Innovating for Growth in an Economic Downturn

No matter how you look at it, there's really no denying that the US and global economies are having a very real impact on virtually all consumers. Here are a few recommendations for innovating successfully during this challenging time.

It's the Economy, Stupid

No matter what you call it, there's really no denying that at this point the US and global economies are in a slump that's having a very real impact on virtually all consumers. Whether impacted by rising consumer packaged goods (CPG) prices (up 6.6% vs. 2006), the stock market slide, or the mortgage crisis, consumers of all income levels are feeling the impact of the stagnating economy, and more importantly adjusting their behaviors accordingly.

Based on an October, 2008 study conducted by Ipsos Marketing, how these behavioral changes manifest themselves differs depending on product category:

• Within the food and beverage category, more consumers are likely to be seeking out newly introduced products than shying away from them. Supported by other secondary data, the hypothesis would be that more families are eating at home and hence seeking out additional food products via traditional grocer channels.
• Within the beauty care category, the converse is true. A relatively discretionary category, a greater proportion of consumers are avoiding new products than is seen in any other category studied.
• The household care and personal care categories are more muddled, with similar numbers of consumers seeking out and avoiding new products. This suggests an opportunity for manufacturers to better define this space short-term from a value perspective.

These behavioral changes have a pronounced socio-economic element. Consumers with an income of less than $50,000 or no college degree are even more likely to try food and beverage items and less likely to try beauty category items than their counterparts, who are more likely to continue to seek out these items to the same degree as in the past.

This economic uncertainty is not only impacting consumers' current purchasing decisions, but clouding their perceptions of future purchases as well.

Consumer Confidence and Purchase Interest Scores are Declining Together

The Conference Board, an independent economic research organization, surveys 5,000 households each month to determine the level of consumer savings and spending. They use these data to calculate the US Consumer Confidence Index (CCI) which is generally interpreted as a measure of consumer optimism in the economy. There is little question that the CCI has declined over the past few years, and has declined from 94 in January 2007 to 58 in July 2008. Since June of 2005, the decline in the CCI is significantly correlated with the decline in concept purchase interest scores.

It seems reasonable to conclude that as optimism declines in the economy, consumers are less likely to express an interest in spending on new products and innovations. This is further supported by the fact that a review of uniqueness measures during the same time period indicates that uniqueness has remained constant, leaving a decline in consumer optimism as a reasonable predictor of the decline in concept purchase interest scores. The change is most likely related to the evolution of consumer attitudes, not from decreased innovation on the part of manufacturers.

What Goes Down Must Come Up

According to Bruce Nussbaum, author and BusinessWeek assistant managing editor, replacing innovation as a key corporate strategy, stopping new product development, and reducing the risk profile within the innovation process are three of the ten worst innovation mistakes to make in a recession. For manufacturers, the pertinent questions revolve around how to best ride out the current economic downturn and capitalize when the recovery emerges. Recommendations for conducting successful new CPG product research particularly in an economic downturn include the following:

• Capitalize on current trends when innovating for the short term: The increase in at-home food consumption is a prime example; an elaborate meal at home is less expensive than a moderate meal in a restaurant. Consider making these connections for consumers, as well as empathizing to some degree with their current plight. Bundling for value is another short-term alternative.
• Encourage "trading up" or "trading down" behavior - don't get caught in the middle: According to the books "Trading Up: The New American Luxury" by Fiske and Silverstein and "Treasure Hunt: Inside the Mind of the New Consumer" by Silverstein, companies in the middle often lack a unique selling proposition.
• Encourage consumers to "trade up" by positioning branded products as small indulgences to ward off private label competition. If the brands evoke positive associations (e.g., "comfort food"), this proposition is made all the more compelling.
• Alternatively, encourage consumers to "trade down" by representing products as a solid value to consumers (e.g., a meal at home is less expensive than a meal at a restaurant).
• Innovate for the future, not just for the current: Use a longer-term measure such as relevance as the primary decision criteria - rather than purchase interest, which is most likely more directly impacted by economic variables - when evaluating new products. It will work for both close-in and further-out innovation. That said, you may still want to consider consciously separating the innovation process for close-in vs. further-out ideas.
• Don't let the innovation pipeline run dry: Consider testing ideas (2-3 sentence concept essences) instead of fully developed concepts, to make the most of available budgets. Then only put resources toward developing into concepts those ideas that have consumer appeal.

By following the guidelines above, CPG companies can transform (rather than scuttle) their innovation process to both face current adversity and prosper with the upturn that is sure to follow.