November, 2017

Fruits of Thought

Time Is Ripe For Innovation

Lots of things are innovative. The risk, though, is that many products are innovative because they serve smaller and more specific slices of the market. That can make someone a living, but it won’t change the world.

The truly disruptive changes typically happen on a different plain, such as structural innovations outside the industry that transform the way business is done. For example, legal changes allowing land grant universities to keep control of their intellectual property have created the Club-apple world we now live in.

The really interesting new products that flood the market may find themselves confronting another business innovation —the rise of small format stores. Most innovative products require retail support to succeed; they need shelf space; they need promotion and they need time for consumers to warm to the product.

It has been hard enough to get this support with large-scale supermarkets. Remember when Tanimura & Antle had a burst of really innovative new products about 15 years ago –there were soups and noodle dishes but unfortunately most died, not because they were bad products but because they were innovative. Tanimura & Antle did not have the marketing budget to pull these items through the supply chain by spending tens of millions on advertising to excite the consumer, and retailers never cared enough about developing these products to sacrifice short-term sales and margin in the service of convincing consumers to buy soup in the produce department.

These problems will only be exacerbated in small format stores like Aldi or Lidl. These retailers will be looking to minimize SKUs and the cost and complexity that come with handling more SKUs. So, innovation in this context can't happen with the expectation of selling more and more SKUs with each catering to more specific tastes.

On the other hand, the growth of Internet shopping and home delivery may promote more innovation. Amazon killed bookstores in no small part because no individual bookstore could carry the assortment Amazon could carry. It is what is called the long tail –everyone could sell the best sellers but on the Internet, Amazon could sell everything.

So, one could imagine consolidated warehouses providing services, such as Fresh Direct, could carry a panoply of products no individual store could justify carrying.

The question is: Will consumers like these innovative products enough to shift their shopping to the companies that can make them available?

It is a battle of visions, not dissimilar to what is still playing out in the airline industry. Airbus bet on a future in which bigger planes will be valued because hub airports will be capacity-constrained. If you must fly from Heathrow, and Heathrow can’t get permission to build a new runway, every takeoff and landing slot is precious. So, you want bigger planes. So, Airbus built the A-380. Boeing saw a future in which hub airports are less important. So instead of all the flights going into Shanghai and Beijing, they saw non-stops direct to smaller cities such as Chengdu. So, Boeing built the 787 Dreamliner.

It is in this tension between restrained but efficient consumer choice at limited-assortment small-footprint stores and the unlimited variety a centralized facility could provide for delivery that one can experience how innovation will define the industry.

Put another way, is the future going to be Cotton Candy and Witch Finger (Tear Drop) type grapes –innovative flavor and shape profiles that will appeal to specific segments of the consuming public —or is it Midnight Beauty and Autumn Crisp —improvements on a mass scale variety? Or is there room for both?

Done well, innovation drives out those who have failed to change. Proprietary varieties lead to specifications that preclude the use or sale of other varieties. Special retailers, such as deep discount, epicurean, warehouse club, supercenter, health-and-wellness-oriented, online…all of these combined can drive out the old, conventional supermarket.

Yet the modern-day supermarket was an innovation itself, combining the old butcher, baker, seafood monger, green grocer, etc., and that perhaps is the most important lesson of all: Innovation is never a battle you have won; it is just a moment in time.

But the moment at which we stand matters. The focus on innovation now is part of a sense that, in fundamental ways, the industry is changing, the consumer is changing, and the world is changing.

 To navigate in the produce business in such times is particularly challenging. Even when we can see the future, profiting from it is not easy. So, the industry in Peru is planting so extensively and upgrading Infrastructure so furiously that it will disrupt global trade entirely. Yet, this enormous boost in production might make it difficult for individual producers to thrive.

 Whatever happens to individual companies in Peru, the ports, roads, irrigation systems and vines and trees will long survive and change the world. As Thomas Wolfe explained, “You Can’t Go Home Again.”That is what innovation is all about.                                       pb