SAN DIEGO -- Developing a better system for introducing products into the marketplace should be one of the next priorities in the industry's Efficient Consumer Response initiative.
Product introductions cost the supermarket industry a staggering 10% of total store sales. If the industry truly wants to cut costs, that would be a good place to start, said John Phipps, senior partner at Deloitte & Touche, Wilton, Conn.
Phipps spoke at the Efficient Consumer Response Forum here sponsored by International Business Communications, Southborough, Mass. He gave a speech titled "Efficient Promotions and Product Introductions."
According to a study conducted by Deloitte & Touche, "the average cost to introduce a product in the supermarket industry in the United States comes out to about $270 per store. That is an enormous amount. When you think about the margin on products, you have to sell a lot of products to pay back the $270," Phipps said.
Moreover, when the total number of new products launched each year is taken into account, the imperative for manufacturers and retailers to work together to help cut costs and boost efficiency becomes extremely clear, he said.
"Let's look at this cost another way. Take $270 per stockkeeping unit per store and multiply that by the estimated 5,000 new products accepted into a given supermarket in a given year. That comes out to about $1.3 million per store per year in new product costs for the industry," Phipps said.
"That's about 10% of total store sales. It's a gigantic number. So if the industry were able to reduce the cost of new products by 50%, that would take about 5% of product costs out of the total system,"
Furthermore, that $270 figure includes both new product concepts as well as line extensions. When only truly new products are considered, the cost is two to three times higher, he said.
The study also explored the question of why introducing products is so high and where the industry should look to streamline the process. The primary reason for the high costs, and the area that deserves the most attention in terms of boosting efficiency, is product failures.
"When you boil it down, there are some time-based efficiencies that could be put into effect to reduce the time span it takes to introduce a new product and trim costs," Phipps said.
"But the real issue is that 70% to 80% of new products fail. If we were able to reduce that failure rate from 70% to 80% down to even 40%, the industry could save the equivalent of about 4% of total store sales. We think there is a giant opportunity out there to introduce new products more efficiently," he said.
To fix the problem, Phipps called on manufacturers, in particular, to take the lead in developing an improved system.
There must be "a more collaborative effort across the industry, especially early on in the process, involving manufacturer cross-functional teams, brokers and distributors, all working together from the very inception of the process," Phipps said.
"We think that manufacturers should drive this process. They should form the teams, they should form the long-term alliances with specific retailers and distributors, and it should be a continuous process," he added.
Efficient product introductions are not the only key to driving costs out of the system as prescribed in ECR. More efficient product promotions are also critical, he stressed.
In particular, Phipps said, far too many promotions are ineffective. If the industry could work together to determine which promotions truly work, and focus on only those, enormous amounts of money could be saved.
At present, though, it seems almost to be guesswork as to which promotions work and which don't. In the process, considerable expense is being wasted.
The usual objective of product promotions is to build long-term volume, but that can be extremely hard to analyze. One study conducted a few years ago, though, revealed that "only about 16% of products really built any long-term volume when they were promoted, and only a very small percentage of promotions made any money, net net net," Phipps said.
The real issue, though, in terms of more efficient promotions, "is whether are we picking and designing the right promotions in the first place for profitability and for building volume," he said. From a retailer perspective, there are only two reasons to carry a product. One is to make money. The other is to build traffic, which could involve promoting a loss-leader item, he added.
But a study conducted by Deloitte & Touche at a major chain over a four-month period revealed some surprising results. The study sought to measure the effectiveness of end-of-aisle promotions for building volume and hiking profits. The results of the various promotions were highly inconsistent in terms of achieving desired results, Phipps said.
"The incremental unit sales per store per week due to end-aisle promotions ranged from a high of 2,851 six-packs of private-label sodas sold to a low of 21 six-packs of a national beer, with a whole range in the middle," Phipps said.
"When we looked at that, we were kind of staggered that there could be such a disparity," he said.
The study also tried to measure overall net profits generated by the promotions. "Well, all but one of the end-aisle promotions lost money for the chain," excluding forward buying, Phipps said. In addition, "the amount of money they lost is significant. Looking at the promotion profits on a per-store per-week basis, we found it ranged from private-label soda, which lost $524, to a national wine cooler that made $84," he said.
Although there may be good reasons for running a loss-leader promotion, and even losing money on an item, the real question is whether retailers and manufacturers know what they want from the promotions and are able to achieve their desired goals. In that respect, there is much room for improvement, he said.