SKU’d Thoughts 1: Is the overvaluation of marketing stifling innovation at Big CPG companies?

When we think of innovation, consumer packaged goods companies (CPG) like Coca-Cola and Proctor & Gamble don’t immediately come to mind. Instead, we think of the Googles of the world as the innovators and rightfully so. CPG companies have a slow innovation cycle and the underlying reason is that they value marketing over research and development.

Big CPG is marketing driven. On average, there’s more money spent on marketing than research and development (R&D). Big CPG only spends less than 2% of its net revenue on R&D versus the tech industry, which spends 13%, per the graph below. This expenditure is not enough to keep up with iterating for changing consumer behavior and causes companies to become reactionary when startups pop-up and capitalize on the unmet consumer needs.

Imagine if after launching the first iPhone on June 2007, Apple decided the way to grow the iPhone business was to double down on marketing and occasionally release cosmetic improvements like different color phones. We would have no GPS, no video recording but we would have iPhones in every color of the rainbow. An upstart phone brand would have entered the market with a better phone that catered to consumers’ needs. Most CPG companies think they can keep consumers by just changing the color of the phone.

Big CPG also competes for MBA-level talent to fill their marketing departments while going the undergraduate route to staff its research and development. The former comes with much larger salaries and incentives to lure them away from consulting and investment banking opportunities. Imagine if Google was paying their marketers more than their software engineers, the most talented engineers would decide to work elsewhere and innovation at Google would be stifled.

Big CPG marketers are compensated more than that of their R&D counterparts, according to a recent data analysis I conducted. I analyzed marketing and R&D salaries from 22 CPG companies who account for ~50% of the global CPG net revenue. The data reveals marketers get paid ~25% more than their R&D counterparts; with marketing salaries ranging from $72K — 115K and R&D salaries falling between $58K — 102K. If Big CPG has a well-compensated R&D workforce, they will attract the best product developers who will be motivated and in tune with emerging technologies within the space.

Addressing the overvaluation of marketing in comparison to research and development in Big CPG will be a step in the right direction. Increased investment in R&D will facilitate a shift in focus from marketing to innovation. In addition to serving their consumers better, there is a long-term financial implication for mergers and acquisition activity within the space (more on this in a future blog).

Cross-posted on Medium.