Consumer packaged goods (CPG) and fast-moving consumer goods (FMCG)
The scope of our work is innovation in the consumer packaged goods (CPG) world, which encompasses many sub-segments such as fast-moving consumer goods (FMCG) or food & drink. CPG covers anything that is manufactured and presented to consumers in a retail channel, whether that retail channel is a bricks and mortar shop, an e-commerce retailer such as Amazon, or a direct-to-consumer e-commerce site where the manufacturer sells their own products.
Consumer, customer or shopper
We refer to consumers, customers and shoppers. This may be confusing, as there is a difference between retailers’ use of these terms and how manufacturers and brand owners use them. In this work, we take the view of brand owners and manufacturers. To clarify, this means that consumers are the end users of the product, shoppers are the people who buy the product from the retailer, and customers are the retailers. The shopper and the consumer may be the same person, but this is not always the case. For example, with baby food the shopper is never the consumer (excluding the jar of apple baby food used for a roast pork dinner in an emergency!). An example where the shopper is also the consumer would be buying a can of Diet Coke from the convenience store to drink at lunchtime. A distributor may be involved, and they act as an intermediary between the retailer and the brand owner or manufacturer. The distributor may be formal distributor or an agent acting on behalf of the brand owner for fee, or a wholesaler who resells products to retailers to make a profit from the reselling. In short, the consumer consumes the product that the shopper buys from the customer of the manufacturer / brand owner.
A process run by a retailer to define what products it stocks, which products it no longer stocks, and which products it will introduce into its stocks. Range reviews typically have different numbers of products dependent upon the types of stores in the retailers’ estate. The range review is the main time where new products are introduced to the shopper, and are an important timing for manufacturers to plan their launch. Range reviews are also points in time where products previously introduced as new may no longer be considered new and may not continue to be stocked by the retailer, either in totality or in the number of stores previously stocked. Range reviews represent both an opportunity and a threat for manufacturers and need to be considered both in terms of timings and also for the metrics being used by the retailer to ensure the new products listed can survive for as long as possible.
Innovation means different things to different people. There are arguments for innovation to only mean substantially new products which have never been seen before. There are other views that say that even if a product changes slightly, perhaps only a recipe change or a design change, then it constitutes a new product, and is therefore innovation. Our definition of innovation is anything that is intentionally developed to generate profitable growth, and covers everything from breakthrough innovation to product extensions, flavour additions, pack size changes, and product engineering to reduce costs.
Innovation success is again another thorny subject, as different companies or retailers have different definitions of success. Some may think that it is successful if the innovation adds value to their existing portfolio. Some may view it as a success only if it pays back more than it cost to develop. Others might think it is successful if it gains a listing in the first place. Throughout our work, we define successful innovation as being innovation that at least lasts for one year in market, and we would want to push that out to three years. One year assumes that the innovation has survived at least one range review, thus proving that it has some form of sales base. However, given that more than 60% of innovation that survives the first year will not survive beyond the second, it is more realistic to use a three-year timeframe to measure long-term innovation success.
There is consensus amongst academics, market researchers, innovation commentators, and industry practitioners that innovation fails more than it succeeds. However, it is also fair to say that the level of failure differs depending upon the sources. The range we have found varies from 95% to 76%. To illustrate the challenge in finding a hard data point of innovation failure, AC Nielsen state innovation failure rates of 85% , 80% and also 76%. IRI state that up to “80% of innovation fails in some way” . We asked AC Nielsen and IRI to provide a robust failure rate, but none was forthcoming from either source. This makes it challenging to have an established, empirically-based absolute data point for innovation failure. Based on the data we can find, we would expect a failure rate of 90% to be approximate across the entire CPG landscape. We have used a figure of 90% in our work to allow for simplicity of communication and calculation of costs and opportunities. However, we would caution the reader to independently investigate their own category’s failure rate as measured by EPOS or Panel data provider to have a more robust model for their own individual business opportunity for decreasing the innovation failure rate.
Insight is defined as a penetrating discovery about consumer behaviour that unlocks profitable growth. Insight can come from multiple sources, but most often consumer understanding. Insight is often used to label up data, or to emphasise a point of view. Insight is often offered as term for an emotionally engaging statement, rather than a validated and proven discovery that demonstrably grows profit. Insight needs to be more than a pithy statement about consumers’ needs, wants, and beliefs; it needs to be proven that the need, want, and belief not only exists, but is motivating enough to drive profitable growth
Existing product development (EPD)
Existing product development (EPD) is where new elements are added to an existing product. It is the classic ‘new recipe’ or ‘new formula’. Some businesses call this ‘renovation’. EPD makes up the majority of all innovation launched, accounting for 70% of all innovation. EPD typically is a function of marketing to defend market share, looking to add product features that other competitors have and negate their advantage. EPD takes up the majority of manufacturers’ resources, yet delivers the least incremental profit margin of all innovation. EPD is perceived as being low risk, as the capability to update the product already exists in the organisation, or is easy to bring into the organisation, to update the product.
New product development (NPD)
New product development (NPD) for us is the development of a new product in its entirety but within existing manufacturing capabilities (although those existing manufacturing capabilities may not be within the control of the company developing the NPD). A classic example of NPD would be Fairy Liquid moving into dishwasher tablets. Other examples would include Mars ice creams and Mars milkshakes, expansions from the traditional Mars confectionery bar. NPD is designed to gain market share by expanding into new categories and/or attracting new shoppers. NPD is generally highly accretive, as it is driving incremental purchases, but requires high investment, especially in insight to discover opportunities for brands.
Breakthrough innovation relates to wholly novel products, starting a category that previously never existed. The printing press, semi-conductors, vaccination, automobiles, telephones, airplanes, trains, flushing toilets, mobile phones, compasses, fax machines, to name a few, were all were all breakthrough innovations when they were launched. Breakthrough innovations are distinctively highly incremental profit generators yet highly expensive as they require significant development.
Waterfall innovation was developed in the 1960s as a way to develop new products based on computer science development. The Waterfall approach was propagated through business schools, with variants described as Stage and Gate or Phase Gate, with each Gate Stage requiring key stakeholders in the business to approve the project to progress to the next Stage.
Waterfall innovation is so named because the work is done in sequence, with the resulting project plan looking like a series of waterfalls. These programmes work well on developing defined technology, as the project can only progress once one element has been built, ensuring that dependencies are built on solid elements. It also reduces risk, so that problems are identified at earlier stages of development. The governance that the waterfall approach ensures is a strength of the process, offering clear investment decision points, and ensuring that development and therefore middle-class investment does not proceed until the completion of preceding functions. The governance also ensures there is sufficient documentation to support the progress of the development, as well as ensuring that all the steps taken are noted, thus reducing the risk of the overall project should any of the innovation team members change. Classically, the shopper or consumer is only engaged at the end of the process when the new product is shipped and launched. There might be some market research with shoppers or consumers at an early stage, but it is frequently limited in scope and scale.
Waterfall is exceptionally poor at building in consumers’ expectations and desires into product innovation, as the consumer is left until the very end before they can have a say. Consumer research and co-development programmes have tried to overcome the challenges of consumers’ not being involved in the process, but the amount of research or co-development that takes place has always been veneer-thin.
Minimum Viable Product (MVP)
Eric Ries coined the term Minimum Viable Product (MVP) in his book The Lean Startup. A MVP is an early product that is at its’ most early form. It is most likely to be terrible in it’s first instance, as it is bereft of features. But by launching an MVP, it allows for testing of the product’s biggest assumption (i.e. will it sell) in a behavioural contex (ie do people use it and how do people use it). Further iterations of the MVP are developed and tested using the Build Measure Learn Loop, which allows for the features that are most valuable to be added through the Pivot or Persevere process. We’ve used real products as MVPs (e.g. relabelled existing wine bottles – see Chapter 7) or even things like Google AdWords as MVPs or visual product concepts as MVPs. What you use as an MVP is dependent upon what you want to achieve and the level of risk you want to take – the more you spend on developing the product before you test it, the more you risk losing.
Pivot or persevere
A common term in Eric Ries’ The Lean Startup , pivot means to move away from a previously held assumption, and based on the learnings from the test of that previously held assumption, develop a different hypothesis to test. Persevere on the other hand is the positive test of an assumption that allows you to progress onto testing the next level of assumptions about the innovation.t
Build Measure Learn Loop
Again a concept presented by Eric Ries in his book The Lean Startup, the Build Measure Learn Loop is the quintessential process for Agile where a leap of faith product is built (aka Minimum Viable Product), that is then tested and measured with real consumers in a real world environment. Using the the metrics from the test, we learn whether or not that particular product’s feature is viable and motivating for consumers. We then Pivot or Persevere, and build a product feature, which starts the feedback loop again.
Category Average Cash Unit Rate of Sale
Category Average Cash Unit Rate of Sale (CACUROS) is the amount of money the average product in a given category sells per week per store that it is distributed in. It is a readily available data point from EPOS data providers such as AC Nielsen or IRI, although they may name it slightly differently. It is the key component in benchmarking for Agile Innovation.