Innovation is one of those buzzwords in business that never seems to go out of style. Though we hear the term constantly, most of us misapply it by assuming a business is either innovative or not. This binary perspective on innovation is often an oversimplification, as innovation can take many forms.
For an innovative idea to be useful in business, it must be replicable without being too expensive, and it must resolve a consumer want. Legacy CPG brands are usually very good at creating cost-effective innovations, but resolving a consumer want has been challenging, as consumer tastes are becoming more fragmented due to stronger competition from digitally native startups.
Compounding that, most legacy CPG brands are publicly-traded companies that must report quarterly earnings to the market. That short-term management pressure is counterintuitive to innovation because much of the revenue benefits are not seen for several quarters or even years. Despite these challenges, some legacy CPG brands are seeing successes or opportunities in the market by using different types of innovation to fend off competition.
Types of Innovation
Incremental innovation is the most common form of innovation in the CPG industry. It utilizes an existing product and increases value to the customer by adding new features within an existing market. Though it is extremely common, incremental innovation is important in today’s shortened-attention-span economy. These easier-to-execute innovations allow legacy CPG brands to keep the attention on their core brand.
Most Americans have fond childhood memories of these famous chocolate wafer cookies with sweet crème filling. For about 100 years, Oreo’s flavor options were pretty much limited to only the original best-seller. That was until the early 2010s, when Oreo started to launch “limited edition” flavors of its cookies. Now, you can find Oreos in flavors such as cinnamon, red velvet cake, birthday cake, key lime, pumpkin spice, and even in co-branded flavors from Reese’s and Peeps. This incremental innovation has proven extremely fruitful to Mondelez International Inc. (Oreo’s parent company). It has seen mid to high single-digit sales growth in its “power brands” (which include Oreo) over the past few quarterly reports.
"Though it is extremely common, incremental innovation is important in today’s shortened-attention-span economy."
Breakaway innovation escapes its current category by deliberately associating with a different one. According to the Harvard Business Review, products communicate their category membership in many ways, including their design, distribution channels, promotions and pricing. Breakaway brands essentially stretch the boundaries and challenge the conventional patterns of consumption.
Example: Milk Bone
Dog treats come in many shapes, sizes and flavors. Despite these varying options, the CPG pet industry has been slow to step outside of incremental innovations. In 2014, Milk Bone saw an opportunity to solve a major health problem with dogs suffering from gum disease. The leader in dog treats created a “brushing chew” that was extensively researched by veterinary clinics. Instead of dog owners thinking about treats as a luxury, Milk Bone’s innovation created a new functional health position that changed the pattern of consumption. This innovation proved fruitful for J.M. Smucker Company (Milk Bone’s parent company), which saw $50M in retail sales of the product within the first year.
"Breakaway brands essentially stretch the boundaries and challenge the conventional patterns of consumption."
Disruptive innovation involves launching a new product, technology or process to an existing market. This innovation often takes a few years to prove successful, but if consumer adoption occurs, established companies must quickly adapt to compete with the innovation.
One of the biggest trends in FMCG is having a strong direct-to-consumer subscription strategy to take advantage of the convenience value proposition. In late 2016, Proctor and Gamble launched a Tide Pod subscription service, which allows customers to buy the laundry products directly from the company’s website, cutting out longstanding retail partners like Walmart. On top of this subscription service, Tide is doubling down on the convenience value proposition by testing a program called Tide Spin in Chicago. This is an Uber-style service that will pick up, wash, fold, and then deliver laundry. Tide is betting on the Millennial urban sprawl to continue, and this additional program will allow them gain new fans as branded and private-label competition increases.
"This innovation often takes a few years to prove successful, but if consumer adoption occurs, established companies must quickly adapt to compete with the innovation."
Radical innovation is what most people mean when they use the term “innovation,” but it’s actually the rarest type. This innovation gives birth to new markets, and because it’s so drastic, it sometimes can take upwards of a decade or more to prove successful.
Example: Campbell Soup
Much has been in the news lately about the disconnect between the products legacy food brands offer and the products consumers want to buy. Though Campbell Soup is facing those same challenges, it recently invested in a radical innovation by an early-stage startup called Habit. Habit is a nutrition-focused startup that uses data from an at-home test kit to make personalized food recommendations tailored to an individual’s unique DNA. Campbell’s investment is an effort to get ahead of changing consumer tastes and make a bet on the future of food, which it believes will be at the intersection of personalized nutrition, well-being and technology. Though the personalized nutrition technology ecosystem is still a bleeding-edge trend, it pairs well with the current “healthier for you” movement in food and beverage that will inevitably continue to get more popular with Millennials and Generation Z entering full buying power.
Joshua Schall, MBA has an 11-year background in the emerging and intersecting CPG/FMCG categories of functional food and beverage and nutritional products.
He currently is the owner of J. Schall Consulting, an Austin, TX-based boutique management consulting company that focuses on digital growth strategies for CPG/FMCG brands that range from pre-launch to portfolio companies with $500M in yearly revenue.
Joshua enjoys an active healthy lifestyle but still finds himself spending way too much time scanning social media and digital grocery aisles for new consumable brands.