Consumer Companies Agree It’s All About Product Innovation

Product innovation has been integral to business success in recent years, primarily because of changing consumer preferences. Consumer companies, including Kraft Foods (NASDAQ: KRFT  ) , Procter & Gamble (NYSE: PG  ) and Colgate-Palmolive (NYSE: CL  ) , have been targeting product innovation in efforts to address changing consumer preferences, effectively address competition, support sales growth, and maintain and/or strengthen their market shares.

A solid product portfolio
Kraft Foods operates in the North American grocery market. Product innovation has been a priority of the company as it bids to maintain its deep and solid product portfolio. Kraft has high brand recognition and solid household penetration of 98% and 99% in the U.S. and Canada, respectively. Also, the company's solid brand portfolio is evident from the fact that its top 27 brands generate more than $100 million in sales annually and it holds the No. 1 or No. 2 market positions in 80% of its categories.

Changing consumer tastes and preferences have also made product innovation important for Kraft. The company has been coming up with new products and reformulating its existing brands, which is likely to benefit its sales volume and market share. Kraft Foods has been focusing on simple ingredients and freshly made products by removing artificial ingredients and lowering calorie counts. Also, the company has been coming up with custom sizes and product packaging to facilitate on-the-go food and drink demand.

The company has done well to maintain the strength of its portfolio over the years, which is evidenced by its dominant market positions in various categories and high household penetration. Also, the importance of product innovation has been increasing over time. Kraft has gained an increasing percentage of its net revenue from new product innovation over the last five years, which is shown in the table below.

 

2009

2010

2011

2012

2013

% Net Revenue from Product Innovation

6.5%

7.8%

10.4%

13.4%

14%


It's all about R&D
Procter & Gamble is another company that has been aggressively working on product innovation to address changing consumer preferences and available market demand. The company is working on its 'twenty biggest new products' to increase and support its sales growth and market share. Also, with the importance of research and development growing, it is directing more resources toward R&D in connection with product innovation and renovation. The company recently inaugurated the 'Singapore Innovation Center' in its efforts to deliver superior value and support product innovation. The center will further help the company come up with products to meet consumer demand and deliver superior value throughout the world.

The company has already been making progress with its product innovation and portfolio strengthening efforts, and its new products have been ranking highly among the latest product innovations. Recently, the company's Tide Pods, ZzzQuil, and Febreze Car Vent Clip were among the 14 breakthrough innovation winners for 2014.

Good efforts in several markets
Colgate has been continuously investing in R&D and product innovation to come up with new products and product categories; product innovation has been very important for Colgate for fueling category growth and expanding its market share. The company has a solid product innovation pipeline which caters to the needs of consumers around the world.

The company has been aggressively working on product innovation and has been making good progress with its efforts; this factor has helped it expand its share in several of its key markets. In the first quarter of 2014, the company's Brazilian bar soap business achieved a record high market share of 26.5%, driven by innovation in its Protex and Palmolive lines. Product innovation has also helped the company expand its presence in rapidly growing Asian markets. In the first quarter of 2014, Colgate experienced organic sales growth of 7.5% in Asia. Also on the back of product innovation, the company increased its market share in the Indian toothpaste and toothbrush markets by 60 basis points to 53.8% and 140 basis points to 44.5%, respectively. In China, Colgate's market share in the toothbrush market increased by 70 basis points to 26%.

In the personal-care category, Colgate is working to enter the kids' body wash category. The company does not have any offerings in the category yet, but is working to develop products to make its entry. The kids' body-wash category presents an attractive growth opportunity for Colgate as it is growing at an 8% rate, above the growth of the overall category at 2%. The company will gain share in different markets and product categories on the back of product innovation.

Final take
In efforts to expand their market presences and address changing consumer demands, consumer companies are increasingly relying on product innovation. Kraft, Procter & Gamble. and Colgate have kept product innovation among their top priorities and have been making aggressive efforts to expand their market shares. Also, product innovation will help the companies support their sales growth and strengthen their product portfolios, and it augurs well for long-term earnings growth.

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