PRODUCT DEVELOPMENT AND PROMOTION REFERENCES

Excerpted From Article: "Conventional wisdom says that 80 to 90 percent of all new food products fail in the marketplace. This figure is often cited that it is accepted as fact.

Figures
Importance of Factors in Food Section, 1989-1993
Top Five Keys to Success and Failure
Comparison of New Products and Services by New Product Type
Contribution to Finished Product Concept
"A new product failure rate of that magnitude must mean one of two things: either our ability to predict the success or failure of a new product is woefully inadequate, or we are somehow unable to convince management that our predictions are credible," said Allan L. Baldinger, director of marketing research for the Advertising Research Foundation, at ARF's New Products Research Workshop last October.

"There is no real, hard information on the number of new food product failures," says Rakesh Malhotra, marketing research manager at CPC International. Malhotra heads a new product failure-rate study recently initiated by the ARF. The study won't cover every product introduction, however. "We're trying to take a case history approach and track specific products," Malhotra says. He doesn't expect any results for at least six months.

Nancy Smith, Ph.D., vice president and food industry consultant at Arthur D. Little, agrees there is no hard data on food product failures. One reason lies in defining a successful product. "How do you define 'success?' For a large company, success might be a sales target, such as $50 million in three years," she says. "Or it might be the number of years the product survives in the marketplace. A product rolled out nationally might succeed only regionally, but is that a failure? A regional company would have a different definition."

In addition, most "new" products are merely line extensions, Smith says. "There can be a different definition of success for each SKU," she adds. "The basic product might succeed, but particular flavors or packaging sizes might fail. Success can therefore be incremental."

Smith estimates that only one in 10 new food products succeeds in the marketplace. She further estimates cost to the industry of failed products at more than $20 billion per year.

The failure to conduct the right kind of market research is the major reason for most new product failures. What's lacking, Smith says, is information such as "how to interpret the new product to the consumer, how to generate the repeat purchase, or how the consumer will use it and translating that back to the technical staff." Food processors are realizing this. "We're seeing more integration of marketing, market research and research and development in the form of product-development teams. But the key is understanding what the consumer wants, and describing the product's advantages to the consumer," Smith concludes.

Inadequate research

Several studies confirm the idea that inadequate market research is a major reason for new product failure.

"Identifying and meeting a market need determines the success or failure of individual new products or services," says a 1991 survey of 27 Chicago-based companies conducted by Chicago management consulting firm Kuczmarski&Associates.

Although the study doesn't break out the six or seven food companies that participated, results varied little across industry segments, says the firm's Barton Tretheway.

Respondents cited a "demonstrated market need" as the major reason for new product success, and "no market need or changing needs" as the major reason for new product failure. "Lack of market research" per se ranked third among failure reasons.

All companies surveyed expect internally developed new products and services to boost sales dramatically over the next five years, by an average of 28 percent, as compared to 19 percent during the past five years. Half of the companies reporting expect to bring new products to market faster than in the past.

To speed new product introductions, however, 42 percent will focus on easier-to-execute line extensions, revisions and cost reductions rather than develop products that are "new to the world" or "new to the company".

But the most successful companies focus more on developing truly new products and services, Kuczmarski reveals. The study segments respondents into two categories: "The Best," which generated at least 20 percent of sales over the past five years from new products and services; and "The Rest," which generated less than 20 percent of sales from new products. "The Best" generated 39 percent of their sales over the past five years from products and services that were truly new, as compared to 23 percent for "The Rest".

Kuczmarski cites three major internal barriers to new product development: risk aversion and short-term orientation; lack of necessary resources, such as people and funding; and poor market understanding.

Additional obstacles include lack of strategic commitment; no formal development process; poor decision making; no incentives for managers; lack of leadership;; a need for focus and discipline.

Top management commitment is critical to new product success, Kuczmarski says. Of "The Best," 83 percent reported their senior managers were committed, compared to 67 percent for "The Rest."

Top execs: help or hindrance?

New product managers rank lack of top-management commitment as the number one reason for new product failure, according to The 1992 Innovation Survey, conducted by Group EFO Limited of Weston, CT.

"We were initially startled by the finding, which indicates that some of the more fundamental factors to a successful, growing business are often overlooked in the heat of battle-perhaps more so today because of the pressured environment," says Edward F. Ogiba, president of Group EFO.

The study compiles responses from 166 new product managers representing 112 companies. Of these, 27 are food or beverage processors, including giants such as Coca-Cola, Campbell Soup, CPC International, ConAgra, Kraft General Foods, RJR Nabisco and Pillsbury.

The study revealed that just 8 percent of new product projects at major companies survived to reach the marketplace - an "internal mortality rate" of 92 percent. And of the 8 percent actually rolled out, only 17 percent achieved their major objective.

In other words, the 1992 new product failure rate was 83 percent, down from 86 percent in 1991 and 90 percent in 1990. Although the study doesn't break out food product failures, there was little difference in failure rates across industry segments, Ogiba reports. "Historically, it's been 80 percent plus."

With only 8 percent of new product projects actually rolling out and only 17 percent of those reaching their objectives, the result is that less than 1 percent of all new product projects initiated succeed in the marketplace, "A staggering waste rate of over 99 percent!" EFO reports.

When asked what single factor makes or breaks a new product effort, more than 90percent of new product managers cited "management." They expect top managers to create an environment conducive to growth, and to support new product projects explicitly with the resources and budget to do the job.

But 63 percent feel that management has no clear strategic focus on the role of new products' 72 percent believe management is more committed to established brands than to new products; 65 percent said that top management's role in new product development is "not significant."

Many believe management has unrealistic expectations. Asked to cite the top strength and weakness of their new product programs, marketers gave the same answer: "speed".

One new product manager articulated the problem well: "Speed is management's current buzzword. The need to react to consumers and to competitive factors has intensified in today's market. This is a bit contrary to the 'quality religion' of a couple of years ago. They're not necessarily inconsistent, but to make 'quality fast' requires a special commitment to resources and to people. I'm not sure senior management understands that equation very well. Either that, or their feet are 'put to the fire' by stockholders and the financial concerns, so they can't pay attention."

However, new product managers have high regard for several top food executives. When asked to name the corporate executive "most effective in leading his or her company to successful new business and product growth over the past two to three years," for the second consecutive year they ranked ConAgra's recently retired CEO Mike Harper as number one among 42 mentioned. Roger Enrico of Frito-Lay and Bruce Atwater of General Mills tied for fifth; Campbell's David Johnson tied with Wal-Mart's Sam Walton for eighth.

Cost per launch: $15 to 20 million

Some 8,162 new food products (SKUs) were introduced to U.S. retail markets in 1992, up 1.3 percent from '91 (though down 9.4 percent from the record 9,019 launched in 1990).

According to Food Marketing Institute's 1993 Speaks Report, the typical supermarket stocks 30,000 different products, unchanged since last year. "This two-year trend shows that the item count has stabilized after the phenomenal growth in the number of items throughout the 1980s," FMI reports. Obviously, few new products survive long on the market shelf.

Yet new products are vital to both processor and supermarket. According to Efficient Consumer Response, a landmark joint-industry study sponsored by the Uniform Code Council (UCC), Food Marketing Institute (FMI), the Grocery Manufacturers Association (GMA), the National Food Brokers Association (NFBA) and the American Meat Institute (AMI), one-third of consumer food sales come from products that did not exist 10 years ago. "At Campbell Soup, 35 percent of today's sales come from products which didn't exist 10 years ago," said Herbert M.Baum, president of Campbell North & South America, at the Food&Drug Law Institute's Food Update '93 Conference April 26 in Panama City, FL.

But many new products are marginal "me-too" products that add little to total category sales, the ECR report says. Truly new product concepts account for only 13 percent of all introductions. Less than 1 percent of new products introduced achieve more than $15 million in annual sales. The result is "slotting allowances" and other fees charged by supermarket chains to cram a new product into their crowded shelves.

"To the extent that such fees discourage the introduction of new products of marginal utility, they increase the efficiency of the system," says ECR report. "However, if such fees are holding back the introduction of innovative new products, or if payment of a fee persuades a distributor to accept an item he would otherwise have rejected, the system becomes less efficient. No data is available to develop any valid conclusions."

The ECR report estimates the manufacturer's cost of launching a new product at $15 to 20 million per event. Manufacturers believe that these heavy costs, combined with high failure rates, force them to reduce risk by concentrating on line extensions or "me-too" responses to competitive introductions. They further estimate the cost of introducing new products, both failures and successes, totals 4 percent of net sales.

Increasingly complex trade and consumer promotion practices-forward buying, diverting, bonus packs, coupon packs, to name a few-are getting out of control, boosting costs for both manufacturers and retailers. With more than 80 percent of many items bought on deal, shipping patterns are out of balance with consumer buying patterns and can boost the supplier's overall costs by as much as 25 percent.

"Clearly, a significant cost-reduction opportunity exists," the report concludes. "The timing is right to explore alternative approaches."

One alternative is Efficient Consumer Response (ECR), which has replaced "Quick Response" as the latest buzzword for manufacturer/retailer partnerships in the food industry.

Avoiding Failure

Quick Response systems (FE, May 1992) link the manufacturer with sales information generated by the retailer's point-of-sale (POS) scanning systems for just-in-time manufacturing and distribution. Such systems automate store replenishment and customize product shipments to demand at the individual store.

Efficient Customer Response incorporates the concept of customer-specific marketing into Quick Response. FMI defines ECR as "a responsive, consumer-driven system in which distributors and suppliers work together as business allies to maximize consumer satisfaction and minimize cost. Accurate information and high-quality products will flow through a paperless system from manufacturing line to the checkout counter with minimum degradation or interruption." FMI estimates savings up to $30 billion, or 10 percent of retail sales, once ECR is fully in place.

But it won't happen right away. "Current trade-promotion practices evolved over many years, and it is unrealistic to expect that they can be completely eliminated overnight without causing extreme difficulty for many distributors," the joint-industry ECR reports cautions.

ECR fits manufacturer/retailer partnerships where manufacturers have adopted Total Quality Management systems and retailers have adopted a Quick Response strategy. New product development then becomes part of ECR and incorporates three elements: customer involvement, teamwork, and continuous, instead of episodic, development.

Unlike the typical, sequential product development process where each function performs its task before handing off to the next, cross-functional multidisciplinary teams work concurrently on new concepts. This compresses product development time, much like a "fast-track" engineering project where contractors and subcontractors perform various functions simultaneously.

At the Food Plants '91 conference, executives from Kraft USA, Campbell Soup and J.M. Smucker described the time-compression strategies their companies use to speed product development. A common denominator was multidisciplinary teams that take a product from concept to commercialization. At Pillsbury, a 20-member cross-functional team took the company's new Bake-Off Collection of refrigerated, ready-to-eat single-serving bakery products from funding to marketplace in just nine months (FE March 1993).

In the retail mass-merchandising industry, where Quick Response originated to respond more quickly to fast changing consumer tastes and avoid markdowns caused by inaccurate forecasts, manufacturers continuously monitor POS data to detect trends and continuously test new product concepts in selected stores. The retailer is part of the manufacturer's cross-functional product development team, providing input at the beginning of the process instead of waiting for the fait accompli, for example, when a salesperson resents the new fall fashion line.

The same concept can apply to developing new food products. The growing use by supermarket chains of "smart cards," which identify individual consumers and their purchases at the check stand, allows food retailers to develop data bases of who buys what products and what brands, who responds to which promotions. This information helps the retailer make more informed pricing, promotion and space-0management decisions, as well as product introduction and deletion decisions. "These developments are expected to have major ramifications on the way new products are introduced in the grocery industry," says the ECR report.

ECR strategy allows the retailer and the consumer to get involved much earlier in the product development process. The ECR report envisions the continuous food product-development process as follows:

• Retailer and manufacturer or broker meet regularly to review consumer trends, consumer research and R&D projects, and select one or more items to test.
• Retailer selects test stores based on target consumer demographics; manufacturer supplies test quantities of product and promotional materials.
• Manufacturer ships initial and replenishment quantities of test product directly to test stores, not through the warehouse.
• Retailer, manufacturer and broker monitor data to see who buys the test product, the effectiveness of product promotions, and the purchase history of consumers who bought the product. Follow-up phone interviews evaluate consumer acceptance and repeat-purchase probability.
• Retailer, manufacturer and broker review results and decide to drop the product, modify the product or marketing mix and re-test, or move the product into full distribution.

For the manufacturer, this reduces failure rates and optimizes marketing strategies, as well as identifying additional new product opportunities.

The retailer would experience fewer slow-moving items and improve inventory productivity. Sales would increase, by focusing new product acceptance on products that increase rather than cannibalize category sales and private-label product development would also improve.

Although financial benefits to the manufacturer vary widely with product category and spending levels, the ECR report estimates overall dry-grocery cost savings of 0.9 percent for manufacturers and retailers. The consumer, however, is the final beneficiary. "Consumers will see more genuinely new and innovative products, and less "me-too" products of marginal benefit," the report says.

Campbell's Baum summed it up at Food Update '93: "The context of marketing continues to change. Several years ago we went from national marketing to regional marketing. Today, the way the game is played is customer-specific marketing. We are addressing our customers with customer teams. Increasingly, food companies are going to have to establish links with our customers, with their strategies, objectives and policies," he added. "That's the only way to deliver optimum product performance and customer service."

Updated: Thursday, September 6, 2007.