Innovation Versus Renovation
Historically when consumer package goods companies were intent on growing their top-line, they looked to innovation in the form of new products, as the most expedient way of achieving this aim. Indeed innovation has traditionally been seen as the most advantageous way of expanding a company’s consumer franchise, while growing market share.
But some of this thinking has changed in recent years, with the concept of renovation taking on increased importance at many consumer package goods companies. Among the reasons for this are as follows:
- The resources associated with developing new products, even prior to marketplace introduction
- The considerable capital investment in new production equipment, especially for the more innovative items
- The low level of success typically associated with new products, making this form of innovation a high risk venture
- The introductory monies usually required to get the innovation properly merchandised on the shelf, let alone the investment necessary to obtain consumer pull so that the product remains in distribution
- The likelihood that revenue will fall by double-digits in Year II of a launch
Few of these complicating factors typically arise when renovating an existing line of products. Indeed in most instances, the total level of investment is considerably less when pursuing renovation, versus innovation. What’s more, coupled with lower risk and savings, renovating existing product lines often provides greater revenue growth.
Let’s look at an example to demonstrate this. Say you have a $300MM brand that decides to innovate by going the new product route. Thus you decide to bring three innovative new SKUs to market, and garner what would be an above average $15MM in Year 1 sales. Unfortunately when one takes into account various introductory allowances, free goods and other trade terms, your resulting revenue gain will likely be in the $12MM range. Furthermore, most new products cannibalize sales of your existing line. Using a conservative cannibalization rate of 50 percent, this reduces your revenue growth to $6MM. Then taking into account in Year II a likely reduction in promotional support and distribution—and using a conservative sales reduction percentage in the mid-teens—your revenue growth will become even less attractive. Thus for all of your efforts, you’ve grown the top-line per annum over two years by just 2 percent, despite what likely was a huge investment in time and money.
Based on these insights, consumer package goods companies/brands are increasingly adopting renovation techniques as a means of growing their top-line, while remaining very conscious of the impact this has to their bottom-line. Many of these renovation activities include product reformulations, new package formats and designs, enhanced communication activities, and improved merchandising and in-store activity. While considerable resource is required to effectuate such renovations, the investment required is usually far less than simply taking the new product route.
In making these types of renovations, companies/brands are taking a laser-like approach as to how they can enhance the experience of their consumers. In many instances, they’re also working closely with their retail trading partners on how the renovations being contemplated may coincide with their customers’ business strategies. Some examples of brands that have engaged in many of these types of activities, and successfully renovated their line of products, include Snapple, Head & Shoulders, Miller High Life, and Luden’s.
While renovation thus possibly should take on an increased role in the management of your brand portfolio, this doesn’t mean that new product innovation—or a combination of renovation and innovation—isn’t likewise desirable. Indeed some of the aforementioned examples cited included the addition of new items to a brand’s line, as well as renovating what represented the core business. The key to your firm’s success should be to look at both options upfront in an unbiased fashion, as opposed to merely repeating what you’ve done in the past. With both innovation and renovation playing such critical roles in the growth of your company/brand, making the right choice will likely be one of the most important decisions you make.
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