Innovation: your response to a changing world

Consumer goods companies are experiencing a trading environment that is more challenging and complex than ever before. Consumers are more demanding, digital disruption is increasing, supply chains are becoming more global, there are increasing regulatory challenges and increasing political and economic uncertainty. The pound has fallen by 15% on a trade-weighted basis since the Brexit vote and in October it received the “accolade” of being the world’s worst performing currency. Innovation led growth will be key for UK consumer goods companies to stay ahead of the competition and navigate this challenging environment.

 

A rise in exports?

Some commentators like to highlight the positive impact a weaker pound will have on UK exports. Associated British Foods CEO George Weston, expects the fall in the pound to boost exports of its brands such as Twinings tea[1] and for the fall to support import substitution for UK food manufacturers. The UK’s biggest net export by value, Scotch whisky, will benefit against high end competitor spirits made in the EU and USA, as a result of a value chain that is largely UK based. So it isn’t all doom and gloom. Whilst some consumer goods companies will undoubtedly receive a lift in revenue, many will also see a rise in costs. Deutsche Bank analysts[2] point out “any economy’s manufacturing exports today contain a significant chunk of value that is added abroad". As a result, the positive impact on the bottom line may remain minimal.

A shift in inflation

There is little doubt that the fall in the pound will increase pressure on many in the UK consumer goods sector, as costs of imported goods and energy increase. Over the last 2 years, manufacturers have been made to absorb some of the margin decline passed on by grocery retailers who are competing with discounters. This means that manufacturers have limited flexibility to absorb the decline in value of the pound. Recently, Morrisons increased the price of Marmite by 12.5% causing outrage in the British media, Apple have announced significant price increases in the UK on all their products, and Birdseye and Walkers have also said they will have to increase their prices. Retailers will attempt to hold off on price rises as long as possible, not wanting to damage consumer confidence and protect peak Christmas trading. In October 2016 shop prices actually continued to fall by 1.7%[3], as a result of increased competition.

Both retailer and supplier will attempt to pass costs onto one another in order to maintain profits. Ultimately, it will be UK consumers who lose out. With the pound at its current rate we can expect inflation to rise to somewhere between 2% and 3% in the not too distant future. The National Institute for Economic and Social Research (NIESR) predicts inflation could reach as high as 4% in the second half of next year[4]. Like it or not, the pound may be set for a prolonged period at its current level and some say it could fall further still.  Inflation may begin to hit consumer confidence early next year, just at a time when the UK may also trigger Article 50. This will pile pressure on large consumer goods companies and retailers alike who have found it difficult to grow the top line of their business with modest sales growth. So, what should they do?

Innovation led growth

Innovation seems to be the buzzword of many Consumer Business CEOs of late but what does it actually mean? Many refer to new product innovations, others in the way they do business, or the way they reach their customers. Put simply, innovation is a response to a changing world. Innovation in the face of greater uncertainty will be hard to deliver. Companies must be determined in their approach to find innovations and deliver them effectively.

Fostering innovation

Fostering innovation in large companies is difficult. Following the sale of Nokia to Microsoft, Nokia’s CEO said “we didn’t do anything wrong but somehow we lost”. Their failure to innovate and react to their changing environment caused them to fail. John Bryant[5], CEO of Kellogg, says when companies get focused on protecting what they have, they fail to create what they need to be. High levels of consolidation in the consumer goods market mean the dominant players in the industry have much to lose and this risk aversion makes it harder for them to be innovative. In order to create an innovation culture, companies should look to empower employees, encouraging them to challenge the status quo. Internal innovation funds and research and development centres are some of the ways companies can help foster this innovative culture through collaboration.

A focus on innovation doesn’t mean that companies only look at new ways of working, they can also innovate the way they deliver their core offering. United Biscuits (pladis), recently acquired by Turkish company Yildiz’s, have innovated their core offering changing the way we consume the “UK’s favourite biscuit.” They have created a bite-size version, Digestive Bites, tapping into the changing needs of consumers now eating more often on the move. It has been one of their most successful product launches. Heinz provides another example when in 2002 the company introduced the very simple innovation of the upside-down bottle, growing sales by 6%[6]. More recently, Mondelez’s decision not to innovate Toblerone and instead just reducing the weight caused a social media backlash, illustrating a lack of engagement with consumers.

Customer is key

As Stephen Stanton-Downes noted in Moorhouse’s Achieving Product Development and Launch Excellence[7] publication, customer centricity is key. Thanks to the digital revolution, the consumer is now a key player in the product launch cycle. The digital revolution provides opportunity to collect and interrogate vast amounts of data on consumers, produce customised products at lower costs, engage consumers in the Research and Development process and potentially bypass retailers with a direct to consumer offering. However, with so much hype around “digital” the challenge is where to invest. In a time when Research and Development budgets are under threat, targeted investment will be essential. Asking yourself ‘what will this do for my consumer’ should be at the start of every innovation.

M&A Innovation

Unable to foster their own innovation, many companies have turned to mergers and acquisitions to generate growth via acquisition of smaller more innovative companies. AB Inbev has been prolific of late, purchasing smaller craft competitors such as Camden Brewery, which is a reaction to changing consumer tastes. For companies that lack the necessary internal capabilities to transform their value chain, mergers and acquisitions may provide a better approach to innovation. The fall in the value of the pound may trigger a series of mergers in the UK, with cut price deals for overseas buyers.

So, in our fast changing economy, consumers with less disposable income as a result of inflation, will become more selective with where they spend their hard earned cash. Customer led innovation is key to staying ahead of the competition and navigating an ever more challenging landscape in the consumer goods market.

[1] http://uk.reuters.com/article/uk-abf-outlook-idUKKBN1330RR?type=companyNews

[2] https://www.ft.com/content/9e1d0350-253f-3d6b-b23f-d1fbf4cdd4b5

[3] http://www.telegraph.co.uk/business/2016/11/02/forget-marmitegate-prices-are-still-falling-for-now/

[4] http://www.bbc.co.uk/news/business-37838087

[5] http://www.ey.com/gl/en/industries/consumer-products/ey---consumer-products-sector---balance---interview-with-john-bryant

[6] http://www.bain.com/publications/articles/innovation-in-consumer-goods-heroes-to-the-rescue.aspx

[7] http://www.moorhouseconsulting.com/insights-publications/publications/publication-request-form/

 

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Author

James Chapple Senior Consultant