SPECIAL EDITION: R&D

Research versus marketing: The battle for investment

By Nathan Gray

- Last updated on GMT

Related tags: New product development, Finance

Investment in research and development, including new product development, is a key growth strategy in the food industry, but how does the current investment in research compare to investments in advertising current products.

In September 2010, Nestle announced that it was to open a research and development centre in India, where it would use local ingredients and spices, as well as focusing on nutritionally enhanced food for people with lower incomes. Whilst earlier this month we reported that companies including Nestlé, Kellogg, Danone, Chr. Hansen, and Fromageries Bel will work in partnership to carry out pre-competitive fundamental research into gastrointestinal health.

Marketing investment

But year on year marketing spends continue to outpace R&D expenditure in the food industry.

According to a report from the Nutrition Business Journal​, in 2006 food and personal care products manufacturers spent a total of 9.4 per cent of their revenue on marketing and advertising, compared with only 4.4 per cent on research and development.

Based on the 2009 annual reports of four of the largest global food companies, FoodNavigator.com estimates that these figures have fallen even more in favour of marketing investment.

In their 2009 annual reports Nestle, Kraft, General Mills, and Unilever, reported over €157.5 billion in sales, investing over €33 billion (over 21 per cent) of this into marketing and advertising of current products, compared to the €2.9 billion invested in research and development – representing just 1.8 per cent of all revenue.

Investment needed

Innovation and new product development are key drivers of growth in the food industry, however the European Confederation of Food and Drink Industries (CIAA) claims R&D investment in the EU food and drink sector is lagging behind the rest of the world because of investments have stagnated since 2006.

The CIAA said private and public companies need to increase spending on R&D, and support coherent EU strategies, whilst also sustaining the levels of investment needed to reach the 3 per cent envelope proposed by the EU 2020 Strategy.

“Research and development will prove crucial to the food and drink category in the forthcoming years, as manufacturers need to find ways to align with consumer need states and encourage brand engagement and consumption – particularly important as reduced shopping budgets mean that people are becoming more selective with their spending habits”​, said Datamonitor analyst Michael Hughes.

Better value?

Research and development is mainly concerned with scientific and technical characteristics of a product – like product composition, quality, stability, and regulatory constraints – whilst in contrast the function of marketing is generally concerned with commercial aspects and market identity of a product – like pricing, profitability, and positioning. So which one is the most important?

An important point is that marketing is aimed at generating further revenues in the short term, in contrast with R&D which is seen as a long term investment.

A research paper, looking at similar issues in the pharmaceutical industry (Nature Reviews Drug Discovery - doi:10.1038/nrd2923)​, addresses the question of which is the better use of money – long term investment in R&D, or shorter term promotion of existing products? They found, in general, that long term research investments have a much more positive result than increasing short term investments in advertising and promotion.

Yet, in 2009 Unilever alone invested more in marketing (€5.3 billion) than all four companies together put into research and development. But Unilever were not the biggest spenders on marketing – that was Nestle who invested 33.7 per cent of sales (over €26 billion) into marketing and advertising, nearly 18 times more than their investment in R&D (1.9 per cent of sales).

Related topics: Business

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