2010 R&D Survey: Recovery in Development

April 6, 2010
After two years of economic limbo, our annual R&D Survey shows things might just be picking up as promised.

On the April 2010 magazine cover, we popped a champagne cork when our research indicated a 19.5 percent increase in capital spending for 2010. We felt similarly giddy in January, when our annual Manufacturing Trends Survey found 66 percent of our Plant Operations respondents were optimistic going into the new year.

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While our 39th Annual R&D Survey shows no retreat, our product development readers appear to be a more cautious group. It's a good sign that, for the second year, new product development is the most important target of R&D efforts – much more so than cost control, which was a key concern in 2008, and up 1.6 percentage points over last year's vote for new product development.

But when asked about the R&D department's budget, 51 percent say it looks about the same as last year's (which probably was reduced from the previous year), 22 percent report it's been increased and 15 percent indicate it's been cut. Not bad, but nothing to celebrate – except to note last year's figures were reversed, with 28 percent saying their budgets were cut and only 14 percent claiming their allotments were increased.

Still, this indicates processors either see new growth around the bend or they recognize a Business 101 rule: Economic downturns are the best time for growth -- material costs go down and competition for capital goes up (possibly hindering your competitors). All those factors can allow you to jump ahead of the Nervous Nells, who are overly risk averse.

(It's worth noting the Natural Products Expo West show in March was great vindication of this new product exuberance: More than 60,000 exhibitors and attendees crowded the Anaheim Convention Center for four days of interesting, albeit nichey, new products.)

The second most-targeted area of R&D mimics last year's — existing product improvement — although in total, it was lower by a few percentage points at 25 percent versus nearly 30. This year, we divided that answer to better reflect just what sort of improvements our processors are working on. In a nearly even split, existing product improvement accounted for about 13 percent, while "cleaning up" current products by making them natural or organic or removing perceived-as-negative ingredients accounted for 12 percent.

Of course, many processors are working a combination of such improvements into their lines. "While we will look to develop new products, we will also search for ways to make them natural and as organic as possible," says one manufacturer of seasoning blends. Another processor notes, "We are seriously working to remove MSG, hydrolyzed vegetable proteins and added I+G [Disodium Inosinate (IMP)+ Disodium Guanylate (GMP)] from our entire product line. We are also working on lowering salt/sodium values throughout our product line."

Another area of minuscule growth is the 10 percent who say product-line extensions are what they'll be spending most of their time on this year (last year it was 9 percent).

Creativity is certainly the name of the game in juggling economic concerns with new investment. Let's hope those who slashed their R&D budgets won't get left in the dust when their competitors hit the shelves with a flurry of new and improved products. As one processor put it so succinctly, "We're spending more to keep our company well ahead of the competition [in order to] continue (our) success."

One respondent in this year's survey is applying the concept of research and development not only in product development but into more efficient use, and conservation, of materials and energy. How? By investing in the utilization of biowaste energy as a "value-added" aspect of production. This is the sort of forward thinking that pays off at a rate of four for one: Once in actual costs saved on energy, once in money saved disposing of the waste, once toward preserving the environment for the future and finally in the ability to enhance the value of products to the consumer through green marketing.

Decisions, decisions
As manufacturers slowly leave their risk-averse shells, investments of time, personnel and especially R&D dollars are being treated with a fine-tooth comb. While not much has changed internally in terms of who's on the larger product development team, the big gains are in outside forces. The utilization of outside consulting nearly doubled, from just under 10 percent last year to just over 17 percent, and the involvement of a single supplier in the mix tripled from 2 to 6 percent.

In 2009, respondents noted 70 percent of new product development decisions were being made in a centralized fashion at the corporate level. Whether recognition of the need to get input at all levels or a desire to spread the risk around to cover one's brass behind, the top dogs are loosening the reins this year: Centralized decision-making dropped below 50 percent. The decentralized method – where decisions are made by separate business units or other groups — rose from last year's 30 percent to almost 40 percent. Also, we targeted more explicitly where R&D fits in to find that for almost 13 percent "R&D really gets to call the shots."

This is borne out by the analysis of who actually sets the goals of product development. R&D has the greatest input, with 85 percent being "very involved" in those decisions (versus 2009's 74 percent). Marketing & Sales stayed very involved at the same rate, about two-thirds. Decentralization notwithstanding, there's still a strong hand on the tiller: Whereas last year those with the title CEO, President or CFO were "very involved" to the tune of just 43 percent, this year more than 54 percent claimed such involvement. General Management rose in this area slightly, from 48 percent to 52 percent. And the Manufacturing & Plant Ops folks held steady at 23 percent. (Many questions allowed more than one answer.)

Seeing the light
Great ideas don't just come out of thin air. Well, OK; sometimes they do. But who's having them? In asking which elements your company uses to identify new product ideas, we learned there's a lot of internalizing going on. More than 80 percent of respondents say their team gets its ideas from internal research. Still, almost half of you — 44 percent — recognize your customers can be a big help in planning the next move, and so you turn to focus groups for input.

We sent survey links to Food Processing readers who cover both administrative and R&D titles, plus opened links to same on our web site. The 310 respondents included manufacturers from all areas of R&D, quality control and assurance, marketing and administration and management. Some of the responses included verbatim comments, plus personal interviews were conducted with those who provided contact information. As with all Food Processing surveys, personal information is kept strictly confidential and is used only for research purposes.

Almost as many (42 percent) get that info second hand in the form of research from outside suppliers. And just over 17 percent of you say you get this crucial direction from an external product development company. That number is actually down by about a third over last year's 24 percent.

Once the idea is on the board, someone has to either pull the trigger or drop the hammer. This means answering some key questions: Does it fit our brand? Does it fit our marketing strategy? Do we have the assets to make it? Can we make money on it?

If you are the CEO/President/CFO, you spread your energies across all those questions, with your strongest interests on whether the new or re-imagined product fits your brand and company, as well as on the bottom line. Marketing & Sales is right there with you on deciding if fits, and those guys really take over in considering the overall marketing strategy, of course. R&D is most concerned with whether or not the new idea can be built, as is Manufacturing/Plant Ops.

In spite of the upward creep of exuberance, the length of time it takes for a product or revision to get from brainstorm session to the retail shelves is slowing. Last year, 90 percent made it in less than a year. This year, those manufacturers launching in that time span dropped to 69 percent. Almost a quarter are taking 13-23 months and 7.6 percent require two years or more.

When we inquired what big issues processors expect to face, there was only a slight shuffling of the deck. For the immediate year ahead, food safety held its perennial place as No. 1, cost reduction stayed at No. 2 and going organic/natural remained third.

Sustainable/eco-friendly/fair trade issues moved up from the No. 5 position in 2009 to fourth this year, unseating preventive health, which dropped to last of our six possible answers. Palliative health was fifth.

Looking further down the road (and to a different set of pre-set answers), developing healthier/better-for-you products rose to first place from second as a long-term priority, with 54 percent of you ranking it prime, a 9 percentage point increase over last year. This pushed consumer trends from No. 1 to No. 2, at 52 percent (although still a tick higher than last year's 51 percent). One place the economic downturn seems to have helped processors is that labor issues are slightly less of a concern than last year, dropping nearly 2 percentage points.

In third place, regulatory issues rose slightly as a concern for the future, from 35 to 40 percent. Green issues remained fourth. But going global more than doubled, from 8 percent in 2009 to 19 percent in 2010. Said one R&D expert in our survey, "Most of our R&D budget is allocated to international expansion and meeting the product needs of global-based clients. Challenges include expanding organizational resources — .i.e. IT, infrastructure, marketing, distribution and set-up costs — to support international expansion."

Looking to 2011 and 2012, we can hopefully expect the financial health of the U.S. to pick up more steam. The need for wholesome and flavorful ready-to-eat meals, healthy foods and multifunctioning beverages will only grow as Americans find themselves adapting to new realities of a tightened economy.

However slow or fast progress occurs, food and beverage companies can hardly err by taking advantage of competitive pricing and stabilizing energy costs to invest more capital and effort into research and development of products that consumers demand and need. As the director of R&D for a global food & beverage giant sums it, "Innovation is more important then ever. As for our company, we're launching major initiatives in several key categories this year with line extensions being planned for 2011." In other words, move forward or get left behind.

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