In 2024, many large food and beverage manufacturers will need to double down on an often-overlooked part of their business: innovation.
This year is forecast to be challenging as inflation, consumer fatigue over price increases and other factors weigh on companies, placing pressure on producers to upend their usual way of thinking. While breaking with tradition will be difficult for some, it also could be key to their success this year, experts say.
Analysts who follow the sector told Food Dive that under the current environment, innovation is more important than ever for companies to attract and retain consumers who are curtailing their spending, pushing for products that better meet their needs and navigating through a seemingly endless array of choices in the marketplace.
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For many storied companies, however, paying more attention to innovation and investing extra money to bulk up that side of their business means upending an inherently conservative culture that has been largely risk-averse for much of its history.
Mikael Bengtsson, industry and solution strategy director of food and beverage at Infor, said for many food companies that have been around for more than a century, doing things the way they’ve always done it “won’t cut it anymore.”
“If they don’t, I think they are doomed. They need to embrace it. Otherwise, they’re not competitive,” said Bengtsson, whose firm advises companies in the food and beverage space. “It gets more expensive. It’s less efficient and they can’t be profitable anymore. The world is changing and if they don’t change with it, I think it’s hard.”
Pressure from private label
Despite the growing importance of innovation, food and beverage companies are facing obstacles in the market that make it less attractive for them to green light potentially risky bets that will take years to pay off — if they even prove to be successful in the first place — while generating minimal sales in the near term.
Not only are executives under pressure on Wall Street to increase revenue, but there is mounting pressure to maintain and expand margins, a difficult feat with businesses today facing higher costs for ingredients, shipping and labor. Companies of all sizes also are dealing with higher borrowing costs with interest rates hovering at their highest level in years, creating a disincentive to tap into capital to fund a far-from-certain endeavor.
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“They’re much more risk-averse now because they have to,” said Brian Choi, CEO of The Food Institute, a food industry media and market research company. “Companies are judged by [investors and their boards on] how they are doing compared to their competitors. They are not judged based on innovation.”
Instead, executives are more likely to favor maintaining sales for popular brands that are responsible for the lion’s share of their company’s volumes and sales.
Shelving some innovation now could pay off now, but analysts said it risks slowing medium to long-term growth by creating a stale portfolio and reducing a company’s competitiveness.
“I honestly believe in the U.S., a lot of CPG companies are just not very good at innovation. They’re not very good at moving their products forward. They’re lazy.”
Neil Saunders
Managing director, Global Data
The inability of some businesses to innovate quickly enough is already causing some to fall behind, with a handful turning to M&A as a way to fill gaps within their portfolios.
Last year, jam and peanut giant J.M. Smucker dolled out nearly $6 billion to buy Hostess Brands to deepen its presence in indulgence categories and consumer occasions focused on convenience. And Campbell Soup, which already owns Prego, announced plans in August to buy Sovos Brands, the owner of premium pasta sauce brand Rao’s, for $2.7 billion. The deal is expected to close later this year.
“I honestly believe in the U.S., a lot of CPG companies are just not very good at innovation. They’re not very good at moving their products forward,” Neil Saunders, managing director with Global Data. “They’re lazy.”
That could soon change.
Retailers such as Target, Safeway, Kroger and even Amazon are getting savvier with their private label offerings that often are as good or better than the branded items, and available for a fraction of the price.
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At the same time, large food and beverage companies are facing increased pressure from more nimble, innovative upstarts — as well as other large peers in their category — for the attention of cash-strapped consumers.
Saunders said he sees early signs that food companies are putting more resources behind innovation, but that so far it hasn’t appeared on store shelves in a way that would meaningfully impact their bottom line.
“It is happening, but it takes time,” he said. “Some of the bigger companies are at a disadvantage because they’re not set up to innovate in a sort of interesting way. It’s very difficult for them to do that.”
Companies that are fast-forwarding innovation
He noted that health and wellness, limited-time offerings, sustainable packaging and snacking aimed at on-the-go individuals are four areas that are especially ripe for innovation. In contrast, categories such as pasta and soups, where consumers tend to be wedded to products they have a history of purchasing and where creating new and unique products is particularly difficult, are less conducive to upheaval.
“Innovation actually is really important in this environment because it’s one of the ways that you can fight back against some of the more unfavorable consumer trends in the market,” Saunders said.
At Nestlé, the Switzerland-based food and beverage manufacturer is ramping up innovation.
It joined other companies in scaling innovation back during the pandemic and disruptions to the supply chain to focus on delivering its most popular products to consumers and retailers, said Mike Van Houten, head of the consumer and marketplace insights group for Nestlé USA.
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Last year alone, the Lean Cuisine and Nescafe manufacturer increased its pipeline of innovation projects by nearly 45%, with more expected in 2024 in areas such as coffee, creamers, convenience and prepared meals — categories where Nestlé says it has a leading presence in the marketplace.
“Innovation is here in a big way,” Van Houten observed. “Within our own organization, as well as other companies we admire, we can see that this is bubbling up as a top priority.”
Hershey is among those other companies that have “stepped …up” its innovation plans for 2024, CEO Michele Buck recently told analysts.
Mars Wrigley, whose candy portfolio includes M&M’s, Snickers and Skittles, is planning fewer but more impactful innovations in 2024 through what it calls a “very disciplined approach,” said Tim LeBel, the company’s president of U.S. sales.
LeBel said items that fail to bring much new to the segment risk siphoning off sales from other products already available while failing to appease retailers looking for offerings that bring incremental growth to the category. Consumers typically are willing to pay more for products that are different, have an improved formulation, or are unique in a positive way.
The rollout of Snickers Hi-Protein in 2022, for example, brought the popular confection into the performance nutrition category by using the same ingredients as the iconic candy bar but loading it up with 20 grams of protein and only 4 grams of sugar. LeBel said Mars Wrigley is aiming for similar products across its portfolio that provide a spark to a candy sector that has been dominated by the same companies and brands for decades.
This year alone, Mars Wrigley’s is planning to introduce sweets and snacks such as Dove Milk Chocolate Tiramisu Caramel Promises inspired by the Italian dessert, Ranch Dip flavored Combos, and a Dove bar made with 100% real ice cream using sustainably sourced vanilla.
“Innovation is critical to the category. We understand that,” LeBel said. “But we want to make sure we bring the right innovation. It’s not just about throwing 10 items and seeing if one sticks.”
Rafael Acevedo, who is president of Danone’s North American yogurt business, agreed. He said with Danone’s yogurt brands often tied to a key attribute, such as protein with Oikos and low sugar with Two Good, innovation needs to coincide with how people view the brand and what it is known for. Straying too far risks deluding brand equity and confusing consumers.
“It is very important the innovation is building upon what the brand represents and the core essence,” Acevedo said. Shoppers “want to consume products that they really relate to and that really connect to who they are. And that’s what we want to continue to develop more of.”
