‘What will we tell shareholders?’: Fear of failure in functional drinks spooks big beverage firms

Julian Mellentin from New Nutrition Business (NNB)​ writes in a new report Failures in Functional Foods & Beverages​ that senior managers at large food and beverage firms are wary of potential costs that they have to explain to shareholders, who “pressurise management to innovate, but also punish them for any failures”.​

“As a result, most major companies have in recent years become increasingly risk averse and have failed to innovate, instead relying on acquiring small innovative startups,”​ Mellentin says.

Management’s over-estimation of the size of a potential market for a product and possible growth rates are one of the biggest “enemies of success”​, he says, and is the reason many brands are withdrawn prematurely.

“Some of the most successful functional brands have taken as long as seven years to reach breakeven and over 10 years to produce a positive return on investment,”​ Mellentin writes.

Brands increasingly appeal to niche markets​

When large companies do create brands their risk aversion leads to unrealistic expectations that a brand should quickly thrive in a high volume mass market, he says.

But following this policy with a functional beverage brand leads means it ends up in front of mainstream consumers unwilling to pay a price premium for health benefits or take a risk with a new product.

Citing Symphony IRI’s 2014 New Product Pacesetters ​report, Mellentin notes that 58% of new US launches earn less than $7.5m in retail sales in Year One, while only 4% achieve $50m, which he says reflects the reality that new products increasingly appeal to more discrete consumer segments.

Speaking to BeverageDaily.com about one functional drinks failure Nestle’s Nesfluid​ – NNB’s ​report also covers brands such as Good Belly that initially targeted the mass market, stumbled, then came back strong with a niche focus – Mellentin also criticized Nesfluid’s diffuse functional focus.

For your first 5-10 years you need focus!​

Taking one drink in Nesfluid range at random, Renforce (for bone health and immunity), I asked Mellentin if he thought such a launch would work in 2014 rather than 2011 – given that he thought Nesfluid’s range as a whole offered far too many benefits and that this confused the consumer?

“No I don’t think it would work. One easily defined message works, but products that talk about two different benefits and succeed can be counted on the fingers of one hand globally,”​ he said.

Successful brands start with one message, Mellentin added. “You might vary things further down the road – but for your first 5-10 years you need to be really focused.”​

Seniors will only hand over their hard-earned cash for tangible benefits, he said, which is why Benecol Yogurt Drinks (sold in the UK promising a 10% drop in cholesterol within three weeks, if you drink one per day) sell well – this benefit is something that the doctor can measure.

“But you’re also talking to a niche, because there are lots of ways people can manage their health. Eating specially designed food is just one of them,”​ Mellentin warned.

“Take heart health. Sure you can buy Flora Pro.Activ or Benecol, but the doctor will also be giving you statins. And there are some people who eat more oats, or get beta glucans from a supplement, or do more exercise,”​ he told this website.

“There are many ways people address health problems, and you can do the same multi-sectorial mapping of responses to every health condition – we forget that food is just one of those,”​ Mellentin said.

US joint juice market in ‘terminal decline’​

Mellentin believes the US market for joint health juice – once worth $100m – is in “terminal decline​” despite the fact that the juices sold taste good and work.

The reason he gives is that seniors interested in such benefits want them for the long term, and can get supplements that do the same job for a significantly lower price.

This means it is crucial that brands choose their health benefit carefully, and also don’t also ‘over-medicalize’ the proposition, Mellentin said, agreeing that blood platelet aggregation fighting drinks such as Sirco risked doing so. Savvy communication of a brand’s one​ clear​ benefit​ is vital.

“You’ll be more likely to succeed if your product talks about a natural or intrinsic health benefit. Or if you’re using an ingredient, it’s an ingredient that people understand,”​ he said.

People also like to consume products with health benefits in as natural a form as possible, Mellentin said, adding that this is a big plus for oats since they lower cholesterol naturally.

‘Dairy owns the bone health platform’​

“If you’re launching a calcium fortified juice, then you’re setting yourself up to fail. People do not believe calcium lives naturally in fruit, and dairy owns the bone health platform, as a credible natural carrier. Look at the success of Anlene in Asia,”​ Mellentin said.

Provided that you can prove a tangible benefit and have targeted your functional niche with your, you shouldn’t forget that it will likely remain precisely that, a niche, Mellentin said.

This brings us back, full circle, to his point about unrealistic management and shareholder expectations.

“If you’re talking about bone health then you’re talking about low volume, high value products,”​ Mellentin said.

“Trying to build mass successes quickly is one of the most common reasons for failure. People evaluate success over too short a time horizon,”​ he added.

Mellentin said many beverage industry executives are horrified by the thought that an innovation might only be successful 3-5 years after launch, not in year one.

“One of the biggest mistakes that management make is saying ‘What’s happening at the end of year one?’ when most brands are performing pretty modestly,”​ he said.

“Supermarkets are jammed full of products and the world’s full of things offering health benefits – it takes a long time to get the consumer’s attention,”​ Mellentin added.