|Health strategy and marketing in the recession|
|Friday, 12 March 2010|
First published in New Nutrition Business February 2010 Newsletter
Our opinion is that Innocent is a company whose strategy has not only failed to evolve, but it is a company whose strategy breaks many of the golden rules of success in the business of health. The economic downturn is not the cause of Innocent's problems, rather it has exposed the many flaws in the company's strategy. Our prediction is that not only will this company not regain anytime soon the 34% decline in sales of its health-enhancing smoothies that it suffered in the period 2008-2009, it may never do so. In 2005, Innocent's sales were at £30m. They rocketed to £80.5m in 2006 and to a high of £131.4m in 2007. With the recession they dramatically fell to £107m in 2008 and declined further to £94.3m in 2009.
The problems of Innocent provide useful lessons for the rest of the food and beverage industry (no matter what category you are in). They demolish many of the marketing myths that have grown up over the last 10 years of economic boom and simultaneously underscore the continuing power of some of the well-established golden rules for success in health, rules which Innocent breaches in many key respects.
The premium price myth
The easy answer for why this company has suffered such a disastrous drop in sales is that as a result of recession consumers have turned away from super-premium brands to lower-priced juices. But that's only one part of the story. If premium pricing was a problem for all consumers, then other super-premium brands would also have experienced sharp falls in sales in 2009. But they did not:
Danone's Activia digestive health yogurt, for example, actually grew its UK sales by a staggering 32.6%, to £214.5 million ($345.9 million/$247.5 million) despite selling at a 25% premium to competing supermarket own labels.
Danone Actimel natural defence's drink on a per litre basis, one of the most expensive products in the UK supermarket managed an impressive 5% sales increase to £114.1 million ($183.9 million/$131.6 million), despite a background of intensely negative media about probiotics.
Benecol cholesterol-lowering drink the most expensive dairy product in the UK supermarket actually increased its sales by 18.8% to £39.2 million ($63.2 million/$45.2 million).
There's an even closer parallel for Innocent in the example of blueberries, the trendy, super-premium priced fruit. Sales of blueberries continued to increase, despite selling at a 600% premium to apples, even while Innocent sales fell.
The argument that Innocent's premium pricing is the main problem doesn't stand up to scrutiny. The decline is not just a matter of price, it's a symptom of failing to justify the price in the minds of consumers and that is a result of a number of serious strategic problems, problems which we believe could prevent Innocent smoothies from regaining their former level of sales.
A brand that talks to the wrong consumers
It's not premium pricing in itself that is the problem. Innocent smoothies challenge is that its core consumers 20-somethings and early-30s have been more affected by the recession than older, more affluent consumers.
The core consumers of brands with health benefits are people aged over 40. Professor David Hughes, Emeritus professor of food marketing at Imperial College, London, explains of the UK's largest grocery chain, Tesco: Tesco has six segments of shoppers. The finer foods group who are 16% of Tesco's shoppers are higher income and include many older, richer people and they are 2.5 times more likely to be buying blueberries than any other group. This consumer profile matches that of many if not most health-oriented brands.
Consumers over 40 have been affected by the recession less than other age groups and the over-50s hardly at all. The over-50s in fact have better levels of disposable income than any other age-group and hence have more to spend on products which address their health concerns, such as Benecol cholesterol-lowering drinks, which are, like Innocent, premium-priced but whose sales grew by 45% in 2008-2009 even as Innocent's sales fell 34%.
But these people are not big smoothie buyers. The fact is that old guys don't drink smoothies, as one industry executive succinctly explained.
Rather, smoothies primary appeal has been to Generation Y and the younger members of Generation X. Innocent's brand image, its quirky messaging and the product type holds most appeal for younger consumers, people rather like the founders of Innocent themselves. They have been free and easy spenders, unafraid of debt, and what one marketing expert called "dream consumers with limited financial know-how".
According to a Bank of Scotland survey, the average Generation Y-er does not know the difference between a credit card and a debit card; two thirds know the price of an Apple iPod Mini but three quarters have no idea what a pint of milk costs. One in eight thinks that "in the red" means being embarrassed. They each have 800 illegally downloaded songs, and one in 20 spends more than £100 a month on mobile phone bills. Many never read newspapers and two thirds do not vote.
But Generation Y is suddenly encountering its first recession. In our opinion, it was the easy spending habits of the young in the years of easy credit, beginning in 1998, that drove the growth of the Innocent brand which debuted at the same moment as the 10-year spending spree of UK consumers began. Innocent is a boom-and-bust brand that rose on the back of a generation of easy spenders and sank on the back of their shock encounter with their first-ever recession.
Loss of any point of difference
If your product is premium-priced, it must offer a point of difference. Innocent began by making no added anything (meaning no colours, flavours or preservatives) the cornerstone of its business. Back in 1998, that was a point of difference - today it's an industry standard, the promise that every brand in every category aims to make.
Innocent has lost its point of difference as a source of one of your 5-a-day of fruit. Its a message that is now commonly used by fruit drinks. Some brands, such as Compal Essencial (shown here) also use innovative packaging to better communicate the benefit an opportunity which Innocent has missed.
Similarly, the promise of one or more of your 5-a-day that is the core proposition of the Innocent brand was once unique. Today it is the most common marketing message in the supermarket, made by every juice product that can make it and found in many other categories.
No benefit you can feel
One of the biggest marketing advantages a product can have and the surest way to create loyalty for a brand is to deliver a benefit that the consumer can quickly see or feel. When people can feel the benefit that is being offered to them, they can see that they are getting value-for-money and they can immediately understand why they should buy the product again and again and again. The power of feel the benefit is one of the key lessons from the past 15 years.
The best examples of the power of feel the benefit include the energy drink market and the market for products for digestive health.
Energy drinks deliver a health benefit an energy shot that is immediately effective and detectable. With digestive health you can very quickly find out if a product is effective or not and if it gives you the benefit of better digestive health and, therefore, an improvement in your quality of life.
In 2007 we wrote that In hard times products without immediate benefits could see sales fall and in many categories this has been the case. Omega-3 products for example, have been withdrawn or slid in every Western market (you can't feel or see the effect on your heart health of consuming omega-3).
Innocent for all its great branding and skillful communications also doesn't offer a benefit you can feel. One, two or three of your 5-a-day is an important benefit, but you don't feel any better when you drink a smoothie.
Aiming a niche product at the mass market
Another key lesson from the past 15 years is that products with health benefits are usually low-volume/high-value and that few, if any, brands have achieved mass-market status. Health is an ever-increasing number of niches whose premium appeal is to the 20%-25% of consumers who are actively health-conscious.
Innocent made one of the most common strategic mistakes by trying to widen its appeal beyond the health-conscious niche, even while it still tried to charge super-premium prices. The mass-market has never been willing to pay (much of) a premium price even in economic good times. And when people in the mass market feel less well-off they turn away from premium health brands especially when they are brands that don't enable you to feel the benefit (see above).
As we said back in 2007: We believe that sales of health-enhancing foods may actually shrink in some markets as the price-sensitive, mass-market consumers who have been including them in their shopping over the last four or five years cut back. But the committed hard core who comprise 15%-20% of the population will form a valuable core market.
Innocent has experienced the evaporation of its newer, less health-committed consumers and its smoothie business has been shrinking back to the core consumers.
Innocent's decision to focus on the kids market makes sense but only if it is treated as a niche opportunity. The core buyers of healthier kids-oriented products tend to be higher-income mothers, and sales of kids nutritional products are niche. Premium smoothies have limited appeal beyond the most health-conscious niche, as Innocent has already discovered, sales of its kids smoothies falling by 14% in the year to September 2009.
The UK's most successful mass-market kids drink brand, the competitively-priced FruitShoot, which includes juice and flavoured water, has total sales of £98 million ($158 million/113 million). If Innocent Kids Smoothies, which have retail sales of around £21 million ($33.9 million/24.2 million), manage to get to half the level of FruitShoot then that will be an impressive performance. But to hope for more than that isn't realistic. Kids nutrition can be another great niche for Innocent, but it isn't going to offset the collapse in business sustained over the past two years.
No packaging innovation
Good packaging supports a brand in asserting its difference. It's the best way to catch the consumers eye and earn premium prices and better-than-average profit margins. Putting your new product in a standard 1-litre gable-top carton makes it look like every other brand on the shelf and enables consumers to easily compare prices between your product and regular products.
Contrast this approach with the daily dose probiotic dairy drinks brands such as Actimel and Yakult, which are among the world's most expensive products, measured on a price per litre basis. Their packaging innovation makes it very difficult for consumers to easily compare prices.
In pursuit of volume, Innocent made the mistake of putting its products into standard 1-litre cartons, making the high price premium very clear and thus reinforcing the effect of driving away the more price-sensitive mass-market consumers and carrying the brand back towards its original niche.
With its strategy having failed to justify its super-premium pricing and sales plunging as a result, Innocent has drastically cut its prices by 30%-40% in some cases. It's a step that might protect the brand's volume, but once taken Innocent will most likely never be able to recover the lost value.
While Innocent's pack designs look appealing the company has failed to innovate in packaging design and now finds itself up against brands such as Compal Essencial which are marketed on the same 5-a-day message but use packaging innovation to communicate the benefit, stand out on the shelf and conceal the extent of their price premium.
Innocent is paying for its failure to innovate and differentiate - its retail price is down as much as 30%-40% in many retail outlets. When the recession ends it won't be able to get its prices back up again. It is sacrificing margin to maintain volume and with the expensive ingredients found in smoothies that's a route that can only result in a serious erosion of profitability.
A significant part of Innocent's initial success arose because it was creating a new category based around an innovative product - it was the first all natural, not from concentrate smoothie brand on the UK market.
It created this new category and it remains the category leader seeing off attempts from PepsiCo to break in. With the launch of its Veg Pots vegetable snack meals for one Innocent has managed to create another new category, with first year sales of more than £15 million ($24.2 million/17.3 million). However, as with fruit smoothies, the opportunity has an upper limit. Sustaining a brand in ready meals (which is what Veg Pots effectively are) is difficult. Consumers require new flavours frequently and grow bored quickly. It's a category where brand loyalty is non-existent and hence in the UK market is 90% dominated by private label. These factors will, we believe, keep Veg Pots at a niche level for many years and limit its ability to transform Innocents fortunes.
Flawed international strategy
For some years now Innocent has been working on growing its brand in the rest of Europe, marketing in the Netherlands, France, Sweden and elsewhere. But all it has to show for its efforts is a toehold and one that it will be hard-pressed to improve upon.
Innocent may boast that it has 47% of fruit smoothie sales in mainland Europe, but fruit smoothies are an ultra-niche in continental Europe with barely a 2% share of the fruit drinks market and very slender profit margins. The main reason for the difference is that the consumer types who have driven the growth of smoothies in the UK do not exist in the same numbers anywhere else in Europe.
In terms of incomes, the UK is the most unequal society in Europe, with an upper income group whose incomes are vastly higher than the rest of the population. London and the south-east, the heart of Innocent's business, has for a decade been filling up with young people earning stratospheric salaries in finance, IT, consultancy and related services. These high income groups also pay less in income tax than their peers anywhere else in Europe.
Nowhere else in Europe do you find this concentration of high-earning, low-tax paying younger people. Put simply, the potential smoothie market in the rest of Europe is very small. Figures from drinks consultancy Zenith, for example, underscore that smoothies remain a UK and US dominated phenomenon.
In the long run, we believe, Innocent will continue to perform less well than the science-based brands that deliver measurable benefits and which have already demonstrated that, unlike Innocent, they can sustain sales growth and premium pricing in a recession. These brands are successful because the companies behind them have a better grasp than Innocent on the rules of the food and health business and have been more savvy in their consumer targeting. The challenge for Innocent will be to show that it can now accept and apply the rules. If it does not, we believe its business will not regain its former status anytime soon if ever.
About New Nutrition Business
New Nutrition Business is a London-based research, publishing and consulting company which specialises in researching, analysing and forecasting developments in the business of food, nutrition and health around the world.
The strategies and success factors it has identified in the 1990s have become the benchmarks for strategy development and brand positioning in the worldwide nutrition business. It works with companies all around the world, from the United States to Australia and from Sweden to South Africa.
New Nutrition Business is headed by executive director Julian Mellentin, one of the world's very few global specialists in the business of food, nutrition and health.
He is the editor-in-chief of New Nutrition Business and Kids Nutrition Report, the only industry journal in the world on the rapidly developing kids nutritional marketplace.
Julian is co-author of both The Functional Foods Revolution: Healthy people, healthy profits?, the first-ever book on the business of functional foods, now translated into Japanese, and Commercialising Innovation: The Food & Health Marketing Handbook.