Changing Food Marketing Systems

by John M. Connor, Professor, Department of Agricultural Economics, Purdue University, West Lafayette, IN., and Alan D. Barkema, Senior Economist, Federal Reserve Bank of Kansas City, Kansas City, MO.

Over half of all new packaged consumer products introduced each year are foods and beverages. Almost daily, new product introductions bombard consumers and retailers with the need to evaluate product claims. New product marketing has become a major strategic concern of food processors and is profoundly affecting farmers' decisions about what to produce and how to sell their output.

Nearly all new foods are designed initially by food manufacturers that sell branded products. After a few months of market testing with small consumer "focus groups" or in a city or two, the manufacturer tries to entice food distributors to stock the new products in their warehouses and grocery stores. Because there are always more new products trying to gain acceptance than there is room for them on the grocers' shelves, only a tiny share of new products offered actually "make it" that is, gain a respectable share of the market within about a year of introduction. This "battle of the brands" the jockeying and jostling for shelf space by competing brands is one of the great spectator sports of the modern food system. Additional rivalrous thrusts and parries may occur some years later when manufacturers of private-label products learn how to imitate at low cost some successful new category of food or beverages.

How Many New Products?

This question is harder to answer than it appears at first blush.

Consider milk. In the late 19th century, milk was available in only one form: raw, full-cream, in glass quart bottles. Today, fluid milk is almost always pasteurized and homogenized. Moreover, it is now sold branded and unbranded, in many sizes, with many butterfat levels, and in lighter, less breakable containers. Goat's milk and soy milk are available for the lactose-intolerant. Ultra-high-temperature treatments permit milk to stay fresh-tasting for 1 year or more. Flavored, carbonated canned beverages may well be the next new form of milk to hit the market.

The number of new products introduced each year into the Nation's grocery stores has been estimated at from just a handful to above 20,000 depending on who is counting. A conservative count of just new brands shows that more than 3,000 are launched each year, but that only 100 to 200 will still be around a year after they are introduced.

New brand activity is most prominent in such categories as candy, sauces, snacks, juices, breakfast cereals, salad dressings, and highly processed frozen and refrigerated foods (table 1). These categories generally have higher growth rates and heavy consumer advertising support. On the other hand, there were a number of new brands introduced in such slow-growing categories as canned fruits and vegetables, butter, and bacon.

Source: SAMI (1990). Note: Of all the brands introduced during this 12-month period, only 191 or 5.8 percent were successful in reaching $1 million in U.S. sales by March 1990.

High failure rates among newly introduced products have not discouraged food firms from bringing yet more new items to the U.S. market (fig. 1). In the late 1960's, only 1,900 grocery products were being launched each year. In the last 20 years, the number of new grocery products introduced has increased by an average of 11 percent each year. The number has doubled since 1986 alone. Even the 1991 recession failed to stem the tide of new products.

The Role of Food Manufacturers Food manufacturers are primarily responsible for the decisions that launch new products, with brand firms taking the lead and private-label makers following their lead a few years later. Manufacturers continually monitor consumer trends as well as the product introductions of rival manufacturers; they listen to the needs expressed by grocery retailers, wholesalers, and foodservice firms.

Note: The source is New Product News, which since 1964 has been counting all branded, packaged grocery items except wine, spirits, clothing, and hardware items introduced into grocery, health-food, and gourmet food stores. New flavors, colors, and varieties are counted, but not reformulations ("new, improved"), and new sizes of old packages are not counted.

The marketing and product-development divisions interact to design the formulas, cooking characteristics, and packaging they think their customers want. Most new items are test-marketed for a few months along with a coordinated advertising and promotion campaign designed by the firm's advertising agency. If early indications are promising, production may occur in secret fora couple of months to build up inventory for a regional or national rollout, thereby taking rivals by surprise.

Why do food processors feel such an intense need to constantly introduce new food products, most of which are minor variants of existing products? The simple answer is to enhance company growth and maintain targeted profitability. The fact is, the U.S. food industry is growing quite slowly. In the 1960's, industry volume grew at only about 2.5 percent per year; after the year 2000 it is expected to slow to less than 1 percent per year. At the same time, demand by U.S. households is becoming ever more fragmented into smaller and smaller segments. Food products are increasingly aimed at just men, women, children, teens, or mature buyers; at smaller families; at families with dual-career heads of household; at health-conscious or environmentally concerned individuals; at up-scale young professionals; at certain ethnic groups; or at numerous other distinct categories.

Beginning about 20 years ago, sufficiently disaggregated food purchasing data became available so that processors could exploit these narrow demand segments, a process that has accelerated with the introduction of electronic scanner data.