Product development slowdown

by Allison Sebolt
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While new product introductions for the first quarter of 2009 were down 51% from the same quarter of the previous year, it doesn’t necessarily mean there isn’t any innovation during a recession, said Lynn Dornblaser, an analyst with Mintel International, Chicago.

Ms. Dornblaser said companies tend to act in one of two ways when it comes to product introductions during a recession. First, some may look at line extensions and get products on the market fast to see what will happen. On the other end of the spectrum, some companies may go for a big introduction or a big initiative rather than numerous small initiatives.

As an example, Ms. Dornblaser referred to Omaha-based ConAgra Foods, Inc.’s introduction of the Healthy Choice line in 1989 as a big initiative during a downturn. There was a small recession during that period, but the company decided it was worth the investment, and it clearly paid off for ConAgra. Ms. Dornblaser said it’s hard to know what products are going to change the industry during the middle of an economic downturn, but she noted ConAgra’s Healthy Choice Fresh Mixers line as a significant line extension for the times even if it didn’t come directly in the middle of the current recession.

Despite some successful products, the pace of innovation is definitely slowing. The categories most affected in terms of new products during the first quarter were beverages, down 56%; chocolate, down 55%; sugar and gum confectionery, down 64%; and dairy products, down 60%. Ms. Dornblaser emphasized part of the reason for the decline in the sugar and confectionery category was a result of Easter falling in the second quarter this year. The holiday typically falls during the first quarter.

Factors driving slowdowns

Initially a slowdown in product introductions is brought on by a specific event during a recession, Ms. Dornblaser said. She said in the case of the current situation the "big" event most likely occurred when the banking crisis came to a head this past fall. About the same time the government announced the country had been in a recession for a year.

"Companies’ revenues dry up because consumers stop shopping, and as the revenues start to shrink then companies back up and start to think about what it is that is most important at that particular moment," Ms. Dornblaser said.

A company will consider if its top priority should be doing everything it can to maximize shareholder value or if it should be offering new products. Ms. Dornblaser said sometimes offering new products will enhance shareholder value, but not always.

In general, Ms. Dornblaser said the slowdown in product introductions ends up being driven by consumer shopping patterns.

"Quite simply the companies have less money to work with and less resources to put into new product development," she said.

Likewise, the increase of product introductions at the end of a recession is driven by the consumer and will occur when consumer confidence picks up again and consumers start shopping more. At that point, companies will loosen their financial restrictions and begin developing again.

Another factor that may contribute to a slowdown in product introductions includes an influx of numerous significant introductions during the previous year. She said last year was a big year for the confectionery industry with heavy emphasis on antioxidants, the healthfulness of chocolate and other functional benefits. So naturally there might be fewer similar introductions this year after a big year last year.

Lack of shelf space is another factor that may come into play. Ms. Dornblaser noted that sometimes there just isn’t enough room to accommodate new product introductions. She said during the 1980s and 1990s when there were years of increases in new products it was primarily due to the growth of alternate retail formats and outlets such as convenience stores and supercenters. Those markets now are becoming saturated and there aren’t many other places where consumers may purchase foods and beverages, Ms. Dornblaser said.

Yet these factors don’t explain the entirety of the decline in product introductions.

"Although some of the decline might be due to forces that have nothing to do with recession, we think the reason the decline is as big as it is has a lot to do with the recession," Ms. Dornblaser said.

During such economic times, she said companies should look to products that will simplify meal occasions, and this may involve lunchtime solutions, meal components, sauces and seasonings, as well as products that are co-branded.

"The biggest opportunity is for products that simplify consumers’ lives and do it in an economical way," Ms. Dornblaser said. "It’s not about really expensive meal or dinner kits … it is to offer cost-effective, really convenient solutions to consumers."

She said during such times there is an increased emphasis on the basics, and there will be fewer introductions of products that have claims that are less proven or that are more niche.

According to market research firm Packaged Facts, retail sales of functional foods and beverages were $30.7 billion in the United States in 2008, which was up 6% from 2007. This jump was smaller than the 8% gain the previous year, and the slowdown is the result of the market maturing and the recession. Even though shoppers are minimizing grocery spending, Packaged Facts said revenue for functional foods is not expected to drop dramatically as consumers are more likely to make savings in other areas before cutting food spending. In addition, consumers are looking for ways to ward off illness, and functional foods may save consumers money by combining food with nutrients consumers would otherwise buy in the form of nutritional supplements.

The mindset of the consumer

Consumers are working to reduce the amount of money they spend on food through eating out less and planning meals, according to the Food Marketing Institute in its latest "Grocery Shopper Trends" report.

"Shoppers in every income bracket are facing budgetary pressures, and they are making different choices when it comes to the foods they purchase," said Leslie G. Sarasin, president and chief executive officer at the F.M.I. "The recession is affecting shopper decision making in ways that may endure. Retailers are challenged with a great opportunity to win over shoppers with money-saving ideas that appeal to their customers."

The F.M.I. noted three stages of consumer behavior when it comes to economizing food purchases. First, shoppers will save money on eating out by switching from fine dining to fast food as well as buying supermarket meal solutions instead of going to a restaurant. Next, consumers will change their saving measures in the store through purchasing more private label brands, using coupons, buying basic ingredients, and shopping with a plan. Finally, consumers will switch store formats and choose supercenters, warehouse clubs and limited assortment stores.

Sixty-nine per cent of consumers said they ate out less and an additional 50% said they ate out at less expensive restaurants. Consumers also are making plans to prevent impulse purchases before going to the grocery stores, as 53% said they made a shopping list and 40% said they searched newspaper or advertising inserts.

In addition, 97% of consumers said they plan to purchase the same amount of private label brands or more during the next year. Consumers also are enjoying healthier meals when cooking at home, and to help with this many are looking for easy-to-make recipes, recipes for cooking a meal for under $10, and convenient placement in the store for dinner items such as pasta, sauce and bread, the survey showed.

Consumers also are still concerned about the safety of their foods with 72% saying they were somewhat confident in the safety of food in the supermarket, and nearly one-third of consumers saying they stopped purchasing a food product because of safety concerns. Almost three-fourths of consumers said they purchased locally grown items on a regular basis.

Full-year forecast

Overall, Ms. Dornblaser said new product introductions will not catch up during the course of the year to be greater than they were in 2008.

In addition to the 51% year-over-year decline during the first quarter, there was a 32% decrease in introductions from the last quarter of 2008. Product introductions normally decline during the first quarter, but this decrease was larger than usual, Ms. Dornblaser said.

She said 2008 introductions were essentially flat compared with the previous year, and she attributed this to the recession. She said there is normally a 5% increase every year.

"New product introductions for food and drink in the U.S. will be down at the end of the year," Ms. Dornblaser said. "It just takes awhile to come back."

This article can also be found in the digital edition of Food Business News, May 26, 2009, starting on Page 49. Click here to search that archive.

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