The need for food companies to be more innovative is a constant theme of planning and growth policy for the agri-food sector in Ireland. There is increasing consumer demand for new products with enhanced nutritional or dietary capabilities in which Irish companies are heavily invested.

Moreover, the agri-food sector is constantly told that other sectors such as the IT-communications, pharmaceuticals and medical devices sectors are more focused and more capable in the innovation space.

A major part of the Foodwise 2025 report is focused on innovation. Indeed, the point is emphasised again and again that Irish food companies should make better use of the domestic market as a platform for the launching and test marketing of innovative consumer foods products. Another myth that is often put out there is that it is the lack of ambition from Irish food companies that serves as a key barrier to innovation.

It couldn’t be further from the truth. In practical commercial terms, one of the biggest barriers to innovation is supermarket buying power and in particular the use of own-label products to undermine innovation.

Furthermore, looking at those companies in other sectors that are most successful at innovation, they do not have a market structure where the product will be either sold below cost or imitated by a cheaper own-label version.

If supermarkets controlled the smartphone sector or the pharma sector, Apple might not have got beyond the first iPhone

While Apple has to compete with Samsung and others in the smartphone sector, its latest iPhone cannot be sold below its Apple-mandated price nor is it required to produce a Tesco iPhone for sale at half price or less to compete with itself.

The reality is that if supermarkets controlled the smartphone sector or the pharma sector, Apple might not have got beyond the first iPhone. And while we might have very cheap Disprin, we would most likely not have any breakthrough cancer drugs.

When we look at the food sector, it really is like comparing apples and oranges.

In contrast to the smartphone or pharmaceutical sector, dominant buying power in food and grocery is both squeezing producers’ and manufacturers’ margins and stifling innovation.

Let’s look at the life cycle of an innovation project in the agri-food sector. A typical large food company will spend anything from €2m to €6m in developing, researching and test-marketing the product.

The next step is to get the product listed with the one of the four major supermarkets that control 80% of food and grocery spending in Ireland.

The supermarket will insist on being paid to list the product. The cost of listing will be based on the profit made on the product being replaced by the new product. Typically, this is two years’ profit up front minimum, plus a binding requirement to get an enhanced return on the new product.

The food company will have to pay for all in-store marketing and all advertising for the product including across all media. Clearly this is a costly proposition given that the success rate for new products can be as low as 20%.

However, the real kicker and largest barrier to innovation is the requirement that the food company will provide to the supermarket an own-label version of the innovative product after a two- to three-year period, which the supermarket will sell at a much lower price than the food company’s branded offering.

What this means is that if the food company is fortunate enough to have developed and backed a winner and developed a niche product or new product category, any profit on the new product must be shared with the supermarket through the own-label provision.

So the supermarket which provides only the shelf space at the end of the innovation cycle not only doesn’t share the investment risk but insists on sharing the investment return.

20% success rate for new products

This clearly does not happen with smartphones and the result is a thriving industry that is constantly introducing new and innovative products.

Clearly the cost and business risk associated with investing in innovation in consumer food products is not for the faint-hearted. In reality, only a Nestlé, Unilever, Mars or Danone, can support innovation by being big enough to absorb this level of cost or big enough to refuse to provide the own-label version until a sustainable market platform for the product has been allowed to develop.

So abuse of dominant supermarket buying power is in reality a major disincentive to innovation for all but five or six multinational food brand companies across the EU.

From an Irish national policy development perspective, what is required here is that the agencies supporting investment in innovation in food like Enterprise Ireland understand that it is not lack of ambition but excess risk that is curtailing investment.

The best way of ensuring that food companies are as innovative as pharmaceutical and IT companies would be to allow them the same ability to secure a return on investment.

Furthermore, in a more joined-up policy world, the Government department responsible for supporting jobs and innovation would look at its own role in regulating fair trade in the food and grocery sector and recognise that jobs and innovation are both being stifled by dominant supermarket buying power.

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