped 13 percent across the board. The damage of such food calls can be lasting. AMR Research observes that after a recall, 57 percent of consumers reconsider buying the affected product for at least a year.
 
Product and supplier traceability is critical for quickly isolating ingredient issues—to focus any recall efforts, and even better, to prevent contamination in the first place. Systems that support traceability also enable F&B companies to comply with government regulatory and reporting requirements more rapidly, and address consumer concerns with concrete facts. In doing so, F&B companies can more effectively ensure consumer safety, brand protection, and consumer confidence.

How good is it for the environment?

The last few years have seen a growing, global awareness of green practices and sustainability. All things being equal with a beverage or food item and its pricing, more consumers are looking to the brands that are offering eco-friendly, recyclable packaging. Still others, conscious of food shipping costs, are looking to see if produce was shipped 50 miles or 2,500 miles to get to the store shelf. Finally, concern for the environment has extended to the welfare of animals, including how they have been raised, what they’ve eaten, and whether they’ve received antibiotics. As with the addition of healthy food and beverages, environmentally friendly F&B products place new demands on complexity management.

In addressing these questions, one thing is clear: the demand for food and beverage companies to innovate is greater than ever. At the same time, the slow recovery and tighter research and development budgets will challenge the ability of F&B businesses to adapt to the post-recession consumer. Those that do are well positioned to become the new leaders of this industry.

In the coming months, I’ll examine more closely the specific best practices, processes, and technologies food and beverage companies can implement to profitably address the new consumer reality.

Next month: 5 traits of the next food and beverage industry leaders.

George Young is a founding partner of management consulting firm Kalypso (www.kalypso.com), which specializes in innovation, and he leads Kalypso’s Consumer Packaged Goods practice. He has more than 20 years of industry experience, including several years at Deloitte Consulting before co-founding Kalypso. He holds four U.S. patents and was named the 1994 Northeast Ohio Inventor of the Year.

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