The Battle for the Consumer: Deciphering the Code to Product Innovation and Growth

Neely: It's funny this is a webinar talking about growth. Here we are, it's Q1, everybody's fired up about the new year and driving growth. The first thing we talk about is market research: is there a disconnect there? In the past there might have been because people were commissioning studies, and it would take three months to get into the hands of the people who could act on it.

That has changed with the rise of digital marketing and e-commerce. There's so much more data than we used to have, more information about the consumer that provides granular, real-time insight into the actions needed to connect with consumers. Having been in this industry for a long time, I love exploring how much more we now know about all the different aspects that can influence consumer shopping habits, channel preferences, etc. The rise of digital marketing, where CG companies can take advantage, has given more particular insight into consumers.

Now a debate has opened up about whether we only want to look at the transactional behavioral data with some of consumers' digital activity, or whether we need to think long-term and look at things such as brand awareness and consideration — some of the memory structures that brands create over the long-term to build equity. 

Larson: Sunny, what do customers need to know about the consumer to be successful? Let's boil it down, what types of data do they need to make this work, to be successful, and drive revenue?

Neely: Great question, Paul. It’s critical that behavioral immediate real-time data I mentioned is relatively new to a lot of brand leaders. You’ve got information coming in on e-commerce, the website is playing a more important role than it used to, consumers' traffic patterns — what they're browsing and purchasing on the website — is giving insight that wasn't there before, if you're lucky enough to have a storefront, an e-commerce storefront.

Other brands are building up content portals. Molson Coors is a great example of building a content portal, creating a newsletter, then tracking the kinds of consumer behavior around the interest, and understanding the insights. 

On the immediate level, the view of point-of-sale data, Nielsen, IRI, and others, is never going to go away. Pulling that together with immediate behavioral data to understand how it's impacting sales is important. There’s a massive world of e-commerce ratings and reviews and ambient social media listening that should be coming together.

You're able to understand the contextual view of consumers in the short-term, but people should never leave it there. You need to take a step back and look at the big picture. 

Dano: Sunny, I love when you say “the rise of digital marketing” like it's some cool movie that's coming out. Maybe one of the big antagonists to the movie is for the consumer products companies saying, how do we gather all this data and where are we storing it? How do we make sense of it? It's a big challenge. 

Neely: It can be like a horror movie or a science-fiction horror movie, I guess. In fact in previous sessions that we had in Q4, talking to some of the customers, they said, "The data is chaos, we're trying to find our way through the chaos." Look, you've got to create a foundation, a central repository. There are a lot of platforms that can do this for you, a consumer data platform where all the information about each individual consumer is gathered together.

Remember, consumer products companies are facing a data deficit because they haven't had first party data in the past. Instead, they relied on the media ecosystem and retailers to have a direct relationship with consumers. 

Now that CP companies are building these first party databases, they can pull information together — whether the consumer is immediately known or not — they can progressively profile and build a unified record. That’s valuable because if the information is together in the same place, different interconnections can be segmented within consumers, making it easier to understand and take action.

This idea of a consumer data platform for gathering short-term data, but also a longer-term view. If you're going to go to the trouble of brand tracking, which plays an important role, asking questionnaires about awareness, asking people about how they rate the brand on certain critical attributes. At Coca-Cola it was things like taste, value, and positivity. 

It's not easily done, but the idea of centralizing these massive disparate data silos into a single, unified record is critical for success. Don’t stop there though. If there's one takeaway in this section, it’s the data deficit. In fact, a lot of people talk about the data deficit that consumer price companies are facing, that data deficit wouldn't matter if it wasn't becoming an engagement deficit. 

The winners are going to be the ones that find a way to take the data and seamlessly bring it into action.

The closer the centralized consumer databases can be with the omnichannel consumer engagement platforms, the more successful you’ll be. When taking action, it allows different aspects and different ways of personalization to come together more deeply, making a more meaningful impact with consumers. That’s the main takeaway for me.

Larson: One more question. In our complex world, we have more and more data, more and more access — you can run, but you can't hide right in the virtual world. Actionable, automated things are going to save us. With all this data and information, we have to use it. We've got to make it actionable, but figure out a way to use that data to be more automated, in order to take that intelligent information and actually use it. Do you have something you can share with us based on more of an automated approach with all this information?

Neely: When you've got a centralized consumer database, you're able to put together elaborate targeting and segmentation for consumers. But then what do you do with that? These omnichannel engagement platforms that are available out there have proven tactics that are already in place. If there’s a particular type of consumer segment, or consumers in a particular disposition, trying to decide whether to purchase.

There are automated consumer journeys that can send them right that have been proven across different brands and categories. Those are examples of the short-term initiatives that can be automated and done without having to reinvent the wheel every time an opportunity comes up. Also, think about the bigger picture, within a brand tracker, an appropriate brand health platform, you can set up alerts.

Sometimes that is more important than anything else. If a competitor has made a massive media spend or lowered prices across the line, the sooner you know about that, the better in order to make concerted action. We all know it's not easy to steer the aircraft carrier unless you've got a few months advanced warning. The fact that we can have data automated and receive information in as near real-time as possible, is going to be key to success.

Those are some of the main points I wanted to cover on consumer sentiment. Understanding short-term transactional behavior data, understanding the bigger picture as well, so that all those building blocks are building into expanding and enhancing brand equity — that's going to pay off in the long run. 

Paul, you hit the nail on the head, we're not in the business of building libraries of information about consumers, we're in the business of engaging and driving greater consumer connection and impact across all the different touchpoints. Making that data work for you is the most important thing.

Denman: The second key growth topic is new product innovation. Consumer goods companies must continue to develop, refine, and launch new and improved products if they're going to stay relevant in today's hypercompetitive market. Over the past two years, consumer goods companies have been less focused on product innovation and more on getting products into the hands of consumers quickly.

During the peer-to-peer conversation on new product innovation, the participating CG execs covered a lot of topics. Some of the key discussion points were: supplier partnership management, skew reduction and simplification, marketing innovation, and how to innovate at speed. Jon, let's get the conversation on new product development started.

Dano: The key insight that came out of the workshop in December was a little bit surprising. There was a drawback from the new product development and product innovation to focus on getting product available, on the shelf, and fast. Obviously, there are challenges that we're all aware of. Additionally, there were indications that over those two years, the focus was on dealing with the hyper-demand from the consumer and getting the product on-shelf.

They were focused on digital innovation, and in some cases, that was prioritized over product innovation to connect with the consumer in a different way during this point in time where there wasn't as much innovation. Looking at a lot of that was looking at the rear view mirror. It's a new year, a new day. This business moves fast.

Obviously, the product innovation teams haven’t been sitting around watching Netflix — this is something they've been working on. Capability is required to get there. You're going to see a renewed emphasis on capabilities, such as innovation management, cost evaluation, design collaboration, product compliance, etc. that are necessary to ensure strong innovation from a speed perspective to the market, as well as make sure it's successful.

Neely: Jon, you mentioned it was a couple crazy years. New product innovation did take a little bit of a downturn in certain places, certain segments, but what were some of the actions that companies were taking to drive speed and availability in lieu of that NPD?

Dano: Companies had to think differently. The speed and availability was the critical measure from the consumer. There was a lot of the sentiment out there — companies were tracking it and did not want to see a consumer that was frustrated with lack of availability of the product. They were trading different products and didn’t want to lose the consumer. 

There was a strong emphasis on overcoming supplier issues through network expansion and making sure to get the right product that was needed to the shelf.

They were focused on skew reduction, eliminating the tail, and simplification to deliver speed and de-complex the supplier environment, which was challenged in terms of being able to get the right products to shelf. Then, finally, regardless of those challenges, we learned from a lot of consumer products companies that quality cannot be compromised. 

Larson: Jon, you think about new product innovation, but you also think about the digital new product innovation. What did some of the customers that were participants at the table talk about when they were looking at digital innovation? What did you hear in the session? Everyone's doing a great job at the shelf. They're owning the marketplace. But the digital marketplace is a whole new frontier — one that I'll talk about in a minute. The extreme double-digit growth in digital, how are you seeing that from digital innovation for new product introduction?

Dano: There were definitely some good insights. When talking about how this is going to be a big year for new product innovation, part of the reason is that companies have spent the time getting into digital innovation and connecting with consumers. 

Obviously, the consumer is the one that defines the innovation that's provided to the marketplace. 

Things like consumer experience innovation, where we saw a tool company building solutions to help guide and train the consumer on how to use the products. Getting closer to the consumer and building a relationship. The use of consumer sentiment data to understand what's going on with the consumer in the marketplace. 

There was an interesting example with this t-shirt company that we're talking to that started to gather consumer sentiment data and talked about small businesses that sell products and how the consumer was very concerned about these businesses closing during the pandemic. 

They leveraged that capability. That's the new insight from the consumer to help take some action and get into some cool fundraising capability to help these small businesses survive, which in turn, is beneficial to them. It’s really interesting.

Another big piece is adding first-party data. Sunny talked about this. This is beginning to demonstrate a path to significantly improve consumer intelligence, which is a priority for all consumer products companies. Finally, marketing technology investment. I joked earlier about the rise of digital marketing, but this is a catch phrase now. Everybody talks about e-commerce, how it took 10 years, and jumped into 10 months of innovation.

As a quick example, I'm a soup guy. Condensed soup is a product that is from a demographic that traditionally has been more in the baby boomers and Gen Xers — maybe not so much in the millennials.

Over the course of the past couple of years, condensed soup has increased to 5 million new millennial households — 5 million. That's an entire new consumer set that was created in part by this hyper-demand. Now, how do you retain that consumer? 

You do it through some of the things we're talking about: consumer experience — connect with these consumers, talk to them about solutions, recipes they can make with this condensed soup, building loyalty to this experience, and getting them to pull that can out of the pantry and use it. Going beyond that hyper-demand of cleaning out grocery shelves to actually building this relationship with the consumer. 

This type of digital innovation is going to be driven once they've got this consumer to be able to produce more interesting products for them.

Neely: Jon, it's like you're telling my story over here. As a Gen X father of three, I doubled down on soup the last two years for sure. It's true, that's what we saw in the past couple years, this focus on the core business. Companies like Coke cut a lot of the long tail of the smaller brands and used some new product introduction. What do you see ahead? 

Dano: It’s back and in a big way. The reality is product innovation is in the DNA of consumer products companies — that's what they strive to do. Innovation is driven by the consumer as we've been talking about. Sure trade-offs were made during the peak crisis points of the pandemic to focus on availability, but it doesn't mean product teams were sitting around binge watching shows either. 

The ones that are going to win are the ones investing in connecting to the consumer in a personal way and getting more insights about the products, how they use them, what they like.

That is going to create a higher success rate when it comes to new product innovation because of the investment made in capability to connect with the consumer in a deeper way — in the various ways you talked about, some of the examples I shared — and you see it already.

I'm sure a lot of us watched the Super Bowl. There was a lot outside of the crypto ads, but there were a lot of new product launches that were announced during the Super Bowl commercials. You see it right there, as a big wave, for example.

Larson: That's a great example. I hate to bring this up, but let's talk about inflation. It’s affecting all of us. It's in the news. All of us that have run brands, delivered brands, and sold brands, and everyone on this call has been involved in price point, price elasticity. Everything that goes with new product introductions. 

By the way, inflation is moving every day. How do I establish that? How do I maintain it? How do I make sure it resonates well with the consumer and then my customer, my retailer, depending on how I deliver that pricing? We don't have to get into the nitty gritty on pricing, but how is inflation affecting new product development?

Dano: Honestly, it's a major factor. I'll give you a few stats: food at home has risen 6.4% during the past year from a pricing perspective. That's the largest 12-month increase since the period ending in December 2008. Prices have risen 7% in food in January alone — it's real. However, it can be a trigger for new product development because there’s a threat that inflation starts to impact consumers. 

CP companies across the board have been raising prices. As of now, from an elasticity perspective, there hasn’t been a negative impact on demand.

That doesn't mean companies aren’t preparing for it, though. As we know, this world has become very unpredictable. The reality of rising prices and other economic factors — think about how the government stimulus has gone away, savings may start to shrink, people are not staying at home — will hit the consumer free-cash flow. It has the potential to make consumers look for value shopping strategies, such as promotions and trading down. 

That influences the consumer products company's behavior when it comes to, in this case, new product development.

We see new product development as a response to these behaviors — could be packaging changes or product content reduction. For example, maybe there's not so many chips in that bag, but the price point remains the same and they're keeping the price the same. We've seen that in the past. 

The other day they were challenging the Etsy CEO on Squawk Box about how much chips are in the bag. Is it still the same? It is a reality and that's different, that's not necessarily innovation, but that's renovation or creating ranges of tiers of products that's differentiated at each price point in terms of economic opportunities or challenges. 

Of course, it also means new flavors, rich innovation, healthier choices that the shopper may be more willing to accept the price hike because they love the innovation. 

Smart capabilities need to be in place to be able to manage the dynamic nature of renovation, innovation, etc. It's all about speed to market. If you don't have the right capabilities in place, it's going to create more challenges to be able to react to these interesting inflationary pressures that all consumer products and consumers are under.

Denman: We're going to transition to our final growth topic now, which is new roots to market. Consumer goods companies have been exploring and building new roots to market aggressively over the past few years and that has only been accelerated thanks to the current market conditions. 

A savvy consumer goods company knows that the competition is going to explore these new sales channels and they need to be prepared to innovate in order to keep pace.

At our peer-to-peer workshop back in December, the CGs and attendants shared their company's experience over the past few years, as well as how they were able to pivot to meet changing demand. We discussed the evolving and important role of direct-to-consumer and the challenges and opportunities it presents. The group shared some of the important wins they experienced over the past couple of years, as well as the missed opportunities. 

Paul, how about you lead today’s discussion on the evolving route-to-market in the consumer goods industry? 

Larson: Sunny and Jon set this up well by talking about consumer sentiment and new brand introductions. How do you get to consumers? How do you use a product to be introduced? Looking at that, it's the route-to-market. No matter what industry you're in, no matter what sub-industry in consumer products — there's about nine of them, including the protein business, food and beverage, durables, AG business, animal protein, etc.

That's Amazon, Walmart.com, and companies like that, which are called “the marketplace” and are growing double- or triple-digits per year. If you've been in that area or you have products that can be sold easily in that area, it's going to be the route-to-market that you spend time nurturing.

However, there's a lot to consider looking at one type of route when it comes to direct-to-consumer. Many companies are exploring their own ways to market through direct relationships. Sunny spoke about consumer sentiment, when companies have a robust database and the proper technology with the right data analytics to drive new routes to market. They can understand if it's worth it, if it's worth the squeeze.

 If I can understand my profitability a little bit better, and have the platform to understand my true cost of goods, what my laden cost is to get to that consumer, then I can understand my pricing dynamics on inflation.

The group at the workshop at the Consumer Goods Sales and Marketing Summit were talking about that direct-to-consumer model. Not that traditional markets market delivery is not going away because automation is providing many different avenues when it comes to providing the best route-to-market and how to process that income in order. 

Neely: Paul, during the pandemic there were big changes in the channel mix for CPGs, e-commerce — marketplaces went straight up and on-premise or food service went straight down. What seems to be regulating or is top of mind for the idea of routes to market with CPG leaders?

Larson: It is. In meetings last week with large consumer products companies, that was our topic: what's the route-to-market. I have five routes-to-market today, but only two strong routes were delivering the majority of business — it was down and automated. My logistics system was in place, but lo and behold, drivers and plant workers can’t be found. I'm not running a manufacturing facility for three shifts a day, now this has to be rethought out. Then, I have multiple forms of orders coming into my company.

You may think that sounds great — just go ahead and ship 10 truckloads of product to one of the marketplace companies and that will be the answer because it seems less expensive. However, committing to 24-hour a day delivery — or a two-hour delivery for fresh product — the money that you think is being saved by shipping truckloads to a marketplace company, may not actually be the right choice.

It’s important to understand what the specific route-to-market is and be able to manage those orders in an essential order process. Then, look at the route once again in order to run simulations that are the most cost effective, best for the consumer, the right price point and profitability for that particular product. Specifically, when a new product is being introduced. That may be a long-winded answer, but that's what I'm hearing and seeing in real-time.

Dano: It's interesting you mentioned the profitability. When you think about direct-to-consumer, the challenge of doing this profitably has to be top of mind. When you're talking to CPG executives, Paul, what are they telling you about the direct-to-consumer journey? Is this here to stay? Are they doubling down? Is profitability a challenge? What are they talking about?

Larson: Some of these conversations started six, seven, even eight years ago. Think back to the Shave Club business. Some of the pioneers of these new venture capital companies had a lot of private equity coming in to fund them. They didn't have big plants and manufacturing facilities, they had 3PL that was delivering products. They were marketing companies. 

Then, I'm talking to the big companies, the large companies that own the manufacturing facilities, they own their own distribution systems — they're not set up to pick, pack, and ship

It's difficult to change my packaging to shipping each-es instead of boxes, containers, or truckloads. It was painful, but it's become less painful because of the rapidly developing technology over the last couple of years. 

Rapid change, rapid development, but it's a fun conversation because we always seem to fall back into it. Then, when we start talking about what's profitable, topics like inflation. We look at the market, what are investors saying? We talk to private equity on a regular basis. At SAP, we're invested in the startup world, we think that can help everyone build business networks to try to solve some of these problems. It's a fun conversation.

Neely: I’d like to jump in here. We talk about direct-to-consumer. As a dyed-in-the wool brand manager, I would've loved to have people come to my brand's website, or set up a storefront and build the traffic around myself. You would think that the future would be more with marketplaces — the Amazons, Walmart.coms. What's your take on that? Is that the direction it's going in?

Larson: I'm seeing that, it's just so big. It's going from 78 billion to nearly 200 billion in the next four years, and that’s just for the consumer products of business. That’s a freight trend. A lot of these smaller companies, startup companies, and the mid-market have the ability to do a lot of the direct-to-consumer interaction. They started that way with their own pick, pack, and ship. That's going to continue, it's going to be a hybrid model. There's going to be a lot of M&A activity that will be driven because of this.

We need to have a whole new session on that, thanks for bringing it up. Here at SAP, we're focused on helping customers. We want you to be profitable, to be able to take care of your employees, and have the right technology to be able in your businesses, so we can continue on with our lives together and continue to delight the consumer.

Denman: Thanks, everyone. Let’s take a moment for some final thoughts from each of you and also some ideas of how we can keep this conversation going.

Dano: I would leave you with this point. All the factors going on, whether in the marketplaces, product innovation, or consumer sentiment, you need to be taking action.