Why is it so hard to innovate in F&B? Most F&B companies are public and most public companies have internal structures that restrict innovation; the situation is exacerbated by the intense interest from activist investors seeking immediate returns. Additionally, food innovation cannot be applied broadly, nor is it long lasting, since food is a local phenomenon and consumer trends and insights change frequently. Speaking of consumers, they want a lot less innovation than companies try to get them to adopt. Considering these challenges, what is a realistic approach to innovating in F&B?

1. GEORGE YOUNG, PhD
Founding Partner
Kalypso
George is a founding partner of Kalypso with over 20 years of
management consulting experience in the food and beverage industry.
George is the author of 4 US Patents, holds a PhD in Organic Chemistry
from The Ohio State University and an MBA in Finance and Strategic
Planning from Rice University.
Why is Innovation
Difficult in this
Industry?

2. This is Hard
Only 6% of CPG
product launches
meet commercial
goals – Kalypso
The failure rate
for new products
launched in the
grocery sector is
70%–80%
– Inez Blackburn,
University of Toronto
85%
of new
products
fail.
– Nielsen
Only 1.5% of
new products
amass $11M or
more (Pacesetter)
– IRI
2

3. It’s Even Harder
to be Truly Innovative
Consumer
Leaders
All
F&B Protein
Grocery
Products
Food
Service
New To The World 10% 2% 2.5% 2.6% 0%
New Product Lines 20% 12% 5% 6.4% 2.2%
Additions to Product
Lines & Repositioning 33% 35% 27.5% 24.4% 67.4%
Improvement to
Existing Products and
Commercial Innovation
26% 33% 40% 19.2% 30.4%
Cost Reductions 11% 18% 25% 47.4% 0%
Sources: Cooper, R., Winning at New Products,
Accelerating the Process from Idea to Launch, Basic Books.
Kalypso client data.
3

4. Sustainable Success is Hard
Data from IRI, a market research firm, shows the number of times
a brand wins top-selling new food and beverage products.
There is no distinct pattern across the top 10’s performance
in selling new successful products over the last seven years.
2008 2009 2010 2011 2012 2013 2014
OTHER
4

5. It’s Hard to Even
Define What Success is!
86%
of new launches
are “me-too”
or incremental
improvements to
existing products
that provide only
39% of new profits.
In contrast, the
remaining 14%
of launches - those
that create truly new
markets - generate
61% of profits.
Source: Beyond Disruption, Jean-Marie Dru
5

6. It’s Hard to Even Define What Success is!
Source: IRI
2014 New Product Pacesetters: Top 10 Food and Beverage Brands ($ Millions)
6

7. The Rate of Product Launches is Declining
931
903 916
859
659 647 665 690
821 796
833
963 949 957
896
1172
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010 2011 2012
#ofNewProductLaunchesbyCPGCompanies
Food & Beverage Non-Foods
Source: IRI New Product Profiler
Rate of Food & Beverage launches is trending down while CPG trends up
7

8. Why is this Happening?
Structural Problem
Public companies are less innovative
than private companies
“…private ownership creates incentives for innovation,
while public ownership disincentivizes innovation…”
– Ferreira, Manso and Silva (2012)
“…going public causes a substantial decline of
approximately 40 percent in innovation novelty as
measured by patent citations…
…the transition to public equity markets leads firms to
reposition their R&D investments toward more
conventional projects…
…“stark increase” in the likelihood that companies
once public will acquire other companies in the years
following an IPO…” – Stanford research (2013)
Innovation in public companies
is driven by acquisition –
e.g. Hormel acquired Skippy and Muscle Milk
Only 4.1% of
F&B companies
over $5B are
private
– Food Processing Top 100
8

9. Why is this Happening?
Structural Problem
CEOs view their
job as driving
shareholder return,
not leading
innovation
CEOs would rather
spend more on
trade promotion
than innovation
F&B companies
spend around
15% on trade
promotion as a
% of gross sales
and only 1.3%
on R&D as a %
of gross sales
9

10. 3G Capital was the worst
thing that ever happened
to this iconic company, they
are squeezing it to death.”
Why is this Happening?
Structural Problem
“Activist” investors
make it worse
When companies become a
target, return to shareholder
goes up while rate of
innovation goes down
Innovation drives
long term financial results
“HJ Heinz must
be rolling over
in his grave at how
you have taken one
of the world’s most
powerful brands
and destroyed it.”
10
Source:
http://www.glassdoor.com/Reviews/Heinz-Reviews-E304.htm
“Sure profits are up as the
company is squeezing out costs.
However that ship has sailed and
now products are suffering.”
“The strongest CPG companies are
those that invest in true innovation…
and there is no indication that current
leadership will address it as they are
more poised to drain additional
profit off of the current business
versus finding ways to fuel growth.”

11. Why is this Happening?
Structural Problem
Success breeds
arrogance and
lethargy and kills
innovation
Company culture
becomes a negative
support group
Genentech looks to
drive out
“processlike
behavior”
“Sure profits are up as the
company is squeezing out costs.
However that ship has sailed and
now products are suffering.”
“When leaders and teams lack a robust decision-
making process, groupthink — a common bias
that afflicts teams where team members tend to
conform to a prevailing view — often takes hold.
This leads teams to a lack of challenging and
limited imagination in discussing or seeking
non-conventional solutions.
Such teams tend to stay in a “safe” zone and are
dominated by one or two strong opinion leaders.
They lack innovation and strategic thinking..”
Source:
http://decisionstrat.com/lacking-innovation-groupthink-may-be-to-blame/
11

12. Is that bad? Depends on your goal
(winner vs. breakthrough)
We should understand trends that will
drive subtle, lasting changes in consumer
behavior, but once again, it’s hard.
Why is this Happening?
Problem Serving the Consumer
Consumers actually
don’t want that much
“85% of American
household needs are
consistently filled with
the same 150 items.”
– Harvard Business
Review, April 2011
Sensory is
the most
important
factor
Emphasis on
consumer insights
is great for driving
incremental
innovation, but
not breakthrough
12

13. Why is this Happening?
Food is a Local Phenomenon
When Shopping, I look for Food & Beverages...
Source: The Hartman Group Health + Wellness Reports,
2007‐2013 n=2551‐2013; n=2744‐2010; n=2978‐2007.
26%
2013
2010
2007
21%
19%
26%
19%
17%
25%
20%
13%
25%
15%
11%
That are minimally
processed
That contain only
ingredients I recognize
That are locally
grown or produced
With the shortest
list of ingredients
13

14. Never
10%
Always
11%
Occasionally
79%
Locally sourced signals freshness and quality
The vast majority of consumers say they purchase locally grown products at least occasionally
(90%). Consumers exhibit a level of inherent trust in the quality they associate with local products.
Why is this Happening?
Food is a Local Phenomenon
Frequency purchasing
locally grown products 86%
75%
61%
56%
39%
39%
31%
30%
24%
Freshness or in season
Supportthe localeconomy
Taste
Like knowing the sourceof the product
/howit is grown or produced
Nutritional value
Price
Environment impact of transporting
foods across great distances
Appearance
Longtermpersonal healtheffects
Reasons for buying locally grown at retail
Source: FMI U.S. Grocery Shopper Trends 2014, n=2116.
14

15. Macro-Trends go against the
way today’s food company is built
Eating
healthy
People still
want food
that tastes
good
Sustainability
Beyond Meat
Completely
different
paradigm
15
Sourcing locally
Goes against food
companies’ focus on
economies of scale
Chipotle, James Coney
Island breaking paradigm
QSR lost the millennials
Ultra-convenience
Goes against how
we feel about food
Soylent
Subscription food
Usually locally sourced
Plated, Blue Apron,
Starbucks delivery

16. Prescription for Success
Focus on setting up an Innovation Engine separate
but tied to your Performance Engine
Define terms and your innovation strategy
Force the CEO to engage and have a dialog on innovation
Reduce dependency on trade promotion (implement the 12 steps)
Industry call to action to fight Barbarians at the Gate
Ruthlessly extinguish devil’s advocates and
relentlessly promote innovation angels
Act smaller
Act more local
Be open (internally and externally)
Measure, market and promote your results
16

17. Coming
up next
GEORGE YOUNG
Sync: Using Foresight to Fill & Manage
an Innovation Portfolio (Workshop)
Why is Innovation
Difficult in this
Industry?
george-young
george.young@kalpyso.com