Baking & Snack’s Trends in Industrial Baking Industry Innovation & Development study, conducted by Cypress Research, revealed just how much of an impact the coronavirus (COVID-19) pandemic had on new product development. Before the pandemic, it was no surprise to discover that product development — and the riskier versions of it — were front-and-center.
For the purposes of the study, Baking & Snack classified new product development into three different categories: innovation, invention and formulation. Invention was defined for survey respondents as true breakthrough product development that usually results in the launch of a new brand. Innovation refers to new products launched within existing brands or categories. Baking & Snack defined formulation as product development focused on new ingredients within brands and categories, or line extensions.
Innovation and invention were the leading forms of product development, with 88% reporting a focus on innovation initiatives and 73% focused on invention. Formulation ranked fifth in priority, behind ingredient/formulation cost savings (65%) and new ingredients/ingredient technologies (61%).
Everything changed, however, during the height of the pandemic. Respondents were asked about how important six different food sciences initiatives were for their companies throughout the pandemic: ingredient/formulation cost savings, innovation, formulation, ingredient supplier base reduction/rationalization, new ingredients/ingredient technologies, and invention. Four out of the six product development initiatives listed saw major declines in priority.
The only two to see any increase in priority were ingredient supplier base reduction/rationalization, which rose from 47% to 54%, and ingredient/formulation cost savings, with a four-point increase during the pandemic. Looking at the continued issues with supply chains and ingredient availability, companies prioritizing ingredient supplier base reduction/rationalization continues to climb in importance for the next 12 to 18 months, with 63% of survey respondents listing it as important. Cost savings through ingredient and technology initiatives skyrocketed with 90% of respondents listing it as a priority for the future.
“During the height of the pandemic, we see a lot lower activity in general across these six R&D initiatives,” said Marjorie Hellmer, president of Cypress Research. “We see a dramatic shift to a primary focus on cost savings, which took the No. 1 spot, and that was followed by a new examination of ingredient suppliers, which is directly related to cost savings.”
This was reflected in the study when bakers were asked to reflect on how their relationship with their ingredient supplier partners has changed due to the pandemic. On the positive side, some bakers reported the supply chain issues led to improved communication and partnership as vendors helped bakers find alternate ingredients to shortages in the marketplace.
“Our suppliers were forced by circumstance to adopt better methods of communication and cooperation,” said one respondent. “We are more than a revenue stream, and the constriction of the pandemic really put our market choices into perspective.”
For some respondents, however, this was an area of needed improvement for ingredient suppliers. Many bakery professionals reported they just wanted to know what was going on, even if it meant receiving bad news.
“Our suppliers certainly need to be more transparent as we have to be with our customers about price drivers and forecasting,” one respondent explained in a written response. “We have less latitude than our suppliers when it comes to price on finished goods; we are in a very competitive space.”
As bakers evaluated these six initiatives as they look to the next 12 to 18 months, there did seem to be a recovery in product development, but with a continued eye on saving costs, supplier rationalization and a focus on line extensions. Of the big three formats of product development, formulation has surpassed its pre-pandemic numbers, jumping from 58% of respondents prioritizing it to 71%. Innovation is seeing a nice recovery with 76% focused on this initiative for the future vs. 88% before the pandemic. Invention is recovering — survey respondents who were focused on this initiative fell from 73% pre-COVID to 41% during the pandemic — but it lags with only 59% of respondents saying this was important to their companies for the coming 12 to 18 months.
“We do see invention recovering, but according to this research, we project it won’t likely make it to pre-pandemic levels until some time in 2024,” Ms. Hellmer explained.
Leading R&D initiatives for the future, however, are ingredient/formulation cost savings with 90% of survey respondents saying this was a priority for the next 12 to 18 months. No. 3 in importance for the future is ingredient supplier base reduction/rationalization, with 63%.
“We’re still seeing those belt-tightening measures with the focus on cost savings and reexamination of the supplier base,” Ms. Hellmer said.
In fact, survey respondents who listed invention or innovation as less important were asked to give their company’s primary reasons for shifting away from these initiatives. Sixty-two percent reported greater attention on both cost savings and existing brands and product portfolio. Fifty percent also reported an increased company focus on other operations or a focus on manufacturing-related priorities pulling attention away from invention and innovation. With so many bakers looking to invest in equipment and operational efficiencies to keep up with demand, this is unsurprising.
“We also see four in 10 bakers reporting that they are struggling to access ingredients to support product development, but this supply chain issue isn’t the leading reason,” Ms. Hellmer explained. “The obstacles holding back true invention are the focus on cost savings and the focus on existing brands.”
This is impacting bakers risk tolerance as well as they begin to regain their appetite for product development.
“When we talk about risk tolerance, bakeries generally appear poised to accept moderate risk well into 2023,” Ms. Hellmer noted. “This is a more conservative approach than bakers were applying pre-pandemic. We’re in a time of moderation and playing things close to the vest.”
For example, for invention, the riskiest form of product development, prior to the pandemic 20% of survey respondents reported a high company risk tolerance and 59% reported a moderate risk tolerance. At the height of the pandemic, high risk tolerance fell to 16% and moderate risk tolerance fell even more dramatically to 30%. And 55% of survey respondents reported a low company risk tolerance for invention. For the next 12 to 18 months, high risk tolerance is holding steady at 16%, while companies willing to resume a moderate level of risk for true invention-related initiatives has grown to 62%.
Innovation saw similar declines and gains, but formulation, the least risky version of product development, has seen a 12-point increase in respondents reporting a high company risk tolerance from the height of the pandemic to the next 12 to 18 months. In fact, 29% reported a high risk tolerance for formulation initiatives for the future, which surpasses even pre-pandemic levels of 22%. And 18% reported a low risk tolerance for the future of formulation, compared to 23% before 2018.
“Despite bakers playing product development more conservatively overall, many companies seem to be far less risk averse when we look at product reformulation. They are willing to take a lot more risk, even more than pre-pandemic levels,” Ms. Hellmer pointed out. “Even more so than in innovation and invention.”
Overall, the baking industry’s appetite for new product development is recovering as it emerges from the pandemic but with more caution. Even in the budget numbers, 31% of respondents reported their company increased the R&D department’s budget in 2022 compared to last year, while 42% said it remained the same. Only 15% of companies reduced their R&D year-on-year budgets, while 12% didn’t know. All of this points to a shy pivot back toward new products.
This article is an excerpt from the July 2022 issue of Baking & Snack. To read the entire feature on Special Report: Innovations & Ingredients, click here.