JUDGING by the thousands of new products at the Food Marketing Institute's show in Chicago this week, the makers of packaged food are an inventive lot. Hundreds of firms, ranging from family-run outfits to giant multinationals, laid out their wares at one of the world's biggest supermarket-trade events, hoping to attract the attention of retail executives seeking hot new products and emerging trends.
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Yet despite all the buzz, the food industry is falling behind in its ability to innovate. This will cost companies heavily as supermarkets' own-label goods grab an increasing share of the market, especially for products aimed at the growing number of health-conscious consumers.
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The worldwide packaged-food business was worth about $1.4 trillion last year, according to Euromonitor, a market-research firm. The so-called “health and wellness” segment is the fastest-growing bit. This consists of organic products; fortified or “functional” foods (usually with added ingredients, such as vitamins); and “better-for-you” ranges (with things like sugar, salt or carbohydrates taken out).
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In 1997-2000, innovations in food and beverages outpaced those in another crucial consumer-goods market, personal-care products (everything from razors to toothpaste), according to a new study by Bain, a consultancy. That has since been reversed. The most innovative food products once could expect average sales of $150m in their first year, compared with $100m for the most innovative personal-care products. But since 2001 first-year sales of top new food products have fallen to $120m, while sales of such personal-care products have risen to $150m (see chart).
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![]("spacer.gif"){kind=spacer} |
OVERTAKEN - Average first-year sales of top innovative - products in US $m |
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Food - & beverages | - s |
Personal - care | |||
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150 | ||
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140 |
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130 | |
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120 | |
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110 | |
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100 | |
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80 | |
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| 1997-2000 | |
2001-03 | |
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| Source: - Bain & Company |
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Eating their lunch
Innovation is crucial in driving sales of consumer goods, especially when competing against a retailer's own-label products, says John Blasberg, the head of Bain's North American consumer-products practice. With big supermarket chains such as Wal-Mart, France's Carrefour and Britain's Tesco taking a bigger proportion of consumer spending, this battle is intensifying. By 2003, private labels accounted for 16.5% of sales in America, compared with 11.9% in personal care, says Bain. In Europe, private-label penetration in packaged foods, particularly in “ready meals”, is above 20%.
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Most new food products now tend to be extensions of an existing line, for example, a vanilla-flavoured cola, rather than a new category, such as Crest's Whitestrips for whitening teeth. Food firms need to invest more in research and development, says Bain. It calculates that personal-care companies spend an average of 2.6% of sales on R&D compared with 1.6% by food and beverage companies. Food firms must also become faster at launching new products and quicker to exit when demand wanes, adds Mr Blasberg.
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The packaged-food industry's reaction to low-carbohydrate diets typifies the problems. Many leading brands have been launching new low-carb products recently, just as the market has peaked. Two years ago, the soaring popularity of the celebrity-endorsed low-carb diet promoted by the late Robert Atkins saw sales of eggs and steak soar as those of carbohydrate-rich products, such as bread and pasta, slowed. A fad or a long-term trend?
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Either way it presented food firms with a big opportunity—if they could move fast. Some did. In 2004, the number of new low-carb products jumped from around 500 to some 5,000. Sales exceeded $2 billion in America last year. But by autumn the market was turning down. Now the talk in the industry is of products being axed and of truckloads of unsold low-carb snacks and meals being donated to charities for the homeless. In March, AtkinsNutritionals, the commercial arm of Dr Atkins's legacy, sought bankruptcy protection for its British operation.
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Even so, new low-carb products are still coming to the market, including a low-carb potato developed in Florida. In Chicago this week, Kraft, one of the world's biggest food firms, unveiled its new line of “South Beach Diet” products, produced in association with an Atkins rival.
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Many food firms believed that low-carb foods might prove only a short-term opportunity—but not that short, says Christiana Benkouider, research manager for health and well-being products at Euromonitor. In the rush to get new products to market “taste probably suffered as a result,” she says. It was the “avalanche” of new products that helped cause the spike in the market, says Matt Wiant, chief marketing officer for Atkins Nutritionals. He blames the firm's British woes on operational problems but believes that in various ways low-carb foods will remain an important part of the health market.
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Whether or not he is right, future innovation is likely to come increasingly from small firms. They have led the development of organic products, points out Bain. Over the longer term, organics has been the fastest-growing packaged-food sector.
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Large firms will often look to smaller ones to provide the innovation they lack—and then buy up the successful ones, says Roy Bingham of Health Business Partners, an investment banking firm specialising in nutrition and consumer health-care. As he points out, one of the chief problems faced by big companies is that, by definition, new products that claim to be healthier signal to consumers that existing ones may not be. So to avoid cannibalising sales, big firms must know the difference between a fad and a trend. With even fast-food chains such as McDonald's and Burger King adding healthy options to their menus, and governments becoming increasingly concerned about obesity, healthier food definitely looks like a trend.
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SOURCE: EIU/ INFO-e