Innovate or perish has become a rallying call among FMCG companies of late. However, most innovations perish rapidly post launch. It seems a Sisyphean task for organisations - launching innovations at great costs only to face failure. Even when some innovations make no financial sense at launch, they get characterised as 'strategic' by the senior management, only to be dragged to an unnecessary painful death. In this litany of failures, emerge a very few successes. They are spoken about in conferences and presentations as best practices to be emulated. Others (especially consultants) give various examples from Europe and the United States about 'how to innovate successfully'. Everyone, it seems, is in search of the formula to innovate successfully.
It is difficult to drive successful innovations in India consistently. This is because of structural differences in our operating environment. Despite significant advances in research techniques, the industry's rate of success has not improved - primarily owing to faulty, nonrational decision making in organisations.
AC Nielsen data reveals how difficult it is to make innovations succeed in India. In 16 FMCG categories, new stock keeping units, or SKUs, launched in the previous year contributed only 1.6 per cent market share in Year 1, growing to 3.6 per cent in Year 2. This share achievement was distributed across 100 plus launches. On an average, each new launch managed a turnover of Rs 4 crore in Year 1 rising to Rs 10 crore in Year 2. Any practising marketer would know that the marketing cost of a new launch far outweighs this paltry return. This slow buildup of innovation sales is also reflected in the time it takes an FMCG innovation to touch the milestone turnover of Rs 100 crore - the modal time is five years. In most FMCG categories, an overwhelming market share - sometimes approaching 75 to 80 per cent - is cornered by brands and variants that have been in market for over 15 years. This contrasts with the West, where in many categories, innovations control around 33 per cent market share.
The reason for this difference is the market structure - the retail trade. Our trade is fragmented in nature. AC Nielsen data indicates that innovations take a longer time to achieve comparable levels of distribution against launches in markets that are modern trade driven. Also, peak distribution levels at the end of Year 2 are lower. As is obvious, a lower distribution linearly dampens trial rates for innovations from reaching their true potential.
The second issue with a fragmented trade is that traditional shoppers not only have to fit in a new product buy within a pre-determined shopping trip and an allocated budget but also need to remember the new brand name to ask the retailer for it. This is a very different scenario from a shopper in a modern trade who has a higher shopping budget, may come across a new product while walking past the shelves and has a chance to reach out for it - all leading to a higher probability of a trial.
Supporting this hypothesis is the market share data across categories in India where new launches and newer brands have a higher share in modern trade than in traditional trade. The competitive structure across most categories reveals very different market shares in modern trade. Better pre-launch work preparation can mitigate some of these issues, but there are other challenges. Most organisations rely on some pre-launch volumetric research to not only inform their launch planning but also optimise the launch package. However, post launch success rates have not improved dramatically and it has become popular to blame research agencies. Companies are equally to blame for this.
Many marketers consider a project successful if the derived volume meets initial targets and any one or two of key underlying criteria (e.g. differentiation and value, to name two) beat norms. However, they forget that if all four of the criteria are not met, the probability of in-market success falls below 50 per cent. The issue is one of education; but the bigger issue is by the time a milestone research is completed, the project is infused with so much organisational energy and emotion that there is a strong tendency to clutch at any good news - even if rationally, you should take a different decision.
Given the various issues - pre-launch and in-market - outlined above, does it make sense to revert only to traditional marketing and sales interventions to drive top line sales? While in the short run, this gives better financial returns, it prevents an organisation from participating in new areas of growth, precludes the possibility of new streams of future revenue, and arguably prevents strong brands from being seen as modern and contemporary - putting at risk the entire brand franchise.
One strategy to balance this tension is by approaching innovations with a portfolio mindset. Any risky investment benefits from spreading the risks across a portfolio of assets with differing risk-return profiles. You could approach innovations by continuously evaluating the value of your innovation portfolio - the pipeline. Evaluate if the portfolio is balanced - in terms of project size - balancing large, risky projects with many small, less risky ones.
Spread the risk across different types of innovations, where the project is driven by entering a new category or creating a new one, or a balance of small, incremental flavours or new pack launches. Balance low-margin projects with high-margin projects. Ensure there is a steady stream of projects spread across time frames. By managing a portfolio of assets, it becomes easier to kill dud projects before their launch and also kill innovations that do not perform in the market.
The blended metrics of the innovation portfolio can achieve a better financial profile - balancing top line growth with bottom line returns better than a singular focus on individual innovations. This will require an organisational restructuring - in terms of allocation of resources as well as identifying of competency gaps for the human resources department to focus on for training and development. It could also lead to organisational restructuring where dedicated teams can focus on early stage ideation for long-term innovations.
Following some of these principles has helped GlaxoSmithKline Consumer Healthcare, or GSKCH, in India. One key outcome has been a significant diversification of our portfolio where the over 100-year-old Horlicks, despite growing at its fastest rate ever, contributes to only half of our business - down from 67 per cent in 2002. And our innovations have helped GSKCH become one of the faster growing FMCG companies in the past two to three years.
In conclusion, innovations are a key driver of growth. However, the track record of innovations is dismal. While organisations can improve their odds with better discipline pre-launch, the structure of our market makes it difficult for most launches to succeed. Organisations will benefit from working within the 'law of averages' and construct a portfolio of ideas that spreads the risk rather than get trapped by the 'fewer, bigger, better' syndrome. And beware any wise man who says that he has a formula for delivering successful innovations consistently in India. The author is Executive Vice President, Marketing, GlaxoSmithKline Consumer Healthcare India