Why innovation remains important in an inflation-hit fmcg industry

Inflation is front and centre of almost every conversation at the moment. The focus is typically on the impact on shelf pricing and how that influences affordability. There is, however, another major implication that’s at risk of slipping under the radar: the toll on innovation.

As manufacturers face a perfect storm of cost pressure on their core business and retailers cut ranges to increase efficiencies, we have to anticipate a reduction in the investment allocated to fuel innovation in the near term, and fewer new products securing the listings they need to succeed.

However, innovation pipelines remain a critical area of fmcg – and grocery retail, especially. IRI new product development analysis reveals genuine innovation is generating significant sales. It also fulfils a number of critical roles for all.

For manufacturers, innovation adds incremental sales – and often at incremental margins. For retailers, innovation brings fresh attention to ranges and creates differentiation from discounters. And by typically arriving as premium, rather than core products, innovation can offer retailers incremental value to the category while also enhancing margins.

For consumers, innovation feeds their appetite for brands that offer something different – be it better quality, better for them, better for the planet, or ticking as many of those boxes as possible.

Innovation budgets may look like the most attractive to push back as businesses batten down the hatches, but the message to our clients is to preserve them as best they can. While it may be tempting to pursue NPD on a reduced budget through flavour extensions and recipe changes, this typically adds more cost and complexity than category incrementality. Far more impactful will be taking the resource from those efforts and putting it towards something truly new.

To succeed, genuine innovation should be rooted in an understanding of the changing consumer behaviour we’re all seeing. Couple this with a more personalised approach that better targets the right shopper, and manufacturers will find the penetration they need to warrant a place on the shelf beyond launch.

The IRI Inflation Resilience Playbook, a study in to 40 high-performance brands that mitigated inflation, found innovation to be at the heart of their category-leading resilience. These brands saw inflation as an opportunity and acted counter-intuitively by investing in the trough and working to comprehend the cost of their innovation versus its potential for realising incremental sales. They sought to better understand changing consumer needs and behaviours that could shift the demand curve and create new pockets of growth.

The ability for larger manufacturers to drive NPD success is clear. This year, 8% of sales have come from new products. Among the top 20 manufacturers, that figure is 14%. If we go further still to the top five manufacturers, that number increases to 19%.

However, as many big manufacturers put the brakes on their innovation pipelines, there is a huge opportunity for challenger brands to step into the void. This is especially true for the younger brands that have been built around the more recent changes in consumer behaviour and can react much quicker to what’s coming around the corner.

It’s far from an open goal for those challenger brands, particularly as some retailers push through significant operational changes – buying teams and HQ staff are being reduced as part of cost cutting exercises – that make it more difficult to get a voice when it comes to ranging innovation. Nonetheless, for both the short- and medium-term good, it’s imperative for retailers and wholesalers to give innovation a chance and find ways for both challenger brands and genuine innovation to be seen, heard and given an opportunity both in-store and online.

The importance of NPD is not to be underestimated, both in terms of generating sales today and unlocking longer-term gains. A drop in the quality and/or quantity of fantastic innovation will be a real lose-lose-lose for manufacturers, retailers and shoppers.