When companies stop innovating, they die. On the contrary, well-managed businesses that aggressively invest in research and development thereby gain a competitive edge that helps them reward shareholders for many decades on end. To help you sort the winners from the losers, four Motley Fool contributors discuss below how Nike (NYSE:NKE), PepsiCo (NYSE:PEP), Amazon (NASDAQ:AMZN), and Under Armour (NYSE:UAA) are making innovation a priority today.
By investing in new technologies, forging strategic partnerships, and aggressively increasing R&D spending, these companies are able to stay one step ahead of the competition.
Keith Noonan (Nike): Nike's secret underground research base is the stuff of legend, and the innovation efforts that occur in the subterranean lab are key to the appeal of the company's products. Nike doesn't give details on its research and development spending, but some estimates put its annual R&D expenses at a mid-to-high single digit percentage of revenue, and it's generally held that the company's development investments are high for its industry.
2014 saw the company deliver a variety of innovations in high-performance sportswear used by top athletes. Its mid-cut silhouette Flyknit soccer cleats extend the shoe above the traditional ankle cut-off point, and the line's new Magista model was worn by Germany's Mario Götze to score the winning goal in last year's FIFA World Cup. Kobe Bryant also debuted his new sneaker, the KOBE 9 Elite, in the mid-cut Flyknit design style. The performance advantages that Nike's high-end innovations offer for the casual sports player are probably negligible, just as its research base probably doesn't see much benefit beyond increased cool-factor from being underground, but the company's sportswear advancements can provide a real edge at top level competition and drive consumer interest.
By investing to deliver high-end sportswear to top athletes, Nike wins influential athletes as spokespersons and brand ambassadors, thereby propelling sales and enabling the company to charge a premium for its wares.
This brand strategy has helped the company claim impressive victories, including reaching more than 65 million women with its Nike + Training Club app and securing roughly 90% of the American basketball shoe market.
Tamara Walsh (PepsiCo): You don't survive in business for more than 117 years without making innovation a priority. PepsiCo is a testament to this as it has evolved from a soda start-up in 1989 into one of the most recognizable soda and snack companies in the world today. In fact, people now consume Pepsi's innovative products more than one billion times a day in over 200 countries around the world.
PepsiCo's dedication to research and development is driving the future growth of its business. Last year, innovation accounted for more than 9% of Pepsi's net revenue. This tells shareholders that the company's R&D efforts are resonating with consumers in a material way. Pepsi boasts dozens of scientific R&D centers and test kitchens around the world, which help the company create innovative products that cater to local markets.
Pepsi's state-of-the-art Shanghai research and development facility, for example, is responsible for churning out Pepsi-branded snacks and beverages that cater to specific tastes in the Asian market. From wasabi shrimp chips to grilled beef flavored snacks, research centers such as this one help Pepsi's products resonate with local consumers in emerging markets like China and Asia Pacific.
PepsiCo's laser focus on innovation has earned it a rich portfolio of products that includes 22 brands which each generates more than $1 billion in annual sales. This helped Pepsi pull in revenue north of $66 billion last year.
Additionally, Pepsi's increased R&D in recent years helped PepsiCo become the largest contributor of U.S. sales growth last year among industry peers. Pepsi generated retail sales growth of roughly $1 billion in 2014, or more than the next 27 largest food and beverage manufacturers combined, according to Pepsi's annual report. Ultimately, Pepsi's impressive ability to generate loads of cash means the company should have no problem continuing to boost its R&D spending in the years ahead.
Tim Beyers (Amazon): We don't often associate innovation with the consumer goods sector. Why would we? Between razor-thin margins and costly inventory, consumer goods suppliers have a tough enough time funding existing operations. Investing for the future is a luxury, most retailers would say.
Thing is, Jeff Bezos isn't most retailers and Amazon.com (NASDAQ:AMZN) isnt your typical consumer goods supplier. Research and development (R&D) is one of the company's largest line item expenses.
Bezos' spending has increased over time. In 2010, his team committed $1.734 billion or 5.1% of revenue to R&D. In 2014, the total jumped to $9.275 billion and 10.4%, respectively.. Over the trailing 12 months, Amazon has spent $10.832 billion in the pursuit of innovation -- a staggering 11.3% of revenue over the same period. The pattern suggests that Amazon sees homegrown innovation as key to sustaining a long-term, insurmountable competitive edge.
What shape that moat takes is anyone's guess at this point, especially since we've yet to see what new ideas such as delivery drones and to-your-door grocery can do for the business on a larger scale. In the meantime, we can point to the Kindle and Amazon Instant Video as examples of services that were birthed by the e-tailer and appear to have real staying power. More services will join them. Amazon's continuous spending on innovation all but guarantees it.
Joe Tenebruso (Under Armour): Even from its earliest days, innovation has been at the core of Under Armour. The company was formed in 1996 when Founder and CEO Kevin Plank created a moisture-wicking T-shirt to help keep athletes cool, dry, and light. The product was a success, and Under Amour has continued on a relentless push for innovation ever since.
The hard-charging company would go on to produce further advances in performance athletic apparel including ColdGear, which helps athletes battle frigid temperatures by circulating heat, Charged Cotton (a sweat-wicking, fast-drying synthetic fiber), and coldblack, a revolutionary fabric that reflects heat.
But Under Armour's greatest innovations may be yet to come, thanks to the more than $700 million the company has invested in fitness-related apps in recent years. That's allowed Under Armour to amass a fast-growing digital platform with more than 140 million users. Even better, these apps help Under Armour collect valuable data, which should help the company to better identify trends, connect with its customers, and more effectively market its apparel. In this way, Under Armour's blossoming digital ecosystem should further cement its brand in the minds of athletes and fitness enthusiasts, and strengthen its position as a leading innovator in the fitness arena.
Keith Noonan has no position in any stocks mentioned. Tamara Rutter owns shares of Amazon.com and PepsiCo. The Motley Fool owns and recommends Amazon.com, Nike, PepsiCo, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.