Right now, the ability to launch and scale innovative products is increasingly important for consumer packaged goods (CPG) firms.
In a time of rapidly evolving digital trends, consumers are more informed and more open to independent brands that may better reflect their lifestyle.
Challenger firms continue to outpace the growth of larger competitors, with small players (under $500 million in annual US retail sales) accounting for all branded share growth, according to Circana’s 2024 US CPG Growth Leaders report.
The So What
Many challenger brands have a relatively low barrier to entry. They can test the potential of a new snack or drink by selling on social platforms and quickly gain traction and then access shelf space.
“There needs to be a wholesale reinvention of CPG firms’ innovation strategies in order to avoid losing more ground,” says BCG’s Nicol Zhou, who leads the firm’s work in consumer product innovation.
“Innovation has always been hard but it’s something that you can no longer afford to overlook, especially as other growth levers are strained.”
Expansion into new geographies or new sales channels is becoming more limited. And growth from consumer spending faces the headwinds of trade uncertainty and the threat of inflation.
The last decade saw an increase in corporate venture capital (CVC) vehicles as a mechanism for multinationals to invest in emerging trends and promising startups. But many of these CVCs have underperformed or been wound down, sometimes due to structural and cultural misalignment.
Suboptimal innovation performance has been a recurring theme even while 83% of CPG firms rank innovation as a top three priority. According to BCG analysis:
- 65% of new product launches are renovations rather than innovations, the highest point in 30 years.
- 76% of yearly product launches fail and two-thirds of these don’t achieve 10,000 unit sales.
“The industry will find a way of reimagining some form of venture studios when market conditions better favor long-term investments over short-term results. But the elephant in the room is the need for organic innovation,” says Khalil Younes, a senior advisor to BCG and a former president of the global emerging category for Coca-Cola.
“Whether it’s the speed of discovery or the ability to move from incubation to scale, brands need to identify their pain points and establish a strategy to ensure they stay relevant.”
Now What
While M&A is still an important option, the quest for growth also requires formulating a bold and agile innovation agenda. Here’s how CPG firms can overhaul their innovation ecosystems.
Reinvent consumer insights. The innovation process should begin with superior consumer closeness and insights. This is where challenger brands sometimes excel, creating super-focused propositions based on one particular insight or unmet need. The rapid advance of technology is an enabler here. For example, firms can use AI to scan global consumer trends, provide real-time data, and respond to iterations. At the same time, it’s important to enhance digital data with deep human insights based on behavioral sciences such as semiotics and anthropology. The reinvention of this function should combine the best of both.
Nurture entrepreneurial talent and culture. A culture of innovation needs to be established as a company value and priority from the CEO down. This may include an incentive structure that rewards continuous learning and hyper-experimentation. It may also include external collaborations such as partnering with universities or startups, or crowdsourcing ideas through open innovation platforms. “A successful innovation culture means that ideas can come from anywhere in the organization—and outside it. It celebrates learning fast and failing fast,” says Claudia Schubert, a senior advisor to BCG and former president of Diageo North America. Such a culture can also help attract and retain younger entrepreneurial talent to CPGs, she adds.
Embed the role of innovation within the wider portfolio strategy. Well-defined innovation goals should be grounded in the broader portfolio strategy, including a thorough assessment of which products will drive short- and long-term growth. This could then lead to allocating an agreed percentage of resources to different types of innovation, such as incremental, breakthrough, or transformational. It will be important to establish whether innovation is tracked as part of the annual results cycle or sits within long-range business planning. It will also be important to identify the decision makers and when they will intervene.
With thanks to Alan Wolpert and Martin Hettich for their contributions to this article.
