By Mike Concannon and Evan Eckman of Chief Outsiders
If you’re a big food company chief executive, here is what your chief sales officer may hear from retail buyers at the next category review:
“I read online that your CEO is planning to cut back on promotions next year. That’s a tough decision, but I understand. I’m afraid I have some bad news for you. We’re cutting back on your SKUs for the next reset. We’ll probably use some of the space to expand private labels. I’ve also met with a start-up. They have an amazing trend-forward product range to grow the category, and they’re offering 40% margins. How about you? Do you have any new products ready to replace the items you lost?”
Without a robust innovation pipeline, any food & beverage chief executive who has promised analysts that they’re cutting price promotions next year has a big problem. Should companies accept more category declines and share losses? Have you noticed how many big CPG CEO departures have been announced lately?
How we got here
In past years, most big food & beverage companies proudly reported their percentage of revenues from new products. Today, they no longer report this information and few track it internally. A healthy, high-performance CPG company generates 15% or more of its revenues from new products every year.
In a recent Chief Outsiders survey, nearly two-thirds of CPG chief executives said their products are less innovative than their competition. What’s the result? In 2023, private label shares reached historic highs while simultaneously, across many CPG categories, unit sales were showing double-digit declines. So, what happened?
When CPG companies moved away from having marketing-led CEOs to favoring CEOs with extensive careers in finance or operations, over time, their R&D investments shifted from innovation to drive accretive growth to innovation to drive cost-savings. Consequently, product quality eroded, and soon the leading brands became indistinguishable from private labels.
How to fix it
Accountability starts at the top with CEOs. Historically, 85% of all new CPG products fail, but big CPG innovations fail more often. In recent years, leading brands across CPG categories have generated about 25% of the grocery and mass dollar sales growth in the U.S. versus 30% by private labels.
Most revealingly, small and medium-sized brands, known for disrupting CPG categories with innovation, captured about 45% of dollar sales growth. For big CPG chief executives, such a history of innovation failures reflects wasted R&D resources and talent, demonstrating the need for CEO engagement. But it also points to an opportunity loss when challenger brands have nearly double the innovation success rate vs. leading brands.
Big Food needs to study and learn from challenger brands and apply their best practices, or expect to see further brand erosion ahead. Challengers are lean and agile, their CEOs regularly walk every aisle of the major grocery and mass chain stores for inspiration, and they're fully engaged at each step of the innovation process.
They have marketing lead R&D through a disciplined stage gate process, knowing how to move, improve and scale. They typically start small with a 100-200 store test, and closely monitor their marketing investments to optimize their ROI. When they reach their sales velocity target, with an optimal marketing mix, they scale up.
They may not reach full distribution for 3-5 years, but with a robust innovation pipeline to maintain their competitive edge, they deliver consistent accretive sales growth.
Mike Concannon and Evan Eckman are with the Houston-based strategic marketing firm Chief Outsiders (www.chiefoutsiders.com/industries/cpg).
