By: Mike Concannon and Evan Eckman
Which business author is famous for the quote “innovate or die”? Peter Drucker, Tom Peters, or Dr. Jack Matson?
Answer: All of the above. It was a fundamental business principle for the past century. So why has the collective wisdom of these contemporary business authors seemingly been forgotten by the big CPG companies this century?
If you’re a big CPG chief executive, here is what your Chief Sales Officer (CSO) 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 Spring 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?”
Hopefully, your CSO will have several new compelling products ready to present that offer accretive growth, but most won’t. A clever SPINS data analysis won’t change the buyer’s mind, nor will more advertising. Very soon, the year-over-year lap of inflation pricing will occur, and revenues - in addition to units - will be down.
Without a robust innovation pipeline, any CPG 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?
In past years, most big CPG 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 a double-digit decline. 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.
When CPG companies fail to innovate for accretive growth, they impact shareholder value, but this also has a long-term negative impact on the health and wellness of the world.
The CPG industry has noble roots. Most big CPG companies were founded at the turn of the 20th century at the last stage of the Industrial Revolution. Driven by innovation, big CPG companies solved societal challenges by pioneering ways to improve food safety and storage, while promoting better nutrition and hygiene. These principles should remain the vision, mission, and values of the industry.
In addition, the CPG industry represents about 10% of the US’s GDP. Most of the ingredients, other raw materials, and production are domestically sourced. In addition to improving the lives of people around the world, a growing and thriving CPG industry drives domestic economies and job creation.
Some might think that the economic impulse from private labels compensates for the underperformance of the CPG industry, but that cannot be farther from the truth. When CPG companies fail to successfully innovate (when they fail to solve the problems of the consumer in other words), people simply consume less, which is why, across all CPG categories, sales volume (both branded and private label) is down.
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 CPG 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 move to invent the future by focusing on the unmet and changing needs of the consumer and customer, eliminating their pain while making and keeping bold promises by providing unexpected delight. They improve by incubating concepts using efficient consumer research as well as voice-of-the-customer interviews. They typically start small with a 100-200 store test, often combined with Amazon, 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.
For many big CPG brands, their next category reviews will be a wake-up call for a renewed focus on accretive growth innovation. It is time for CPG executives to dust off their bookshelves and read those books by Drucker, Peters, and Matson again. We also recommend “Eat Big Fish”, the challenger brand bible, by Adam Morgan, “Getting Naked” by Patrick Lencioni, and “Growth Gears” by Art Saxby and Pete Hayes.
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