"Innovation" is a word marketeers love. It carries with it the joys of creativity, entrepreneurship, the hope that one may revolutionise a market and leave a mark... But before starting an innovation project, what is THE first question to answer? It's all about SIZE.
Imagine you work in a beverage company (wine, spirits, beer...). You've seen the cut throat competition to gain share and profit. And this year's tariff wars or pandemic did not make things easier. You've also read about trends and envy the success of many Craft brands... So, it is decided, you will put together a team to drive a superb innovation project, and you can already imagine the bottles, labels, names, liquids, the stories...
As the day of the first innovation meeting approaches, what should be on top of your agenda? A Brainstorm? A SWOT ? No, the first thing to start with, is to define AND to create alignment on the project SIZE, i.e. how big do you want this innovation to become in the future. Indeed, in innovation, size does matter and shapes every aspect such as:
Development Scope: answering the question about desired SIZE (or ambition) means defining an actual number. Are we talking about 5 000 or 100 000 cases in 5 years? And yes, it is hard to come with a figure, but consider this: if the project is about selling a few thousand cases, it is relatively easy to source liquids (e.g. whisky, gin, wine...) with some flavour specs, a pack in a standard (good looking) bottle, decorated by (inexpensive) designers. And if your route to market is decent, these few thousand bottles will eventually sold in time. But who says small volume, says small profit.
Source of Business: on the other hand, if the innovation ambition is to go for a 100 000 cases mark, then the name of the game if different. Because at this size, the innovation project will need to answer another question : where will it source its volumes? Here, there are 2 options: a) within the same category where the innovation is intended to play, or b) outside the category, e.g. from rum to a whisky. This in turn has huge implication because the ideas developed will need to convince your target audience to switch to your innovation. For instance, what can your whisky do better than rum to attract rum drinkers... ?
Reinvestment and Profit: Every business needs to make a profit to survive. We are not downplaying the importance of a company Mission or Social / Environmental responsibility, but without profit, the above is not possible. So the size of an innovation, its corresponding P&L, ROI, Break Even and Scenarios need to be assessed and planned. This in turn will inform the development investments, cost of goods, net revenue, advertising & promotion, overheads AND possible market geographies.
Next chapter: assuming all goes well and the brand reaches the planned size in 5 to 10 years, questions on the brand's future will arise, namely, should you keep it or sell it? If this innovation is your life's calling, you may want to keep it in house and grow it. But some may want to sell it at a strong multiple to recoup the initial investment.
In the past years many new to world innovations in drinks came from small to medium entrepreneurs, which largely contributed to the "craft" idea, thus showing that the entry barriers in the drinks industry have dramatically fallen. On the other hand, large corporations seldom innovate from scratch because of competing priorities, large portfolios, lack of flexibility or organisational complexity. Instead of that, they line extend existing brands.
So how does this relate to the question of SIZE? A closer look at recent acquisitions suggest there is a volume sweet spot between 50 000 and 100 000 cases. At this size, an innovation in drinks has found its audience and major players will show interest for an acquisition, putting the original developper in a strong bargaining position. So again, defining a desired SIZE for an innovation allows to plan for the future.
In this article we wanted to shed a business light on the innovation process to complete the classic considerations on trends or process which. In this respect, answering the question on desired SIZE seems a no-brainer, but is a key step as it will shape the innovation brief itself, the resources and expected return, whether the innovation stays in house or is sold.