Innovation is exhausting and hard. It is so much easier to do the same old, same old and just keep delivering irrespective of the competition and the changing environment.
I heard three stories about innovation yesterday, and all three explain why the "brilliant disruption" that is occurring makes it so difficult to win for the older brands.
First, the "brilliant disruption" term came from a tutorial Indra Nooyi and Hugh Johnston put on yesterday in a tour de force conference call from PepsiCo Inc. (PEP) that moved the stock from down two on an organic revenue slowdown to up two from the low and a flirting with even despite the organic surprise. (PepsiCo is a holding of my Action Alerts PLUS charitable trust.)
The pirouette wasn't all about wizardry on the call. A lot of it was recognition that there was only one market of real weakness, and that was carbonated beverage. Of course, that's the most visible because it is the company's namesake and because it has a behemoth competitor in Coca-Cola Co. (KO) .
Plus, it wasn't really just carbonated that slipped. Gatorade had some degradation, which was explained away by weather and, to a certain degree, by a rise in gasoline prices at convenience stores, although the latter seems a little suspect because gas prices didn't rise all that much from historic lows.
What matters, though, is that PepsiCo talked about how it invested too much in some smaller brands at the expense of some of the big ones, and that a balance has to be found to keep the organic growth up if you are going to create value to shareholders -- something Nooyi feels mightily, given her stock incentive is 50 times greater than her cash incentives.
She has to find the right balance between supporting snack and beverage innovation and not losing share to Coca-Cola and Dr Pepper Snapple Group Inc. (DPS) in the beverage aisle or newcomers in the snack aisle, at the same time taking small brands to medium and ultimately larger ones. It's a quandary, and by their own admission they got it wrong.
Clorox Co. (CLX) , on the other hand, has an analyst day and its combination of innovation and purchasing of new brands plus a more organic and natural orientation approach to older ones -- witness the transformation of Burt's Bees to be as chemical-free as possible for all sorts of health cosmetics -- is giving the company more organic growth than PepsiCo, 4% last quarter at Clorox versus 1.7% for PepsiCo.
Clorox is off a much smaller base, but it is inventing new categories and spending for them. Last year the company paid $295 million for Renew Life, a supplements company, to augment its healthy offerings. You need to watch this business, chiefly its probiotic once-a-day enzyme line, because it is going to burst into the club stores in the fourth quarter in a very big way starting with Sam's Club. Clorox is going to make probiotics into a household staple because Benno Dorer, the terrific CEO of Clorox, knows that these supplements can settle the stomach into a healthy routine no matter where you go and, to a certain degree, no matter what you eat.
It's a fragmented category that's about $7 billion and growing and it is as integral as Burt's Bees and Brita to the next leg of Clorox's growth. PepsiCo is so huge that this entry would mean nothing to it,
But it could be very special for Clorox.
Finally, there is Automatic Data Processing Inc. (ADP) , the dominant payroll processing company, the one being challenged by Bill Ackman from Pershing Square. I have no idea if Bill is going to win but, like Nelson Peltz's challenge to Procter & Gamble Co. (PG) , Ackman is citing complacency and the failure to innovate and digitize as chief reasons for the company's inability to grow faster than 6%, as it did last quarter.
Automatic Data is a very well-run company, but it has been slow to innovate technologically and Ackman says it has a bloated payroll and is losing business to a more innovative and digitized Paychex Inc. (PAYX) when they go head to head.
Here's the issue as I see it. When I interview the CEOs of Workday Inc. (WDAY) and ServiceNow Inc. (NOW) , I see companies that are the real share-takers in the human resources space and that can become the real payroll players if they want to because they are cloud-based, which is inherently cheaper and better than the way things have been done before.
That's really a challenge to incumbents such as SAP (SAP) and Oracle Corp. (ORCL) . That said, though, this Automatic Data business is wide open to them and ADP hasn't been able to transfer its business to the cloud -- it is mostly on premises -- in part because, Ackman would argue, it is fat and happy. It is hard to disagree with him, even though ADP is dominant.
My point? Dominance breeds complacency. Complacency breeds business loss. ADP hasn't innovated like Clorox or PepsiCo. That's why it is being challenged.
I have no idea if Ackman will win, but I do think that his ratios, such as employee to revenue growth, are good yardsticks, and for the moment ADP isn't living up to the challenge. It can, but it's late; Clorox is early, and PepsiCo is in between. No wonder ADP is being challenged. It makes sense, even if it rights itself; it did miss out big on what Workday and ServiceNow have accomplished and I simply don't know why that occurred except a pure lack of innovation, and that's a failure that has hurt them badly even as they remain dominant in their own aisle of the financial services supermarket.
Join Jim Cramer, CNBC's Jon Najarian and Other Experts Oct. 28 in New York
Jim Cramer will host CNBC's Jon Najarian, TD Ameritrade's JJ Kinahan, famed analytics expert Marc Chaikin and other market mavens on Oct. 28 in New York City to share successful strategies for active investors.
You can join them as they discuss how smart investors can make the most of options trading, futures contracts, fundamental and quantitative analysis and great ETFs to buy right now. Participants will also get a chance to meet Jim and other panelists and take photos.
When: Saturday, Oct. 28, 8 a.m.-3 p.m.
Where: The Harvard Club of New York, 35 West 44th St., New York, N.Y.
Cost: Special early bird price: $150 per person. (Normal price: $250)
Click here for the full conference agenda or to reserve your seat now.