When the CPG pipeline runs dry
Throughout its 67-year history, Food City/K-V-A-T Stores has been continuously swamped with new CPG items. At trade shows, executives have navigated seas of seemingly endless display booths. At the retailer’s Abingdon, Va., headquarters, buyers’ calendars have always been full, with product samples festooning offices and conference rooms. Be it snacks, pasta, beer or dog food, the new product pipeline has never slowed — until now.
Food City/K-V-A-T is not alone. Like other food, drug and mass retailers, it faces a serious new-product shortage, brought on by pandemic-related supply chain constraints, worker shortages and other issues. Sans guarantees that they can consistently fill orders, many CPG manufacturers are not investing hefty sums in developing and marketing new items.
According to Catalina’s Buyer Intelligence Database, 87,149 branded UPCs were unveiled in 2021, compared to 263,436 in pre-pandemic 2019. In private label, new UPCs fell from 63,201 in 2019 to 29,385 two years later. NielsenIQ estimates that CPG shortages and empty shelves cost retailers at least $82 billion in lost sales.
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Dan Glei, executive vice president of merchandising and marketing at Food City/K-V-A-T, has spent decades in the CPG industry, working for several prominent retailers and suppliers. “This is a different space than I’ve ever seen in my career,” he said. “Newness is a challenge now. It’s been hard to find new suppliers. Vendors can’t meet demand for existing goods, so how do you make more? Consumers see empty shelves everywhere.”
Jim Hertell, senior vice president of client development at Winston-Salem, N.C.-based Inmar Intelligence and another industry veteran, said the situation is unprecedented. “Retailers never had to worry about filling holes on shelves,” he said. “For every 10 new items they saw, retailers may have taken one or two. There were always more new products in the pipeline than there was shelf space. They never had to worry about running out.”
Some people blame product shortages on COVID-19-related shipping and manufacturing disruptions, labor shortages, and the Russian invasion of Ukraine. But explanations can be murky. “The supply challenge is universal, although there is a lot of ambiguity regarding the underlying issues,” Glei said.
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Whatever the cause, shortages of new and replenishment products — along with raw materials, ingredients and packaging resources — have made the retail world more challenging. “It’s pretty scary,” said Dave Marcotte, senior vice president of global retail and technology at New York-based Kantar Retail. “There are enormous holes on shelves. The way retail is going isn’t predictable. There are many variables that didn’t exist three years ago.”
Innovation Drives Performance
New products are the lifeblood of retail. As the pandemic abates, they are key components in reinvigorating store traffic. They also drive incremental purchasing and overall category sales, particularly in physical stores. “There’s a lot riding on keeping store experiences new and fresh,” said Noor Abdel-Samed, managing director at L.E.K. Consulting in Boston. “Retailers are desperate. They need that treasure hunt of discovery. But suppliers are struggling to keep what they have on shelves. It doesn’t help them to introduce new products.”
New items are particularly important in food, beverages and beauty, where consumers constantly seek newness and trends continually change. Ten years ago, for example, who was interested in kombucha, K-Beauty and plant-based foods? “People don’t just go into these departments for replenishment,” Abdel-Samed said. “They seek newness and discovery.”
New items are also needed in categories facing severe shortages. This has made in-stock positioning a bigger factor in new product selections. Before, it was usually a given. “In stock went from being a core business fundamental to a strategic driver in new product decisions,” said Don Stuart, managing partner at Cadent Consulting in Wilton, Conn. “It’s a major change.”
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In canned pet food, for example, “suppliers can’t sustain the demand,” Glei said. “If someone had a new canned food line, we’d look at it tomorrow if it meets our criteria and is consistent and similar to what we’re replacing.”
Retailers may temporarily replace or augment out-of-stock products with new items, but they are not forever discontinuing merchandise unless they are poor performers. “Retailers don’t want to reset shelves permanently since they often have no real-time visibility into when products will ship,” said Paul Weitzel, vice president of data platform at Inmar.
Pasquale Laudiero, president of Ghigi Food Industries, a private-label importer of Italian-made foods based in Manassas, Va., said retailers simply want backup vendors. “There’s a big focus on diversifying suppliers in key categories to avoid out-of-stocks.”
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Laudiero has received inquiries from retailers seeking opening price point private-label olive oil and tomato sauce. Items could serve as backups to out-of-stock brands or act as lower-priced alternatives in an inflationary market. “Historically, people have asked for specialty items to make statements,” he said. “Now, there’s demand for high-volume staples. We haven’t seen much from an innovation standpoint.”
Glei concedes he is willing to take “more risks” with new vendors to keep stores fresh and replenished. “We tell suppliers there’s an opportunity with out-of-stocks.”
One way to mitigate risks while generating impulse sales is to focus more on seasonal merchandise that is not replenished. Abdel-Samed pointed to “bigger buys” here. Costs of unsold merchandise can be offset by the segment’s higher margins. Yet retailers must commit 18 months in advance.
Regardless of strategy, product introduction guidelines have not changed (see IRI sidebar). The bottom line is that introductions must fill a consumer need. “Products are successful when they’re meaningful, on trend and/or close a gap in a category,” said Amar Singh, senior director at Kantar. But “on trend” can have different meanings. “For example, younger generations want authentic messaging; older ones are more focused on organic. Sustainability means different things to different age groups.” Introductions also require market research, advertising, promotions and appropriate packaging.
If they cannot find alternatives for out-of-stocks, retailers may shift existing shelf inventory to improve visual impact. “They spend much time expanding/contracting facings to adjacent, in-stock products to fill holes,” Weitzel said. “This makes shopping harder for consumers, adds labor costs and destroys merchandising best practices like layout and flow principles. Shortages have a huge impact on overall planogram integrity.”
This strategy also does not invigorate offerings. In the absence of new items, Glei uses “creative events and promos” to generate excitement and keep things fresh.
Shorter Cycles and Technology
Traditionally, assortment planning and new product introductions have been calendar-based, not needs-based. Every six to 12 months, retailers reviewed categories, adding and eliminating items and adjusting prices. But this method did not address market changes, such as sudden out-of-stocks, emerging trends and fluctuations in shopper demand. Consequently, assortments were not always up to date.
Today, retailers adjust assortments more frequently to meet current conditions. “Demand keeps changing,” said Cheryl Sullivan, chief product officer and general manager of retail/CPG at Dallas-based Symphony Retail AI. “It’s about how do I become more dynamic? When do I need to make a change or seek a substitute? How do I know I have the right distribution level across stores?”
With COVID-19 making issues more challenging, more retailers are turning to artificial intelligence and other technology tools. In a survey by Coresight Research and Prevedere, 67% of respondents said their organizations are investing more or much more in technology than they did before COVID-19. About half are currently using AI or are fully ready to use it.
“Consumer behavior changed, supply chain costs increased and people are overworked,” said Gary Saarenvirta, CEO of Toronto-based Daisy Intelligence. “They can’t add more people, plus there’s a labor shortage. They need technology to leverage existing teams.” Saarenvirta indicated that Daisy’s sales have “dramatically increased beginning a year ago.”
AI can detect out-of-stocks, check inventory and suggest substitutions. It can measure item performance against other products in the total market. “It tells me what I should keep, remove or add,” Sullivan said. “And which products must be carried in all stores or some stores and which are mandatory. There’s constant ins and outs, with new products carrying more risk.”
Using complex algorithms and Halo Forecasting, Daisy’s tools compare market baskets and usage patterns. If shampoo is on sale, for example, retailers can forecast what items will frequently be purchased with it and how many, Saarenvirta said. “There’s a constant ratio between items and their halo.”
Technology can predict new products’ impact on the total store based on the halo’s size. “Without a large halo, there isn’t a big effect,” he said. “Halo thinking permeates everything we do.” For out-of-stocks, the tool can suggest alternatives with similar halo patterns. It also can help retailers expand private label in categories with the largest halo effects.
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Even with technology, developing, testing, introducing and marketing new products is expensive and risky. With failure rates already as high as 70% to 90% (depending on the category), many suppliers do not want the added risk of being unable to secure materials or ingredients and be out of stock. While this situation has dragged on for more than two long years, Stuart predicts that, over the next few months, the pipeline will again be full with more merchandise than anyone truly needs. “New products will continue to be the industry’s lifeblood,” he said.
IRI outlines the 'seven deadly sins’ of new product innovation
Despite the best laid plans of retailers and suppliers — including millions spent on research, pilots and focus groups — 80% to 90% of new CPG items flop after one or two years. There are good reasons. In IRI’s “2020 New Product Pace Setters” report (published in 2021), Larry Levin, executive vice president of market and shopper intelligence, coined the acronym “FAILURE” in outlining seven criteria that can make the difference between high-flying successes and fatal crashes.
- F-orecasting: Marketing/advertising spending should correlate with performance and distribution expectations.
- A-ssortment: Flavors/variation preferences can vary by region or store demographics. Think about localizing assortments.
- I-ncrementality: How will the item drive incremental sales and benefit the category and aisle? Does it create competition and keep consumers returning to see what’s new? “This is one of the most important aspects of new product innovation,” Levin said.
- L-anguish: A steady marketing/promotional program invigorates introductions and keeps them top of mind. Otherwise, products stagnate.
- U-nclear positioning: What is the brand’s purpose? What does it stand for? How is this communicated?
- R-etread: Introductions should have unique aspects and not be “retreads” in a competitive category.
- E-lusivity: When ad campaigns launch, distribution should be broad enough to reach myriad shoppers.