2006 Beverage R&D Survey

January 1, 2006
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2006 Beverage R&D Survey
By CATHERINE PENN
Hottest job title for 2006: new product development team leader
How many places have you read that 75 percent of new products released to market fail? Is this fixed in your mind? Well it’s time to rethink that paradigm. According to Beverage Industry’s 2006 Annual R&D Survey that statistic is just plain wrong last year. Beverage processors report that 75 percent of new drinks released to market in 2005 were successful.
What’s changed? This research shows that beverage processors have become extremely savvy in new product development methods. This change includes streamlining new product development teams and giving them qualified leadership and autonomy. Many teams now make their own decisions. In addition, beverage processors have both increased the number of their own employees developing new products and decreased outsourcing. Another change is that CEOs have taken leadership positions on teams. Also, the role of suppliers has shifted from a source for ideas to a source for samples and prototypes.
Processors continue to utilize new product development as a way to increase market share. They carefully have tied the creation process to consumer trends, ensuring the right drink is offered at the right time. Also, new product development has moved more in-house and away from outsourcing. Despite more control, team membership is pretty much the same as it was a year ago.
R&D departments continued to purchase ingredients throughout 2005 in a way that was consistent with 2004, with a few exceptions. Sugar purchasing slightly increased in 2005 over 2004. Buying other types of sweeteners dropped from 40 percent in 2004 to 20 percent purchasing in 2005. Also, purchases of vitamins-minerals-iron-colloids and caffeine dropped.
Processors believe that consumers are most likely to choose strawberry and tropical fruit-flavored beverages in 2006. Last year, flavors were all about orange and citrus. This demonstrates how carefully processors are following consumer tastes. It’s like a mantra: follow consumer whims or expect drinks to gather dust on store shelves.
Of the famous marketing quartet of product, pricing, promotion and placement, this study shows that the biggest P in launching a new drink is promotion. Miscalculating consumer demand is at the top of the reasons-why-drinks-flopped list. The next biggest P is product and not having the right taste or concept accounted for 33 percent of failures in 2005. The strategy of copying a popular drink is at the top of the list in product-related failures.
This report reviews new product development by beverage categories — juices, soft drinks, water, coffee and tea, dairy, wine, energy and sports drinks, beer and spirits. Some drink types have more success than others. For example, energy and sports drinks have a higher rate of success than juice drinks. Here, the data show differences in the motivation to develop new drinks. Energy and sports drink manufacturers want new customers and so success is correlated to correctly reading consumer trends. On the other hand, juice processors are more likely to be looking to get existing customers to buy more and so success comes with brilliant marketing and distribution.
Juices and juice drinks
Processors have a 59 percent success rate for new juice drinks released to market. In addition, R&D labs are very cautious about which drinks they float such that only one in four is ever launched. This ratio makes sense because processors estimate a new juice drink costs half a million dollars to create.
All new juice drinks are developed with an eye to increasing sales. Other important motivators include attracting new customers and improving product quality. Slightly less important is being proactive and product diversification. But juice processors are still more proactive than they are reactive as less than half wait for customers to demand a new product.
Four of five processors use a team approach in developing new juice drinks. Most teams include sales and marketing, upper management, production, R&D, quality control, packaging and purchasing. When upper management is involved, this means the chief executive officer, and he or she is most likely in an advisory role.
Two of five processors include suppliers in developing new juice drinks. In this role, suppliers are most likely to provide samples and prototypes. Also, most processors listen to what suppliers have to say about what’s new.
Ingredient staples at R&D labs include juice concentrates, flavors, citric acid and gums. Two of five labs purchased sugar, colors, high fructose corn syrup or other corn sweeteners, stabilizers, sucralose and vitamins-minerals-iron-colloides in creating new juice drinks. For 2006, processors hope strawberry will be their top seller. Tropical, orange, peach, mango and raspberry also will be delivered with high expectations.
One in four processors can develop a new juice drink within three months and 71 percent can offer up a new liquid in less than 12 months. The speed of new product development is an important consideration and one-third of juice processors managed to decrease their turnaround time in 2005. Faster times were achieved when a team leader position was created, as R&D started “working smarter,” and processors conducted testing in-house.
Ingredient purchases for R&D
% of respondents planning to buy2005 2004
Flavors51%59%
Citric Acid47%45%
Juice/concentrates47%51%
Sugar44%38%
Colors33%n/a
Corn sweeteners32%33%
(High fructose)31%n/a
Malt, hops, yeast, extracts31%20%
Stabilizers27%27%
Sucralose27%35%
Vitamins, minerals, iron, colloids27%37%
Gums26%30%
Caramel color24%29%
Acidulants22%23%
Aspartame21%23%
Sweeteners/blends21%39%
Dairy/dairy products19%23%
Anti-oxidants18%21%
Caffeine18%27%
Other energy producing ingredients13%n/a
Cocoa/chocolate18%19%
Emulsifiers18%26%
Ace K17%22%
Coffee17%19%
Starches17%15%
Botanicals (herbs/spices)15%21%
Anti-foaming agents14%20%
Essential oils14%19%
Organics13%18%
Soy10%13%
Anti-caking agents9%7%
Since new juice drinks are so closely tied with consumer tastes, a successful launch must piggyback excellent promotion.
The focus of this research is on ingredients and marketing; however, equipment and packaging developments are on the wish list for juice processors in the coming months. Better PET resins for bottles are desired and one respondent expressed a wish for a pilot plant for new product prototypes.
During the next 12 months, activity levels at R&D labs making juices will look much as they did in 2005. The good news for 38 percent of labs is that they will have more money to spend.
Soft drinks
Soft drink manufacturers launch one of every two soft drinks that R&D develops. For every three new soft drinks that hit store shelves, one will fail. Unlike juices, which are all about promotion, soft drinks are all about product. Soft drink manufacturers attribute 42 percent of product failures to flavor and concept errors.
The data suggests that price pressures over the years have reduced the variance such that price does not contribute to failure — probably because manufacturers know that consumers will not pay more than a certain amount for a can of pop.
 Nine of 10 manufacturers were motivated to launch new soft drinks in 2005 as a way of increasing sales. Another important motivator is customer demand and quality. Also, these manufacturers look to stay ahead and attract new customers. Almost all manufactures get their ideas for new soft drinks from consumer trends. This represents the highest adherence in the industry to popular tastes in developing new drinks.
This research shows that 61 percent of manufacturers use a team approach to developing new soft drinks. The most influential players are from sales and marketing and production. Also, most teams include their chief executives and a packaging expert. Technical team members — chemists and those from R&D and quality assurance — are on 50 percent of teams.
Top management and marketing personnel hold the reins in developing new soft drinks. However, there is a disconnect here. Forty-two percent of the time sales go flat it is due to poor product. Perhaps 2006 should be the year management gives R&D, quality assurance and chemists more autonomy in developing new soft drinks. Moreover, since ideas are most likely to come from consumer trends, why not include consumer panels? For a glowing example, autonomous teams and adherence to consumer trends have contributed to successes for coffee and tea processors. Another shining star comes from energy and sports drink manufacturers where stringent internal audits, plus monitoring of consumer trends equals success.
Currently, 47 percent of manufacturers can develop a new soft drink in less than six months; others take as long as 18 months. Last year, there was little pressure to develop new soft drinks faster. Of the 20 percent that did improve development time, the speed was attributed to efficiencies.
In terms of ingredients purchased, three of four manufacturers purchased citric acid and sugar in 2005. High fructose corn syrup is another popular ingredient and most processors bought caramel color, aspartame and energy-producing ingredients.
Despite the emphasis on soft drink marketing, manufacturers wish for new developments in equipment and packaging. The data show that for two-thirds of manufacturers, both the R&D budget and new soft drink volume will be the same in 2006 as it was in 2005.
Finally, the data suggest that soft drink manufacturers branched out into the energy and sports drinks category in 2005. Suppliers might want to note the ingredients popular for energy drinks in addition to the ones traditionally purchased by soft drinks processors. Specifically, this includes Ace K, aspartame, caffeine, caramel color, citric acid, high fructose corn syrup and other corn sweeteners, juices, flavors, vitamins-minerals-iron-colloids, sucralose and sugar.
Bottled Water
The data show that water bottlers have a winning triple combination. They have the highest new product launch success rate, the highest incidence of outsourcing, and the highest inclusion of customers and suppliers on their new product development teams.
Unlike other processors, however, water bottlers should carefully consider price in releasing a new drink to market — it’s the most likely reason for a spill. Nevertheless, water bottlers did very well in 2005 and expect the good times to continue in 2006. All will be increasing their R&D budgets this year and plan to keep consumers well supplied with new bottles of water.
Coffee/tea
Consumers can expect even more choices of new coffees and teas in 2006. One in three manufacturers will be increasing the number of new coffees and teas they float, and 50 percent will be increasing their R&D budgets. Top-selling coffee and tea flavors in the months ahead will be peach, tropical, orange, apple, lemon, raspberry, vanilla, blueberry, chocolate, caramel, chai, cinnamon, hazelnut and honey.
This study shows a 75 percent success rate for coffee and teas. In addition, for every three new coffees and teas developed in R&D, two are released to market and one is scrapped.
Four of five processors are motivated by increased sales in developing new coffees and teas. Also, most processors report that new coffees and teas find new customers, so this is a way of marketing proactively. It is important to note that this segment is largely driven by consumer trends.
Two of three coffee and tea manufacturers use a team approach to new product development — and these teams have a unique combination. All of them include R&D and sales and marketing. Three of four include upper management, although this is unlikely to be the chief executive. Also, most teams include production, quality, purchasing, customers and suppliers.
Four of five coffee and tea processors bought flavors in 2005 and half bought cocoa/chocolate. Processors report that it costs an average of $230,000 to develop a new coffee or tea drink from concept to consumer, and 66 percent can turn things around in less than nine months. One of three coffee and tea manufacturers surveyed were able to decrease development time in 2005 by creating a team leader.
Dairy
Dairies are, essentially, reactive in developing new products. They are focused, almost exclusively, on sales (rather than value, new customers, diversification, competitors, innovation and trends). They get their ideas from customer demand and many ideas come from outside the dairy. Seventy percent outsource some part of their new product development and 50 percent listen to what suppliers have to say about what’s new.
For the most part, dairies develop new drinks as teams where sales and marketing and quality assurance are the most frequent players. Next in importance is production, followed by upper management and customers.
The data show that the most frequently purchased ingredient by dairies in 2005 was stabilizers. Also, most bought juices and concentrates. Dairies report that it costs an average of $86,000 to develop a brand new drink and most can create something new in less than six months. Faster speed in new product development was achieved by 40 percent of dairies, which reflects a new focus on flavors, packaging, and making the team more cross-functional.
Equipment development, including small batch pieces, would greatly assist in new product development at dairies. Unlike other beverage categories, dairies are highly receptive to marketing ideas, new advertisements and new flavors.
Dairies will not be increasing their R&D budgets during the next 12 months, and only one in five plan to increase the number of new dairy drinks released to market. It is important to note that many dairies also process juices and juice-type drinks with a higher percentage incidence than was the case 12 months ago.
Wine
The few wines that are released to market have a high success rate, but take a long time to develop. Moreover, the data show that three of four new wines actually remain in the R&D cellar.
The data suggest that winemakers are pretty competitive. As well as increasing sales, the most important motivators in developing new wines are ensuring quality, creating customer interest, and staying ahead of the game. This competitive nature is reinforced by the fact that very few wineries outsource their secret new grape recipes.
New wine ideas come from the chief executive officer, who guides and oversees the process. Most chief executives listen to input from sales and marketing and production in developing new wines — but of those surveyed, none say they listen to suppliers.
Top on the wish list for winemakers is packaging, especially new labels, more wine bottle colors and packaging efficiencies. The data show that new wine releases over the next few years will remain pretty constant — at their 2005 rate.
Energy and sports drinks
This category has a high success rate when releasing a new drink to market, but a low in-house release rate. One in four new energy or sports drinks is released from R&D (in-house release rate). At market, a new energy and sports drink has an 80 percent chance of success. This suggests these processors have a stringent internal new product development audit.
This category is very much driven by consumer trends, according to respondents. All of the new drinks they create are developed by a team and all teams include sales and marketing. Four of five teams include customers and suppliers, which is the highest incidence of outside inclusion in the industry. Most teams include the chief executive, R&D personnel and purchasing.
Energy and sports drink processors report that suppliers present concepts or prototype products. Most say suppliers also offer samples and tell them what’s new.
Two of three energy and sports drinks processors purchased citric acid, sucralose and Ace K in 2005. Most bought flavors, juices, sugar, colors, corn sweeteners, vitamins-minerals-iron-colloids and caffeine.
On average, processors say it costs about $450,000 to develop a brand new energy or sports drink, and most need a year to perfect their new offering. Despite the longer incubation time, 60 percent of processors said they were able to develop new energy and sports drinks faster in 2005 by creating efficiencies.
Energy and sports drinks R&D departments will be under pressure to create new drinks in 2006. Two-thirds of processors plan to increase the number of new drinks they develop, but only one in five will increase the R&D budget.
Beer
Breweries create new beer in a uniform sort of manner. Almost all have the same sorts of teams, buy the same ingredients, have the same motivation, and use the same source for ideas. Led by the head brewer, an in-house team will meet and decide what new beer to develop. With this type of in-house springboard for ideas it should be expected that flat beer sales most often reflect overestimated consumer demand. While it might be prudent for breweries to research and monitor consumer tastes and trends, the lower cost ($34,000 on average) to develop a new beers makes the try-and-see approach viable for now.
Breweries report an 83 percent success rate for new beers released to market in 2005. Of five new brews developed by R&D, four were released to market. Breweries are motivated to create new beer as a way to increase sales.
Unlike other beverage categories, almost all new product development teams at breweries are led by production. Sales and marketing is also important and most breweries include the chief executives and quality control personnel.
In 2005, almost all breweries purchased malt, hops, yeast and extracts, and most can create a new beer in less than nine months. Also, most breweries improved their turnaround time for new beers, which reflects team redefinition. Teams at breweries became more autonomous, more cross-functional, better able to communicate, team roles were clearly defined, and planning was put into the creation processes. Also, breweries increased production capacity and added new equipment to ensure all the new brews had equal chance for success.
Breweries report that most of their new product failures are related to promotion, especially miscalculating consumer demand and poor marketing. During the next 12 months, 60 percent of breweries will be increasing the number of new beers they release to market; however, only one in four will be increasing their R&D budgets.
Spirits
Distilleries’ new product development is currently focused on product, but marketing assistance is at the top of the wish list.
For every four new spirits developed in R&D, one is released to market. At release, the odds for success are nine to 10 percent. While almost all distilleries are motivated to introduce new spirits as a way to increase sales, two-thirds intend to attract new customers. Most distilleries create new drinks to be proactive, stimulate consumer interest in something new, and to expand the life cycle of spirits. Ideas come from consumer trends and marketing and sales.
All distilleries surveyed use a team approach to new product development, which is largely driven by top management. Almost all teams include upper management and sales and marketing, and 78 percent include R&D. Distilleries are very unlikely to include suppliers in new product development.
In 2006, 60 percent of distilleries bought ingredients for R&D. Most frequent purchases include flavors, citric acid, juices, sugar, colors and corn sweeteners. Also, two-thirds bought caramel color. It takes between six and 12 months to develop a new spirit from concept to consumer. Most distilleries say this time is an improvement over 2004; the faster time resulting from a more streamlined team. For this year, 40 percent will increase their R&D budgets, which is likely accommodative because almost none say they are planning to increase the number of new spirits to arrive in 2006.
Methodology
The results of Beverage Industry’s 2006 R&D Survey are at the 95 percent confidence level with a ±6 confidence interval.
Processors were asked to identify all the beverage products they process, and many manufacture more than one beverage category. In terms of processing offerings, 41 percent of the sample process juices and juice-type drinks and 26 percent manufacture soft drinks. Energy drinks are produced by 26 percent, 25 percent brew beer, and 18 percent bottle water. Dairy-based drinks are processed by 17 percent, 16 percent make wine, 15 percent coffee and tea, 15 percent offer sports drinks, and spirits are made by 11 percent of the sample.
In terms of job function, management accounts for 54 percent of the sample and 24 percent are from R&D. Also, 19 percent are from production, 17 percent from sales and marketing, 10 percent are purchasers, and 10 percent are from quality. In terms of annual sales revenue, 20 percent of the sample includes processors where annual revenue is more than $500 million. Fifteen percent report revenue from $100 million to $500 million. Eight percent have $50 million to less than $100 million in revenue, 14 percent report $10 million to less than $50 million, and 12 percent say revenue is $5 million to less than $10 million. Thirty-two percent report annual revenue less than $5 million.
This year, processors were asked to indicate where their business has a presence throughout the world. Two-of three have a presence in the United States: 66 percent in the South, 64 percent in the West, 63 percent in the Northeast, and 57 percent in the Midwest. One-third has a presence in Canada and a third are also in Europe. One in four say they have a presence in Asia, and 19 percent in South and Central America. Also, 14 percent have a presence in Australasia and 13 percent are in Africa. BI

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