On the occasion of the international food and beverage industry fair Alimentaria, held in Barcelona, IESE Professor of Marketing José Luis Nueno presented the paper “¿Sirve para algo innovar en el sector alimentario español?” (“Is there anything to be gained from innovation in the Spanish food industry?”), a comprehensive study of innovation in the Spanish food industry based on IRI data (2004). The author pinpoints five changes in society, which he calls “market revolutions,” that have impacted on innovation in food products. The first is the increase in the number of households in Spain as a result of the entry into the labor force and the formation of households by the baby boom generation. The second, related to the first, is the entry of women into the labor market. Data provided by the author suggest that the youngest households are more open to innovation as, due to time pressures, they do not have such a strong food culture and their needs are different. Thirdly, increased life expectancy and an aging Spanish population are creating a market for healthful products that some, generally the younger people, consume out of conviction, and others, the older ones, by prescription.
Fourthly, low-income households tend to spend more on basic products, while those with the highest incomes are less prone to change their level of consumption of such products. Consequently, if food spending in Spain has increased, it is not because household spending has increased, but because there are more households, and therefore more consumers.
Fifthly and lastly, in response to consumers’ resistance to pay more for consumer goods and the growth in market share of discount retailers, retail distribution, which J.L. Nueno characterizes as the “gatekeeper of innovation,” has opted to compete on price. The result of this, says the author, is that the food industry has become the prime exponent of the “Age of Cheapness,” that is, the tendency to offer consumers a wider choice at low prices in the least interesting spending categories.
All these changes might lead us to conclude that now is the best time to launch innovations, and yet the opposite is the case. To show why, J.L. Nueno analyzes the situation of food product innovation in Europe and Spain. His findings suggest that, in Spain, almost all the new products that are launched are backed by promotions, and that the most successful new products are the ones that have sustained promotional backing. The profitability of innovation is thus burdened by a demand for promotions in the form of heavy price discounts.
As far as acceptance of innovation in food products is concerned, the situation is more difficult in Spain: only 13% of new products sell better than established products. Whereas better products tend to have strong sales from the moment they are launched, the less successful ones sell poorly from the outset.
In light of the data on new product launches between 2002 and 2004, J.L. Nueno concludes that during this period innovation has not yielded the hoped-for results. The food industry has tried to explain this in terms of weak demand, when in fact the reasons are to be found in the supply. Broadly speaking, the food industry has sought to mass-produce and industrialize food production through appropriation (industrialization of natural products through the use of technology) and substitution (preserves, frozen and chilled products, and functional foods). In Spain, appropriation still predominates over substitution.
Another key feature of the industry detected by J.L. Nueno is that, owing to consumers’ conservatism in food matters, innovation in food products is rarely radical and is always led by established brands.
A third fundamental characteristic of the industry in Spain is the central role played by retail distribution. J.L. Nueno notes that in order to innovate successfully today, a manufacturer needs to be well known, nationally or internationally, and willing to invest to achieve at least 40% weighted distribution in the first three months following the launch. Also, investment in promotions and advertising during the launch is unavoidable. And of course, the innovation must be based on a concept that is consistent with contemporary human nutrition trends (CHNT), which demands a prior consensus among manufacturers, retailers and consumers.
In the author’s opinion, food product innovation in Spain suffers from the following weaknesses:
- a conservative nutrition tendency.
- a retail distribution network that has opted unanimously for discount pricing
- low, slow and asynchronous sell-in and weighted distribution
- low commitment of manufacturers to their new products
- low-profile launches
- scarce consumer re-education
- inconsistency in the positions of science, government and the industry
Given this situation, J.L. Nueno advocates closer coordination to make the market grow, and greater competition to share it out. He warns that if the current model of innovation does not change, distributors will see their margins shrink as a result of competing with products for which consumers are unwilling to pay more; manufacturers will be trapped in a vicious circle and will lose share to private label; and consumers will automatically gravitate towards the big established brands, which they will alternate with cheap imitations.
Article of José Luis Nueno published in AECOC and Estudios y Ediciones IESE, June 2nd, 2004
