Innovation can unlock £3bn for the grocery industry, finds consultancy Newton

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Retailers and manufacturers are wasting more than £2.7bn (i) a year developing new products that either fail to take off with shoppers or that end up costing more to produce, wiping out any potential profit, according to a new report by retail and manufacturing consultancy Newton.

Whilst research by Newton found that 62% of consumers like products to evolve, offering developments like different flavours and new packaging, all too often retailers and manufacturers within the food and drink industry are basing their innovations on “gut feel” rather than on insight into what customers really want.

Newton found that over an estimated £600m is lost annually on launching new and rebranded products, or refreshing the packaging, on products that don’t return the investment in terms of increased sales. More worryingly, Newton says more than £2.1bn is wasted producing new items, such as products that are costlier to make than those they are replacing, have more expensive ingredients, or that cause manufacturing problems.

Not only is poor innovation costing the industry money, Newton believes they are missing out on hundreds of millions of pounds every year in profit on new products. Less than 3% of new product launches generate over £35m in profits – Newton estimates that improvement in revenue from better new product innovation could generate £233m (ii).

But the consultancy says the key to successful new development is to focus on what consumers want rather than second-guessing their tastes – and largely what consumers want is convenience. The report found that shoppers bought different versions of their favourite food items because they were quicker and easier to use*, such as cheese slices (31% chose these over standard block cheese), or seedless grapes (almost 44% chose this variety over standard grapes).

When it comes to developing new products, Paul Harvey, head of grocery at Newton, says retailers and manufacturers shouldn’t “innovate for innovation’s sake”. He explains: “Regardless of the nature of innovation or the rationale behind it, one point remains of paramount importance – innovation must either add value to the end consumer or reduce costs for the company producing it.

“An understanding of what a customer really wants is critical to the success of innovation and new product development. Research that sets out to prove a company’s own hypothesis right, rather than understanding the needs of the end consumer, is more likely to result in products that fail.”

Harvey points out that some of the most innovative ideas in shopping over recent years have come from the growth of discounters like Lidl and Aldi, where smaller stores have put value at the heart of their proposition and out-performed bigger supermarkets, or developments that focus on convenience, such as dine for £10 offers that are perfect for a mid-week treat, or convenience-store versions of big brands, such as Tesco Metro or Sainsbury’s Local, ideal for busy workers.

On the other hand, Newton cites failed innovations like a Victoria sponge that was re-designed by a leading UK cake manufacturer to have a more “homemade feel”. What worked well in the development kitchen caused havoc on the production line – production efficiency dropped to half of that of the cake it replaced, whilst waste more than tripled.

The science behind innovation

Newton’s report proposes a three-point approach to better innovation:

  1. Collaboration – retailers and manufacturers collate a mass of data on consumer trends and the performance of products, but this is rarely shared. By sharing insights and working together on development, new products are more likely to be both what consumers want and what suppliers can actually produce.
  2. Production – all too often, product changes are made by people who have no awareness of the impact of their decisions on the manufacturing process, so a change of packaging or ingredients can push up costs and reduce efficiency. All such proposals should be tested with the manufacturer first before large scale production is considered.
  3. Iteration – Newton says failing fast is key to developing innovative ideas whilst not spending too much on products that are not successful. If 100 products are proposed but 90 of those are rejected based on consumer insight and production analysis before they even make it to the development stage, that will make huge savings and ensure only the best new products actually hit the shelves.

*Top five most convenient foods

Food % who chose it Main reason it’s better than original % who cited that reason
Seedless grapes 43.7% Tastes better 58.6%
Stock cubes (powder and jelly) 36.7% Quicker and easier 59.2%
Cheese slices 31.3% Quicker and easier 57.1%
Spreadable cheese 28.9% Quicker and easier 50.3%
Grated cheese 23.6% Quicker and easier 64.2%

(i) £2.7bn wasted on poor product development

Opportunity Value Assumption
New Product Development (NPD) Spend (Rebrand/Product Launch) £262m 30% reduction in spend of NPD launches
NPD Spend (Packaging Refresh) £345m assume 200,000 SKU’s refreshed every two years at £10k each
Waste (Operations) £154m based on 1 in 8 products running 20% higher waste
Slow Running (Operations) £1,159m based on 1 in 5 products running 15% slower, valued as labour saving
Raw Materials (Operations) £859m based on 1 in 9 products with 20% more expensive raw materials

 

(ii)Lost profit opportunity

Opportunity Value Assumption
NPD Lost Profit (EBIT) £233m 30% improvement in revenue from better NPD product decisions, assumed 30% profit margin