Distribution: The Undervalued Lever of New Product Success

Distribution: The Undervalued Lever of New Product Success

Kevin Daly

Manufacturers invest many resources when they’re developing their innovations, but distribution is arguably the most important factor that will drive a new product’s success. If manufacturers can’t make the case to retail buyers to carry their new product, they risk a catastrophic failure.

Distribution affects new product sales. This is obvious. What’s less obvious is the extent to which consumer packaged goods (CPG) manufacturers can predict and control distribution for a new product, especially during the first year in-market. Some would argue that distribution is primarily an outcome of new product quality. Others assert that distribution is easily and predictably attained. 

What does the data suggest? In looking at data for three U.S. shaving product launches in 2018, we see that there are big differences in distribution levels yet relatively the same levels of velocity.

Sales velocities (i.e., how quickly your product is selling on shelves) alone don’t explain distribution discrepancies between major brands. There are numerous examples where products generate similar sales per point of distribution, but have very different levels of total distribution. This indicates that sales velocity alone does not explain (or predict) how much distribution a product attains.

In addition, trade promotion and slotting fees don’t fully predict or explain attained distribution. While trade spend and slotting fees can be planned with certainty, there are huge gaps between the planned and actual distribution that new product launches achieve. This translates into missed financial targets.

Ultimately, you can’t explain differences in distribution for new product launches with velocity or trade promotion. So what does this mean for innovators? Retailers don’t always want the product that sells the most. They want things that are complementary or accretive to the category. 

Today, most manufacturers ask retailers to accept a new product on face validity with little analytical support and rigor. This makes innovation very risky for the retailer, but it doesn’t have to be. Manufacturers can use analytics with retail buyers to justify shelf space. This can also provide retailers with comfort and alleviate what would otherwise seem like an uncertain proposition. In our work with both manufacturers and retailers during innovation line reviews, we’ve collected four key learnings around using analytics to justify shelf space.

Learning 1

Category managers place purchase decisions into one of two broad categories: same manufacturer “swap outs” and manufacturer shelf reallocation.

With same manufacturer “swap outs,” the manufacturer asks the retailer to replace an existing product on the shelf with a new product. Category managers view swap outs as a lower risk purchase because incentives are aligned: Both the manufacturer and retailer want to maximize sales for the fixed shelf space assigned to the brand. 

Conversely, category managers re-allocate shelf space from one manufacturer to another during manufacturer shelf reallocations. This is a far more complicated and risky decision for the category manager because incentives are not aligned. In this scenario, any incremental shelf space makes the manufacturer better off, even if the new product performs worse than the competitive alternative previously on-shelf. Thus, the retailer must be more deliberate.

Learning 2

We’ve learned that retail buyers need a simple and intuitive framework for making shelf allocation decisions. By identifying in-market products that are highly substitutable with a new product, but with lower overall preference, retailers isolate an easy set of choices to upgrade their category assortment with limited risk. This has emerged as an intuitive and actionable analytical framework for making ongoing shelf allocation decisions.

Learning 3

Retail buyers view being complementary as safer than being a category disruptor.

Learning 4

There are organizational obstacles to getting the right analytics in the right hands. For manufacturer organizations, there are gaps between handing off the analytics from Insights to the sales organization—the group that will ultimately sell the innovation to retail buyers. Closing the gap is key to a successful line review.

Manufacturers are not providing category managers with sufficient relevant analytics for new product launches. The shelf is where the rubber meets the road, and there’s little reason to not think about distribution strategies with the same rigor infused in the innovation process itself. Manufacturers that use the right metrics are better equipped to meet the needs of their retail partners and gain a distribution advantage.