New product launches can be hugely successful, whether introducing new types of power drinks, chewing gum or soaps and moisturizers.
However, the launch of new foods or health and beauty items can be financially risky too—studies show 70 to 80 percent of new products fail.
While retailers often push manufacturers to invest in creating new products as a way for retailers to offer wider selections to customers and stay competitive, it’s the manufacturers who bear the brunt of costs and risks, says David A. Griffith, Iacocca chair and chairman of the Department of Marketing.
“Manufacturers invest in R&D [research and development], consumer research, product development, and then they launch it through their channel partner,” he says. “The real question is, are manufacturers being rewarded for their investments? That is what we wanted to find out.”
Griffith examines reciprocal value sharing in manufacturer-retailer relationships in a new article being published in Marketing Letters. The study, exploring whether retailers are giving manufacturers a greater share of the value created for introducing successful new products, is co-authored by Tereza Dean of Ball State University and Roger J. Calantone of Michigan State University.
The researchers surveyed more than 200 retail managers for food, health and beauty items and requested they consider in their responses a single manufacturer with whom they had been doing business for at least three years.
Respondents’ median retail sales were $10 million, and median number of employees was 300. On average, respondents reflected on manufacturers with whom they had done business for 15 years and who had received 39 percent of retailers’ business in their selected category.
“We found that the retailer does look at its relationship with manufacturers as a long-term partnership, but primarily work to value the manufacturers who are able to introduce successful products. They reciprocate by giving the manufacturer greater margin shares,” Griffith says. “That was one of the big takeaways.”
“Retailers are selective in value sharing. They are strategic about it. While pushing manufacturers for new product is central to their aim, they are truly looking for partners who can continuously innovate successfully.”
The researchers also looked at two strategic decisions often made by manufacturers in connection to the introduction of new products—how innovative the products are, and how frequently they are brought to market.
“One of the things we really wondered is, when a manufacturer introduces something that's very, very innovative [think, self-driving cars], whether that is going to influence the main relationship and new product success enhancing value sharing,” Griffith says.
If consumers aren’t too familiar with the product, there’s more risk to the retailer that it will sit on shelves. If a retailer can’t move a product, it has to run sales, which reduces their profit margin. So, retailers are cautious about sharing value, even if the manufacturers have been successful in the past, he says.
“We found that the reciprocity effect...is suppressed or dampened because of the increased risk taken up by the retailer when the products are really innovative,” Griffith says.
It also matters how often new products are introduced. According to the study, successful manufacturers who introduce new products frequently are rewarded more by retailers than successful manufacturers who innovate less frequently.
“The argument is based upon the hit rate of successful products being high,” Griffith says. “When a retailer is able to provide a continuous stream of innovative, creative products to its customers, it makes the retailer more exciting and attractive in the marketplace.”
Griffith says it’s critical for manufacturers to know their efforts are being rewarded and that retailers view them as partners, especially when the retailer is putting significant pressure on the manufacturer to innovate. He says the research also suggests that manufacturers would be wise to have a mix of products in their portfolios, especially in product categories such as health and beauty where the margins are high.
“You can have some highly innovative products,” he says, “but our research suggests that you also need some less innovative products within your portfolio. It is the success of a manufacturer’s overall product portfolio that will enable it to develop strong retailer partnerships.”
This story appears as "The Give & Get of Business Partnerships" in the 2018 Lehigh Research Review.