Nestle announced that it is to establish a new regional hub for innovation in beverages. The new hub, staffed by a team of technical specialists will be located at the companies R&D Centre in Singapore. The aim of the new innovation hub is to develop new product concepts based on local tastes and prefences for local and wider regional distribution. Nestle has a strong business in coffee mixes worldwide and is especially strong in Asia Pacific.

R&D is a key driver of sales growth in the CPG industry, but returns from investments in R&D and innovation have been falling. This has led to further cuts to R&D budgets, making breakthrough innovations (which typically have higher returns than incremental innovations) even less likely, leading to lower returns still. This downward spiral in R&D investment is not the only problem. A rigid adherence to orthodox approaches towards innovation, which once served the industry well, are now holding back innovation as they lead to large numbers of undifferentiated innovations hitting the shelves of retailers.

However, major changes are afoot. The advent of open innovation seems to offer a magic bullet solution; it can both improve innovation and simultaneously reduce costs. Certainly the larger, global, players have been quickest of the mark in adopting open innovation approaches, and smaller companies risk being left behind. But open innovation itself is only part of the puzzle - it needs to fit in with a coherent set of innovation strategies and approaches in order for it to work in the long term.

The multitude of approaches available also makes deciding upon innovation strategy (and surprisingly this basic step is often not given enough attention) , approaches and processes increasingly difficult. This report examines what the latest strategies and approaches are, what is required in order to execute them effectively and crucially assesses the areas where companies need to tailor approaches to fit their own company's needs and drive future success.

Orthodox approaches to innovation in CPG companies are leading to most new launches being incremental innovations which are poorly differentiated from other products in the market. The CPG industry invests relatively little (as a percentage of sales) in R&D compared to many other industries. This is despite breakthrough innovations (which typically require greater levels of investment than incremental innovations) offering higher returns. Breakthrough innovations accounted for just 1.5% of all product launches over the last three years. A changing innovation environment is creating many challenges to innovation.

Author: Paul Chapman, Analyst