- Companies release new products to offset low Eurozone prices
- Spending on R&D in the consumer goods sector rises to record
David Blanchard uses a 40-pound ($60) system to care for his teeth and he thinks you should too.
Executives like Blanchard, the head of research and development at Unilever, play an increasingly pivotal role as consumer companies find themselves unable to raise prices on old standards. So Unilever is rolling out a stream of new products -- in this case Regenerate, which was spun out of a partnership between Unilever and dental researchers -- to goose profits.
At 10 pounds for the toothpaste and 30 pounds for a related “activator gel” and serum, the system is intended to regrow damaged tooth enamel. “So, a very expensive but a very worthwhile investment in your teeth,” says Blanchard, a former marketing executive whose division employs 6,000 staff and wields a 1 billion-euro budget.
The stakes are rising for Blanchard because companies like Unilever, Reckitt Benckiser Group Plc and Dutch brewer Heineken NV are being squeezed by inflation that’s been hovering around zero for more than a year. The need to gain pricing power via unique or quirky merchandise has pushed investment in research and development to a record high.
“We all know Europe is a tough pricing environment, and the only way we know of creating growth in a tough environment is through innovation,” Reckitt Benckiser Chief Executive Officer Rakesh Kapoor said by phone.
The spending suggests Europe’s executives are losing faith in the European Central Bank’s ability to ward off the threat of deflation and are increasingly taking matters into their own hands.
ECB President Mario Draghi has warned the rate could drop below zero again in the coming months, even after he cut interest rates to record lows, expanded asset purchases and offered a borrowing subsidy to lenders. His policy challenge was highlighted again on Friday, with the fastest economic growth in a year overshadowed by another drop in consumer prices that was steeper than forecast.
Companies may find it more difficult to raise prices on products that aren’t new in an environment where consumers choose to save rather than spend, said Rob Carnell, chief international economist at ING Bank.
A single innovation in Unilever’s pipeline -- be it Ioma’s collagen-supplement pills or a new Ben & Jerry’s ice-cream flavor -- can be worth hundreds of millions of euros in revenue.
At Reckitt Benckiser, the U.K. maker of Nurofen painkillers and Durex condoms, Kapoor sees potential in foot care. “We all love our hair and our faces, but we don’t love our feet in the same way,” said Kapoor.
New products such as 40-pound home pedicure machines and electric nail filers sold under the Scholl brand are high-margin devices that seek to lock consumers into recurrent use, he said. Sales in the company’s health division, which also includes Strepsils lozenges, rose 10 percent last quarter.
While innovations can drive growth, they can also cannibalize staples and confuse customers. Diageo, the world’s largest distiller, saw sales of its Smirnoff vodka decline after it released over 40 flavored variants including Fluffed Marshmallow and Pineapple Coconut Sorbet.
“The market has a habit of assuming innovation is the only lever to pull to drive growth,” Martin Deboo, an analyst at Jefferies, said by phone. “Best in class consumer companies are the ones that are working as hard on stewarding their existing brands as creating new ones.”
Innovation is important if not crucial in Europe’s tough pricing environment, Gilles Bogaert, chief financial officer of French distiller Pernod Ricard, said. Initiatives such as aging the company’s Jameson Irish whiskey in oak barrels washed with craft beer can boost volumes and generate wider profit margins.
Younger consumers are also increasingly choosing to buy handmade craft over mass-market tack, which has created a pricing opportunity for companies. Earlier this month, Heineken released H41 -- an offshoot of the brewer’s namesake lager made with rare yeast from Patagonia -- at a mark-up in the Netherlands.
“It’s the first time ever that we innovate on the beer in this way,” Willem van Waesberghe, Heineken’s master brewer, said of brewing with South American yeast. The company will suggest that bars stocking H41 sell it for 30 percent more than the flagship brand, “to reflect its uniqueness.”