Newsletter #1
The Pattern of “Seeing” and “Ignoring” New Innovation
This is Prototype’s first newsletter. You’ll receive monthly emails on what’s happening in the consumer products industry and what I have to say about it.
The Pattern of “Seeing” and then “Ignoring” New Innovation
Kanye West, the most decorated hip-hop artist in the world, could not get a rap contract in 2002. Multiple music labels rejected West, despite knowing him well; he was already a famous music producer for Roc-A-Fella, churning out hits for Jay-Z, Cam’ron, and Benie Siegal. He offered them evidence that he could rap with the full-form recorded rap hit, “Jesus Walks,” which would later become Number 11 on the Billboard Top 100.
And Roc-A-Fella was not the only music company to pass on West: executives at many other large and small labels passed on him as well, largely for two reasons:
1) He didn’t “look like a rapper.” In the words of Damon Dash, then Roc-A-Fella CEO, “Kanye wore a pink shirt with the collar sticking up and Gucci loafers.” In short, the music companies could not reconcile his appearance with how they believed a rapper should look, and so they couldn’t imagine how to market him.
2) As West was already valuable as a producer for other musicians, a shift in focus to his own rap meant more inherent risk than producing music for others. Roc-a-Fella eventually signed him—begrudgingly, and only to prevent him from leaving to produce elsewhere rather than because they believed in his future as a rap artist.
In short, Roc-A-Fella executives almost lost one of the most lucrative opportunities the label would ever see, one right under their noses. If this story sounds all too familiar, it is because we see it in business all the time. An entrenched incumbent with the financial resources and expertise to win misses a major breakthrough innovation or opportunity despite knowing about it. Although corporations often cite a “top of the funnel” problem—i.e., they do not have the ideas— in many cases, that actually isn’t the problem. They do have the ideas but have chosen to disregard them.
An entrenched incumbent with the financial resources and expertise to win misses a major breakthrough innovation or opportunity despite knowing about it.
In The Innovator’s Dilemma, Clayton Christensen defines disruptive innovation as a process by which a product or service initially takes root at the bottom of the market, typically by being less expensive and more accessible, even if fundamentally flawed. The product or service improves over time and moves upmarket, eventually displacing established competitors. Entrenched incumbents tend to ignore these innovations because they are lower-end and less expensive. Within the industrial space, or even the technology space, this paradigm has proven true, and Christensen is famous for this concept.
What about in the fast-moving consumer goods sector where the disruption is indisputably happening but not at the low end? An analysis by Bain & Company demonstrates that insurgent brands have only 3% market share yet account for 33% of recent growth.
However, those insurgents are typically not playing in the lower end of the market. Such products in this industry more often sell at a significant premium to the rest of the market. The methods they use to win do not seem to align with Christensen’s model: they’re neither inferior nor cheaper. So why do incumbents disregard them?
In my experience working with large multinational consumer products companies, the Top 3 “corporate antibodies” that prompt the rejection of innovative ideas are:
1) Excessive focus on market share within the current boundaries of that category: The most exciting innovations in consumer packaged goods (CPG) have not been within narrowly defined categories (usually tracked and measured by syndicated scanner data). Instead, they’ve occurred beyond the boundaries of current groupings.
For example, pivotal innovations in the fabric care market have not created share gains in the two largest segments—powdered detergent and liquid laundry detergent. To the contrary, breakthroughs have come via new forms, specifically unitized dose laundry detergent such as “Tide Pods” that targeted the much smaller “tablet” segment of the market, where P&G (Tide’s corporate parent) had very low share. Tide Pods are now an almost $4B business and have powered almost 90% of overall laundry detergent sales growth. As another example, “scent boosters” (added during the wash cycle) top $1B but aren’t really “laundry detergent” at all.
Since his success as a rapper, Kanye West has continuously innovated his business, becoming a wildly successful retail entrepreneur with his billion-dollar-plus “Yeezy” brand. Every move he has made has extended well beyond the previously defined category of his portfolio.
2) Too much focus on large net sales from Day 1: When Greek yogurt launched in the early 2000s, General Mills was the #1 player in the yogurt market with almost 30% share thanks to its Yoplait brand. Then came Greek yogurt, which appeared to be a niche offering when it first entered the US market. In keeping with a familiar pattern of other disruptive CPG launches, Greek yogurt producers focused on a small, underserved segment, offering a product or service that aligned to that specific consumer need without concern that the segment was “too small to matter.”
Over time, these insurgents find ways to market to a broader base or find close adjacencies to migrate toward, which creates a larger opportunity. In 2007, Chobani eclipsed Yoplait, Dannon, and other big brands to claim 19% of US yogurt sales. Its sales have grown by 8% year-over-year through 2019 despite a slowdown in overall yogurt sales for the past few years.
What happened to the incumbent? In 2020, General Mills announced it was contemplating a sale of Yoplait, which had been number one in its category only a decade before. Consider this: even with extremely high growth rates, it often takes 3 to 10 years for an innovation to obtain scale revenues. For example, even when growing at 100% a year, a rise from $50M in sales to $400M in sales takes 3 years.
3) Too much focus on gross margin percentage from Day 1: Large beverage manufacturers repeatedly passed on opportunities in adjacent segments such as ready-to-drink coffee and vitamin waters because the margin profile was not what they had come to expect and the additional revenue would be dilutive to their P&L economics. The gross margin hurdle rate used by CPG companies is typically the gross margin of their current business, which has been optimized and improved over decades. As a result, almost no new product can meet that hurdle rate. While it’s true that the new drink categories have structurally lower margins than carbonated soft drinks, these categories bring incremental consumers to the base business, and therefore additional gross profit dollars, if even dilutive to gross margin percentages.
The winners in CPG over the next 20 years will be the firms that develop their own ability to innovate like Kanye West did or invest in the innovations of others such as Greek yogurt. Are you confident that you or your clients can do this?
Next Time
Why consumer products companies should take many small bets rather than the “fewer, bigger bets” often cited as market goals.
More interesting content on this topic:
How Britain Invented, Then Ignored, Blitzkrieg: https://timharford.com/2019/12/cautionary-tales-ep-6-how-britain-invented-then-ignored-blitzkrieg/
About
Marissa Dent is a Partner with Bain & Company in the New York Office with a focus on the consumer products industry with expertise in growth strategy, operating model, and the intersection of those two capabilities – innovation.