Packaged Goods Suffering From Dearth of Innovation

Bad Economy Might Seem to Favor Basics Like Shampoo Over Frills Like IPads, but Not This Time

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BATAVIA, Ohio ( -- Packaged goods are supposed to be recession-resistant staples people can't do without. Yet things have been different in this recession. People have proven they can do without, or at least spend less. The downturn hit household and personal-care products harder than expected last year, and the rebound this year has been weaker than many expected.

Private-label market shares, while stalling last spring after a big run up, resumed their upward march this summer. While packaged food did fare well as people ate out less, private-label shares have surged there, too.

Credit: Source: Deutsche Bank, SymphonyIRI
On the surface, all this makes sense. The market is tough. But consider this: As people cut back on packaged goods, they are still doling out for such things as smartphones and tablet computers -- many of them coming with steep monthly tariffs on top of three-digit price tags.

The reason? According to some industry watchers, it's simple: Tech companies are innovating; CPG companies aren't.

"Only four in 10 CPG companies are investing more in product research than they were 10 years ago," said Pat Conroy, vice chairman and U.S. consumer products leader at Deloitte. "They've lived on product extensions as opposed to developing truly innovative products."

When "Mad Men" ruled in the 1960s, packaged goods and home appliances brands were product stars by "bringing the big breakthroughs in life: status, convenience, enabling people -- especially women -- to lead more meaningful lives," said Stef Gans, CEO of consultancy EffectiveBrands and a Unilever alum. "You could argue that electronics are delivering that, exactly, today," he said. "They're closely linked to status. They're making your life easier."

Losing status with consumers as an industry has huge implications. Sanford C. Bernstein last month issued a report comparing global household and personal-care marketers today to prescription drug marketers several years back as key patents were expiring. Like prescription drugs lost share to generics, household and personal-care brands are losing to private label, which are growing at twice the rate of national brands in developed markets since 2001, according to Bernstein. As a result, the drug companies have seen a series of consolidations and declines in stock prices relative to earnings.

Category innovation is getting harder because many consumer needs have already been met, said Bernstein analyst Ali Dibadj. Global HPC players also have shifted focus from new products and categories in developed markets to extending existing brands and technologies to developing markets. That provides growth, Mr. Dibadj said, but also dilutes margins.

Credit: Source: SymphonyIRI

Back home, the perceived quality gap with private label is shrinking. Eight in 10 consumers now believe store brands are made by the same manufacturers that make national brands, according to Deloitte. That's not generally true, Mr. Dibadj said, but the perception is bad news for brands.

In Bernstein research last year, 77% of consumers said their experience with "less expensive" brands was as good or better as with more expensive ones, similar to Deloitte findings that "upwards of 80%" of consumers thought that way, Mr. Conroy said.

Broadly, satisfaction with CPG brands slipped in the past year. The American Customer Satisfaction Index from Michigan's Ross School of Business released last week showed customer satisfaction with personal care and cleaning products fell two points to 83 after three years at 85. Share leader Procter & Gamble Co. led the way, down three points to 82 (Unilever and Colgate-Palmolive Co.'s scores were unchanged). Beverages broadly slipped, too.

By contrast, the ACSI earlier this year found gains in consumer satisfaction for such things as personal computers, (up three points to an all-time high of 78), wireless phone service, (up 3 points to an all-time high of 72) and subscription TV (up 4 points to a 10-year high of 66).

Clearly some consumers have adopted a "save to spend" mentality, said Ralph Blessing, exec VP-strategic innovation for GfK, cutting back somewhat on what were once seen as essentials to instead spend on "sexier" things such as Kindles, iPads and flat-screen TVs.

A bad economy might seem to favor basics like shampoo over frills like iPads, but the reality is different. Walmart has seen more people waiting for payday to buy things such as staples and milling around in stores toward midnight on the first day of the month, waiting for electronic benefit cards to recharge so they can buy essentials. That implies people doing without as the end of the month nears.

But folks with the money and inclination to buy iPads or iPhones aren't hurting as much. The unemployment rate for college graduates was only 5% in August, down 0.2 points from a year earlier. The rate for high-school graduates with no college degree was nearly double that at 9.7% and up 0.4 points in a year, according to Global Hunter Securities.

Even within personal care, sales of prestige cosmetics and skin care from the likes of Estée Lauder, L'Oréal's Lancome and P&G's SK-II have bounced back nicely in the past year, while mass brands and product lines have come back more slowly or not at all.

For their part, CPG marketers still see consumers willing to pay for their innovations. "We see shoppers trading up in some categories," said Unilever CEO Paul Polman in an email. "In the U.S., our launch of P.F. Chang's meals offering restaurant-quality Asian cuisine has done very well with consumers seeking an indulgent treat or choosing to eat at home rather than eat out." Dove Men+Care and Dove Nutritum body wash are also doing well.

Indeed, despite being more expensive to use than bar soap, body-wash brands hiked sales nearly 10% last quarter in the U.S., according to SymphonyIRI data from Deutsche Bank, thanks to a big push from Unilever, P&G with Old Spice and Beiersdorf with Nivea, among others.

Razor sales, sluggish for two years, rose 35% last quarter thanks to new system launches from Energizer Holdings' Schick Hydro and P&G's Gillette Fusion ProGlide. And a premium-priced and radically redesigned U by Kotex line extension boosted sales for that long-declining Kimberly-Clark Corp. brand 13% in sanitary pads and 57% in tampons last quarter.

"We've been through several recessions," said P&G Global Brand-Building Officer Marc Pritchard, "and what we've seen consistently is that it takes innovation to pull out."

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