SCOTTSDALE, Arizona (Reuters) Ñ U.S. packaged food companies that brought consumers the ready-made peanut butter and jelly sandwich are preparing a further drive for new products to justify higher prices and win shelf space at a dwindling number of retailers.
“It’s a race with the ideas,” said Brenda Barnes, chief executive of Sara Lee Corp.
But the race is becoming more expensive as companies pour hundreds of millions of dollars into developing and marketing the products.
Between 1997 and 2000, the top 10 new food products generated $150 million US on average in their first year of sales, according to consulting firm Bain & Co. That dropped to $115 million in 2001-03, even as total research and development dollars rose.
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“It is getting much more expensive to put a new product on the shelves,” said Vijay Vishmanath, head of Bain’s global consumer products practice.
The number of new food items has jumped, reaching 14,826 in 2004, up from 13,200 in 2000, according to Datamonitor’s Productscan Online, which tracks such data. That includes new package sizes and flavours of existing products, as well as completely new items.
Companies do more testing before bringing a product to market and quickly kill off those that don’t sell.
“Because it is so expensive to innovate, the industry is far more disciplined,” Campbell Soup Co. chief executive Douglas Conant said in an interview.
“It’s dollars and cents. You have to be smart about it.”
At an analysts’ conference last week in Arizona, companies touted new products like Hershey Foods Corp.’s cherry cordial kisses and Kellogg Co.’s Tiger Power cereal.
Each company is looking for the type of success J.M. Smucker Co. has with its Uncrustables peanut butter and jelly sandwich, which has developed enough of a market in recent years in convenience-minded America that the company is building a new plant to make more.
At the same time, companies want to avoid the next Crystal Pepsi, a colourless version of PepsiCo Inc.’s signature cola that flopped in the 1990s. Disappointing sales of the low-carb products the companies touted just last year at the same conference are still on analysts’ minds.
“Some of these guys went a little bit crazy with brand extensions and flavour extensions that cluttered the shelves,” said David Kolpak, an analyst at Victory Capital Management.
With the retail industry increasingly dominated by larger players like Wal-Mart Stores Inc., companies need to be more disciplined in their new product development in order to get on the store shelves.
At the same time, new products are one way manufacturers can get around reluctance by retailers to raise prices for consumers.
“No retailer is willing to accept (higher) pricing unless the manufacturer can give a good rationale for the need or if the manufacturer can come up with something innovative,” Kolpak said.
Many U.S. manufacturers have raised prices in the past few months to try to compensate for higher costs of ingredients, fuel and employee health care. Food companies argue that those price increases are necessary to improve margins and give the companies the money they need to plow into research and marketing for the next new product, which in turn will help keep consumers from defecting to the cheaper brands.
But analysts question whether new products help the industry increase sales or just keep companies from losing share to private-label brands.
