Study on brands and innovation in food retailing

• Product quality is becoming increasingly important for customers
• Successful premium brands work more efficiently to widen their customer base
• Long-term company decisions influence brand success

Customers are again paying closer attention to the quality of products in food retailing. Successful manufacturers of premium brands have recognized this and are concentrating their efforts on a sophisticated mix of policies regarding distribution, price, communication and product to reach as many customers as possible and to build up loyalty. That is the finding of a study "Brands and Innovation in Food Retailing" by Roland Berger Strategy Consultants, the Markenverband (association of brands) and the Gesellschaft für Konsumforschung (GfK), a market research institute.

Roland Berger Strategy Consultants and the GfK analyzed a total of 1,993 German brands between 2001 and 2004 as part of the study. In addition, in spring 2005 around 2,100 households were surveyed about innovations in the food retailing sector.

Customers again look to quality

"That quality again counts can be read in the growing market share of premium brands," said Heiner Olbrich, Roland Berger Strategy Consultants Partner in the Consumer Goods & Retail Competence Center. Along with private labels, for example, REWE's brand "JA", premium brands are the only growth segment in Germany's food retailing market. Premium brands include Tic Tac, Lindt, Beck's and Ostmann Gewürze. The market share garnered by premium brands has increased from 11.9 percent in 2003 to 12.6 percent in the first quarter of 2005. Private labels increased their market share from 32.1 percent to 34.4 percent in the same period.

Four success factors for premium brands

"Successful brands are concentrating their efforts on the right mix of policies regarding distribution, price, communication and product to reach as many customers as possible and to build up loyalty", said Johann C. Lindenberg, President of the Markenverband. These manufacturers use all distribution channels including discounters, where they generated 15 percent of their sales between 2001 and 2004. Successful premium brands compliment this strategy by selling their products through other distribution channels such as department stores, gas stations, specialty stores, Internet and mail order (17 percent). Less successful premium brands in contrast generate only 8 percent of their sales through discounters, 13 percent through alternative distribution channels.

Along with finding the right distribution channel, another important factor in wooing customers is a consistent presence in print and television. The study reveals that the "winning brands" increased their advertising spend by 1 percent annually between 2001 and 2004, while their less successful competitors cut their advertising budget by 8 percent annually during the same period. Furthermore, ongoing advertising messages led to greater success than short-term advertising spurts. Some 23 percent of the successful brands used TV spots from the previous year between 2001 and 2004, whereas only 6 percent of the "losers" followed this strategy.

Retail promotions are less promising when it comes to winning new customers and retaining existing ones. Whereas less successful brand manufacturers generate 12 percent of their sales with promotions, successful premium brands have a lower share with 7 percent. When promotions took place, however, the price of "winning products" was reduced more significantly against the normal price (minus 19 percent) than it was with less successful competitors (minus 13 percent).

Product packaging is a further important element: Successful brands continually alter their packaging to match the spirit of the times. All 33 of the winning brands among the 310 premium brands changed their design from 2001 to 2004, while 20 of the 47 loser brands made no changes whatsoever. Winning brands define themselves through increasing market share and price, losing brands saw market share and prices sink.

Brand success depends on four factors

Innovations are extremely important for the success of a brand. Some 34 percent of those surveyed wanted more product innovation. Premium brands should take four points into account when they want to have success on the market: long-term innovation steering, focus on the benefit for the customer, working closely with retailers, presenting goods in stores.

Successful brand manufacturers generated with new products 53.1 percent of their sales over the past three years, mostly because they planned their advertising message well in advance or used discounters as their distribution channel. Less successful brand manufacturers made 24.7 percent of their sales with new products.

New products must have a real added-value for customers. Decisive for customers are better performance (49 percent), convenience – such as convenience foods and smaller product size –(34 percent), health factors(22 percent) and the quality of ingredients(21 percent). Design (14 percent) and cost savings (13 percent) play a less important role. Manufacturers can win favor not only by offering totally new products but also by offering improved products: "Let's take Dany Sahne Pudding for example: The company replaced the high, narrow tumbler with a broad, flat one that made spooning easier. Sales of this product climbed from EUR 24.6 million in 2002 to EUR 50.7 million in 2004. During this period, market share jumped from 4.8 percent to 8.9 percent," said Olbrich.

When introducing a new product, manufacturers should work closely with retailers early on. If they don't, the risk is high that the new product will not win acceptance. The placing of around 30,000 new products each year overstrains retailers. As a matter of fact, 75 percent of new products disappear from retail shelves within a year.

Finally, it is important to properly present the product in stores, especially since 65 percent of innovative products are first experienced at the "point of sale". Only 22 percent of innovations reach customers through TV product ads, 14 percent through flyers or retailer advertising. Lindt, for example, promotes its seasonal products at its own sales stands in stores.