Innovation at large consumer and retail companies is dead. Look to consumer giants L’Oreal, Unilever, Coke, or Kraft: the number of new brands they’ve developed in the last ten years is essentially zero.
Last fall Coke and Pepsi rolled out new and “innovative” products: low-cal versions of their flagship drinks. The products are nearly identical: both new sodas that are infused with the same natural sweetener, stevia. Even the new packaging design is the same: green. That’s how low the bar is for innovation in today’s consumer and retail landscape.
Large consumer and retail companies aren’t starting new brands; instead, emerging, independent brands are the ones capturing the imagination of younger consumers who have made healthy, convenient, eco-friendly and ethnic products their day-to-day preference rather than niche products that they buy when they have extra money.
Between 2008 and 2013, large brand’s lost 19% of the yogurt market, 7% of the coffee market, and 3% of the bath and shower market according to Nielsen sales data.
And these three categories weren’t the exception, they have pretty much been the rule: large brands have lost market share in a large majority of consumer and retail categories over the past five years as sales shifted to young brands. In the $25 billion coffee market, for instance, young brands like Blue Bottle, Artis and Stumptown have captured $2.75 billion in additional sales.
What we’re seeing is the Personalization of Consumer, a trend thoroughly researched by the investment banking firm Jefferies. I’ve been watching this radical shift in consumer preferences for several years. First, as a private equity investor at TSG Consumer Partners and Encore Consumer Capital; and, more recently, while building an online private equity marketplace for emerging consumer and retail companies.
The next generation of consumers has arrived, and they have spoken. They don’t eat the same cereal their parents ate; wear the same makeup their mothers wore; or buy the same dog food they grew up with.
While millennials have historically been a small subset of consumer purchasing power, this year, they’ll become the largest segment of the population, surpassing Baby Boomers. These 75 million millennial consumers are demanding brands that meet their personalized needs. Two decades ago, dog food from three companies was good enough for the American consumer. Not today. Now, dog owners want to choose between organic, grain-free, vegetarian, and age-specific dog foods, to name a few of their options.
Similarly, a few years ago, yogurt lovers wanted something new, and they turned to Greek yogurt — and Chobani took off. The result of the Personalization of the Consumer is that retailers are now much more willing to put emerging brands on the shelf than they were even 5-10 years ago. Visit Costco, Whole Foods or PetCo to see this first-hand. In addition, alternative channels like subscription commerce—BirchBox, Love With Food, Trunk Club, etc—and are making it ever more easy for emerging brands to thrive. Large companies aren’t just not innovating, they are also losing their most precious asset: shelf space.
Large brands consistently miss new consumer trends, judging them to be fads or small niche plays not worth pursuing. Or trying to tweak their existing product lines, a new logo here, a new tagline there, to capitalize on a trend. But slapping “gluten-free” and “organic” and “non-GMO” stickers on stale old products and brands hasn’t worked. It would be akin to IBM trying to sell the same computer today that they sold in the 80s but calling it “fast.”
Increasingly, big brands are trying to identify consumer trends and find emerging brands. But, again, they continue to fall short.
Just look at the story of Vitaminwater and Coke. As the market for enhanced bottled water grew larger, Coke watched and waited. Finally in 2007, playing catch-up, Coke shelled out $4.1 billion to buy Vitamin Water, which had grown over a decade to sales of more than $350 million. By going slow, Coke missed the trend in and ended up spending billions for a product line with limited upside potential.
Here are the two primary tactics strategics use today. First, they rely on their brand managers to evaluate and spot ‘significant’ trends. It’s doubtful a brand manager of a $500 million brand will find a $2-5 million company interesting. His/her focus will always drift to larger brands — even if they aren’t growing.
Secondly, they look at retail sales data, from sources such Nielsen, IRI or SPINS. That’s valuable but it’s still historical data. Sometimes the past is a predictor of future, but not necessarily with a massive shift like what we are seeing from millennials and the personalization of consumer.
I see the results of this reliance on brand managers and sales data day in and day out. It’s the history of AT&T repeating itself. Remember AT&T’s blunder in the mobile phone market? AT&T pulled back from the emerging mobile market after its consultants at McKinsey & Company predicted in 1980 that cell phone penetration would reach a mere 900,000 users by 2000. Of course, by 2000 there were more than 100 million mobile users, and AT&T had to spend more than $12 billion to buy McCaw Cellular to get back in the game.
Because big consumer and retail brands hold back on acquiring emerging trends, they – like AT&T – continue to overpay. In fact, in 2014 the value of retail and consumer transactions greater than $50 million hit a five-year high at $195 billion, up 57% from $124 billion in 2013.
My advice to big brands in consumer and retail is simple: Find new ways to identify trends and innovate. They could begin by looking at Google – a massive company that is continuously innovating. One place consumer brands could start is following Google’s example of allowing team members to spend 20% of their time on creative projects beyond their day-to-day jobs.
They could mimic Google’s ZeitgeistMinds – amazing gatherings of innovators talking about trends shaping our world. And they could follow the lead of Google Ventures, which has invested in more than 300 emerging companies. Free from its parent, Google, and Google’s brand managers, GV is able to find and delve into truly innovative trends. They use data not just brand managers to identify the most innovative companies. That’s why it has been able to invest in companies that are far removed from search, such as Uber, cancer diagnostics company Foundation Medicine, and smart device maker Nest, which Google ultimately acquired in 2014.
Unlike Google, big consumer and retail brands have not figured out the formula for spotting and investing in emerging trends. What Google illustrates is that it takes a comprehensive commitment and approach to staying on top of trends and nurturing innovation. Once strategics understand this, then they may be able to start capitalizing on the personalization of consumer.
