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Wall Street Investors Demand ROI - Return on Innovation

Return on Innovation (ROI), and not Return on Investment is the new demand (and expectation) of Wall Street Investors.

July 12, 2011 by Darrel Suderman — President, Food Technical Consulting

As a restaurant business consultant, I receive calls monthly from Wall Street Investors asking my opinion on the state of new product innovation of various restaurant chains – and many times I hear a sigh of disappointment when I state the truth about which chains are not showing product innovation. Those investors represent a large scope of hedge fund managers, angel investors or buy-out companies. Whether these investors represent debt fund financing or just investors looking for short-term or long- term valuation increases, they are increasingly asking for my assessment of restaurant chain's "new product innovation strategy and platform." It was once rare for investors to ask in-depth questions about new product innovation, but now those questions are common. And I am not sure CEOs and CFOs understand that these questions are being asked behind their backs.

ROI or Return on Innovation

Return on Innovation (ROI) is the new term used to describe the product development pipeline business health of a restaurant chain. To this point, investors are asking the following detailed questions:

1. What is your assessment of current new product innovation strategy?
2. What is your assessment of current, imminent or planned new product promotions?
3. What is your assessment of a new product promotion vs. the promotion of a competitor in the same market segment?
4. Has this restaurant chain demonstrated a "culture of innovation" within the past few years – including its executive team?
5. What new innovation strategies would you recommend for this restaurant chain?
6. What valuation would I place on a particular restaurant chain's new product introductions and innovation projects?
7. What is your assessment of the R&D executive leadership and project team innovation track records at their current and previous employments?

The Importance of ROI Valuation

Until recently, most investors were primarily concerned with flow through gross profit margins, and then capitalized their investment projection on that steady stream of cash revenue unique to the restaurant industry. But in a declining sales environment, investors want to protect their downside sales risk. In other words, investors are looking for an additional layer of revenue profit – and I don't blame them! If they can turn up the heat on a CEO across the board table with a new product innovation question or two, then why not when it increases their investment return.

It is also important to note that new product innovation has the potential to pay for new product innovation "training costs", and return a handsome valuation increase. In other words, there is no downside to investing in the implementation of a solid new product innovation process. The return on innovation investment probably represents high valuation multiples.

Calculating and Managing ROII Valuation

Since new product innovation has proven to increase a company's market cap value (Apple for example, as well as a few social media companies), it's simple to calculate several sales increase scenarios and then add a higher profit margin (minus start-up costs). That profit projection over the first five years of sales growth can provide the contribution to innovation profit growth. And if a restaurant chain employs activity-based costing (ABC) at the manufacturing level to its new product introduction, it can demonstrate further valuation confidence to investors

The Food Innovation Institute successfully held its most recently food innovation business process class at Johnson and Wales University in June. One Director of R&D at a major food processor emailed me the following week and stated that he benefited greatly from the class and that the company was already using the innovation demonstrated in the class. In addition, FII has partnered with Business IQ LLC Business Intelligence (BI) consulting company to provide return on innovation investment (ROII) and activity-based costing (ABC) analytics to the restaurant industry.

So get used to the new ROII – Return on Innovation Investment!

The Food Innovation Institute now offers food innovation workshops and executive leadership training on food innovation at Johnson and Wales University in Denver, CO. For more information contact Dr, Darrel Suderman, President of The Food Innovation Institute at dsuderman@foodbevbiz.com (www.foodbevbiz.com).

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