Market conditions threaten to inhibit internal innovation

KANSAS CITY — Food and beverage product development often is characterized as a series of bets companies place to create new opportunities and, ultimately, drive growth. A large bet may provide a significant pay off, but the odds of success are often small. As the industry has transitioned to a normalcy following the worst of the COVID-19 pandemic and the war between Russia and Ukraine has upended global markets, many companies are focusing internal research and development on much smaller bets — line extensions, new flavor varieties and adjacencies — in pursuit of growth.

The reasons for this shift are varied and numerous. Large bets often require new ingredients and processes. Current market volatility and supply disruptions make management cautious about unproven business plans that would require the establishment of new, dependent supply chains within organizations already challenged by supply chain disruptions.

Additionally, the retail and foodservice sectors continue to recover from the pandemic. Regular shelf resets retailers initiated in the past have become less frequent. Their focus has been on keeping shelves stocked and building inventory. The use of artificial intelligence by retailers to identify the fastest-moving stock-keeping units also may limit the opportunity for manufacturers to place big innovation bets.

In foodservice, rising prices are forcing operators to rethink menus. Many are more likely to remove items from a menu to better manage costs than add new ones.

Category adjacencies appear to be attractive opportunities, and many companies are exploring them. SunOpta, Inc., for example, plans to expand from fluid oat milk into oat-based ice cream and spreads. The Coca-Cola Co. is pushing its Coca-Cola, Simply and Fresca brands into alcoholic beverages, and meat processor Maple Leaf Foods has placed a sizable bet on the meat alternative space.

But as Mondelez International, Inc. learned when it tried to extend its powerful Oreo brand into the chocolate segment, there are limits to a brand’s power to propel innovation.

“Chocolate on Oreo is a bit strange,” said Dirk Van de Put, chairman and chief executive officer, during a June 1 presentation at the Sanford C. Bernstein Strategic Decisions Conference. “We needed to make kind of an Oreo-covered chocolate in a way, which is not real chocolate for the consumer. And so it was limited volume. And it was very difficult to understand ‘Where do we go from there?’ So, you had limited shelf space with a proposition next to what’s in the market was a little bit vague and no real route to expansion. That’s really the reason why we gave up on chocolate.”

Finally, as Food Business News’ Food Entrepreneur publication has shown, food and beverage companies are becoming much more comfortable placing bigger bets outside of their organizations. These bets, if successful, offer the opportunity to scale with little risk to a business’s established brands. The list of manufacturers investing in startups is long and shows that what were once niche opportunities for a few large companies like General Mills, Mondelez International and Tyson Foods has become business as usual throughout the industry.

These shifts indicate internal research and development for many companies will continue to focus on incremental innovation for the foreseeable future. Bigger bets will continue to be placed where they can do the least damage to an established brand or to a company’s overall performance.

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