Innovation in the UK Retail Sector - Nesta

Report for 

NESTA 

December 2007 

Innovation in the UK Retail Sector

Preface 

Oxford Institute of Retail Management (OXIRM) 

Authors 

Innovation in the UK Retail Sector 

The Oxford Institute of Retail Management (OXIRM) is a leading centre of retail 

studies based at the Saïd Business School, University of Oxford. OXIRM was 

created in 1985 to relate sound scholarship to the practical needs of retailers, 

service companies and public sector agencies. It undertakes management 

development programmes for companies, conducts research with direct relevance 

to practitioners and acts as a centre for education and networking activity. 

Latchezar Hristov and Dr. Jonathan Reynolds 

Latchezar Hristov is a senior lecturer in marketing at Sheffield Hallam University and doctoral 

researcher in the area of management and innovation at Saïd Business School, University of 

Oxford. 

Dr. Jonathan Reynolds is a lecturer in management studies at the University of Oxford’s Saïd 

Business School, and Director of the Oxford Institute of Retail Management. 

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Contents 



0. Executive Summary 4 

1. Introduction 8 

2. The nature and contribution of retailing as a sector 9 

a. The size and growth of the retail sector 

b. Drivers of change 

3. What are the distinctive characteristics of retail innovation? 16 

a. How different is retail innovation? 

b. Selected characteristics of retail innovation 

i. Retailers as innovation hubs 

ii. The low appropriability of the retail environment 

iii. Predominance of non-technological innovation 

iv. Hybrid characteristics of retail innovation 

v. Retailers’ reverse innovation cycle 

4. How do retailers think about innovation? 26 

a. Strategic retail innovation 

b. Operational retail innovation 

c. The retail innovation pyramid 

5. What drives retail innovation? 34 

a. External to the retailer 

b. Internal to the retailer 

6. What are the barriers to retail innovation? 43 

7. What are the measures of retail innovation? 47 

a. The extent of measurement 

b. Types of measures 

c. Levels of application 

8. Recommendations to stimulate and support innovation in retailing 54 

a. Promoting innovation 

b. Facilitating barrier reduction 

c. Fostering skills and organizational innovation 

d. Promoting innovation in sustainability 

9. References and further reading 74 

Appendix 1: Research Methodology 78 

Appendix 2: Glossary of Terms 

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Executive Summary 


1. In the current discussion on the stimulation of innovation in services, the practice of innovation in 

retailing is poorly understood and inadequately measured. And yet retailing is the eighth biggest sector 

of the world economy in terms of total market value and accounts for 7% of total value-added and 

10% of the UK’s working population. The retail sector makes direct contributions to GDP and 

employment, but also makes indirect contributions to demand and economic growth through its work 

with suppliers and business service firms, as well as to the UK’s social and environmental 

performance. Innovation by retailers plays a critical role in allowing the sector to make these 

contributions. The 17th annual edition of the UK’s R&D Scorecard notes that Tesco and Marks & 

Spencer are amongst the UK’s ‘R&D leaders’ and ‘fastest growing R&D spenders’ respectively. 

2. However, conventional measures of innovation suggest that the retail sector scores relatively lowly 

compared to sectors such as pharmaceuticals, biotechnology or knowledge-intensive based services. 

40% of UK retail firms claimed to be ‘innovation active’ in 2005. Whilst these results are not 

dissimilar to those for many other service sectors, it also suggests that conventional measures of 

innovation may not capture the full picture. Is there less innovation in retailing, or do retailers 

innovate differently? 

The distinctive characteristics of retail innovation 

3. Our research suggests that innovation in retailing has several distinctive characteristics which are not 

easily captured by conventional measures of innovation. Firstly, retailers are acting as innovation 

broadeners in the value chain, or innovation hubs, deciphering existing or impending consumer needs 

and communicating them upstream to suppliers. Secondly, the retail environment is one in which 

innovations can be easily copied. Such a low appropriability environment causes innovating retailers to 

work differently, perhaps starting small, or working incrementally, before rapidly scaling up hitherto 

hidden innovative activities. Thirdly, much retail innovation is non-technological in nature. Whilst 

technology is important, it has a smaller role in relation to innovation than in other sectors. Fourthly, 

however, some retailers have hybrid characteristics which can make them more than purely service 

businesses. Some retailers are vertically integrated (such as Zara or Migros). Others may exhibit a 

‘manufacturing’ approach to product innovation – for example, in relation to own brands. Finally, 

retailers can experience a reverse innovation cycle, where – unlike in manufacturing – financial and 

organizational costs attached to innovation are low at the beginning and high at the end, following 

perhaps an extended roll-out. 

4. Retailers recognise the crucial role of innovation for the performance of any retail business, but 

attribute a real range of meanings to the term, which may contribute to under-reporting in surveys. 

Whilst innovation is seen by all as a necessary means for survival and growth, how to stimulate, 

manage and measure it is a matter of organizational choice. Retailers make the distinction between 

strategic retail innovation and operational retail innovation. Strategic innovation represents more a radical 

departure from ‘business as usual’, (developing a wholly new online offer, or a new format) whilst the 

majority of operational innovation comes from what many prefer to call ‘newness’, or a ‘stage below 

innovation’. Such innovation is inevitably incremental, and might include anything from the extension 

of own brand ranges through to experimentation with checkout queue management techniques. 

Further, retail innovation appears to occur in three main applications areas: offer-related, (in product, 

service category, channel or format), support-related (technology, systems and the supply chain), and 

organization-related (providing innovative management and delivery frameworks for the previous two). 

The drivers of retail innovation 

5. There is broad agreement amongst retailers as to the drivers of innovation within the sector: both 

those external and those internal to the firm. As might be expected from a customer-facing industry, 

the most significant external driver of retail innovation is the customer. One-stop shopping, the dollar 

store concept, in-store theatre, multi-channel retailing, fast fashion, EDLP or more holistic customer 

centricity initiatives are all innovative responses to changing consumer trends. Growing international 

competition coupled, with continued industry concentration and the disruptive effects of the Internet 

on consumer demand and shopping habits also invariably affect the way in which and the pace with 

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which retailers innovate. In terms of internal drivers, the majority of retailers think that strategy drives 

innovation in terms of its direction, the resources available for it and the timelines devoted to it, since 

innovation often requires sustained support. Many also talked about ‘the will to implement new ideas’ 

being as important as the ideas themselves and highlighted the role of the vision and leadership of 

senior management as ‘entrepreneurs of the business’ and in creating a culture within innovation 

could flourish. 

Barriers to retail innovation 

6. The majority of retailers do not perceive there to be any barriers to innovation within their businesses. 

Amongst those that do, the biggest barriers are reportedly in relation to costs, in particular the cost of 

finance and the perceived economic risks of innovation (especially for SMEs). Shortages are seen in 

relation to technical, leadership as well as project management skills. The majority of retailers claim to 

know their markets well and to have little concern that lack of knowledge about technological 

possibilities works to prevent innovation. In relation to regulation, the majority of retail firms report 

no experience of barriers preventing innovation, although a number of specific issues do emerge. 

These include: the availability of allowances for mitigating some of the risks of innovation, as well as a 

lack of a common agenda across Government to stimulate investment in sustainable innovation, 

which often results in conflicting outcomes on the ground for firms. 

Measuring retail innovation 

7. Innovation needs to be measured in order to be successfully managed. Retailers tend to focus most on 

short term tangible performance outputs, based on cost benefit analysis and captured through 

traditional measures of performance but much less on the longer term commercial impact of 

innovation as a value added activity. Measures are adapted from existing KPIs, rather than being 

innovation-specific, since retail innovation is often incremental and dispersed across different 

divisional budgets. The vast majority are financial are relate to sales and market share impact, rate of 

return and measures of profitability. Retailers also recognise that the soft benefits of innovation - in 

terms, for example, of brand value, or total impact on the business - are less well measured, due to 

limitations in management accounting systems, but some progress is being made in tracking the share 

of new activities in the broader context of the business, including customer perceptions about the 

retail and its brand. 

Stimulating and supporting innovation in retailing 

8. Governments around the world have recognised their responsibility for supporting and stimulating 

innovative activity by firms. Similarly, however, many governments have also historically shared a 

preoccupation with the manufacturing sector over services, and support for technological over nontechnological 

forms of innovation. This is now changing and the present UK Government initiative 

into Innovation in Services forms part of this broader response. Existing Government policies 

towards innovation can be adapted to the needs of service sector firms in three particular ways: 

• Deepening of existing policy (making innovation policies more ‘service-friendly’); 

• Broadening of existing policy (recognising that innovation within the service sector are more 

likely to span firms as well as whole value chains); and 

• Horizontalisation of existing policy (recognising that other policies not explicitly designed to 

stimulate innovation may – indirectly – improve the climate for service sector innovation.) 

9. We identify four distinct areas of policy focus which provide the basis for our recommendations: 

a. Provision of support mechanisms for retail innovation; 

b. Promoting innovation in sustainability by the retail sector; and 

c. Fostering skills and organizational innovation in the retail sector. 

10. We also make recommendations for those areas in which the Government might better focus and 

communicate existing activity, in addition to potentially providing new stimuli which might matter 

particularly to retailers because of their commercial benefits. 

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Recommendation 1: 


Improve the effectiveness of innovation-related support activity within Government. 

This will require: 

• A more systematic approach to co-ordinating information & expertise in Government & NDPBs 

which mimimises bureaucracy and improves access. The provision of a ‘one stop shop’ hosting 

information on initiatives, support and services available to the sector, especially to SMEs. 

• A better mechanism for identification, prioritising and channelling of commercial, innovation-related 

initiatives and research to firms (a ‘single voice’). 

• Encouragement of longer term horizon scanning that is more relevant to retailing: facilitating the 

showcasing of new ideas with commercial potential and supporting projects ‘on the margin’. 

Government should identify an appropriate mechanism or intermediary to channel innovation-relevant 

initiatives simply and efficiently to the correct individuals within the sector and to prioritise those of most 

commercial relevance to the sector. Evidence that the sector was responding with purpose and conviction 

to any integrating efforts by the Government would be an important demonstration of commitment. 


Increase the awareness and take-up of R&D tax credits by the retail sector. 


• Identifying and prioritising the kinds of activities undertaken by retailers and by suppliers on their 

behalf which might qualify for support under both large business and SME schemes. 

• Improving awareness of the schemes and of these priorities amongst retailers, particularly retail SMEs 

outside London and the South-East. 

• Improving the speed and transparency of the application process to reduce uncertainty. 

• Investigating the extent to which, without diluting the existing mechanisms, the R&D tax credit 

scheme might be both deepened and broadened to benefit service innovation 

Government should work with retailers and key third party suppliers to clarify the kinds of activities 

undertaken by and for retailers which would qualify for tax credits and to examine ways in which the 

application and inspection process for tax relief on such activities might be further streamlined. 


Promote innovation by retailers in sustainability. 

Eight specific measures which might act as stimuli for innovation in sustainability have been identified by 

the sector: 

Provision of support mechanisms 

• VAT reductions to stimulate green product innovation, 

• Business rate relief on energy efficient buildings, and 

• Encourage development of shared waste facilities by SMEs. 

Reduction of barriers 

• Faster and easier planning regimes for sustainable technologies relevant to retailing 

• Fostering a standards-based framework to manage sustainability and reduce uncertainty and risk 

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• Working towards identifying sustainability metrics, requiring retailers to publicly report on their 

achievement. 

Fostering of skills 

• Building environmental awareness amongst retail staff 

• Training for low carbon technology skills to support growth in retail initiatives 

The Government should work with the retail sector in identifying and disseminating priorities for 

innovation in sustainability. This should occur through the development of a meaningful framework for 

action, including the provision of evidence for the effectiveness of funding incentives, priorities for barrier 

reduction and any skills shortages or gaps which can be addressed at the national or regional level. 


Identify and support the complex sets of skills required for retail innovation. 


• Provision of innovation awareness training amongst employees 

• Provision of ‘management of innovation’ skills training 

• Provision of cross-sector technical skills training capability and, for SMEs, 

• Development of innovative approaches to areas such as product buying and presentation for SMEs 

• Provision of an integrated support structure for retail SME skills and mentoring at the local level 

which further reduces present duplication. 

The Government should identify the lead co-ordinating agency on retail skills at the local level. It should 

take further steps to better integrate the work of the existing relevant agencies to meet both large and 

small retail business requirements in relation to retail innovation skills. 

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1. Introduction 


1.1 There is a broad consensus that innovation deals with the successful exploitation of ideas 

which leads to sustainable economic growth. However, the precise meanings, practices, 

measurements of and potential support for the innovative activities of firms largely 

depend on the context in which they occur. The present Innovation in Services initiative 

recognises that innovation in services may be different in its nature, incidence and 

measurability than that in more tangible sectors of the economy, and that different 

actions and policies may be required of Government in support of service sector 

innovation. What, then, of innovation in the retail sector, one of the largest in terms of 

value added and employment within the UK service sector? Retailing is considered to be 

a service but is, of course, a hybrid economic activity performing a bridging role between 

production and consumption, in which firms bring together assortments of goods 

relevant to the needs of consumers. Yet the nature of innovation in this important sector 

is often poorly understood and inadequately measured. 

1.2 Over the last forty years, UK retailers have become much more active in their own right 

within the value chain. Indeed, large, professionalised, organizations now run most of the 

retailing in western economies and are now coming to do so in emerging economies. In 

addition to being substantial commercial enterprises, such retailers have also become 

trusted brands with, in some cases, retailers’ own label brands being regarded as of similar 

or higher quality than those of branded manufacturers. Now retailing is the legitimate 

focus of business strategy, marketing, operations management and other conventional 

business disciplines. How do such companies innovate, and what kind of innovation 

matters for such firms? How do small and medium-sized enterprises – firms which 

contribute to the vital entrepreneurial ‘froth’ of the sector - undertake innovation? 

1.3 This report has been commissioned by NESTA to examine innovation in the retail 

sector. It seeks to answer the following questions, using a common format and structure: 

• What is the ‘innovation that matters’ in the sector? 

• What is driving this innovation? 

• What are the barriers to further innovation? 

• How is this innovation evidenced within the sector, and how might this inform the 

development of new metrics and tools for benchmarking innovation performance? It 

finally considers and makes recommendations for: 

• The role for Government in supporting these particular forms and systems of 

innovation to create greater economic and social value 

1.4 The report combines findings from a variety of sources. It analyses for the first time the 

retail-specific responses to the most recent Community Innovation Survey. It draws upon 

selected insights from a series of in-depth interviews and discussions conducted by one of 

the authors as part of his doctoral research with over 50 senior retail executives and other 

industry experts from over 30 retail businesses, consulting firms and industry associations 

(within the UK and elsewhere) on how they define, encourage and manage innovation. It 

brings together a wide range of secondary material dealing with innovation (examining its 

relevance through a retail lens). It reviews existing Government activity in this area. 

Finally, the report makes recommendations on the particular ways in which Government 

may improve the effectiveness of its stimulation and support of innovation within the 

sector. 

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2. The nature and contribution of retailing 

a. The size and growth of the retail sector 


2.1 Retailers were once seen as ‘downstream resellers of products’, simply ciphers in 

manufacturers’ distribution channels, intermediaries whose only role was to enable the 

flow of goods and services between suppliers and consumers - and who were of 

themselves incapable of innovation. This conclusion could be attributed partly to the 

dominant nineteenth century view that manufacturing rather than services provided the 

primary motor of economic growth and partly to the fact that in many developed 

markets, until the early 1970s the retail industry was fragmented, mainly consisting of 

single-store and smaller chain retailers. 

2.2 This is a view, curiously, reflected until very recently in the way in which innovation is 

defined and measured. As little as fifteen years ago, the late Keith Pavitt (1984) in seeking 

to explain variations in the nature and impact of innovation between sectors, in terms of 

their contribution to technological change 1 , suggested that innovation in retail firms was 

essentially supplier-dominated. Firms in the sector, he suggested, were passive adopters of 

supplier technologies rather than more active non-technological innovators. Such views 

have been strongly contested, but have become embedded in policy. According to 

McGoldrick (2002, p.2) it is equally, if not more, realistic to talk about ‘channels of 

supply’ within a retailer-centred vertical marketing system. 

2.3 Indeed, today, retailers are no longer hired links in a manufacturer’s supply chain but 

comprise an independent market, the focus of a large group of customers for whom they 

buy (McVey, 1960; Spriggs, 1994; Reynolds, 2004). They provide readily identifiable 

locations where final consumers enter into the transactions by which they acquire goods 

and services sourced by the retailer. In addition, they provide support services of various 

kinds. As such retailing is an extremely significant economic activity which bridges 

production and consumption and affects most of the population every day (Burt, 2003). 

It is the eight-biggest sector of the world economy in terms of total market value 

(Financial Times, 2006). Whilst as recently as 1990, there were no retailers in the US 

Fortune 500, by 2006 Fortune reported that nearly one fifth was now made up of general 

merchandisers, food & drug store and speciality retailers alone (Fortune, 2006). 

2.4 In the US, retail trade accounts for 9.2 % of the GDP and employs 17.4% of the total 

working population (Hristov, Cuthbertson et al., 2004). In the UK the sector represents 

7% of total value-added and employs 2.6 million (10%) of the total working population 

(Burt, 2003). In 2006 general retailing was the UK’s eighth biggest contributor to value 

added. Tesco is the biggest UK private employer (240,000 employees) (FT 500, 2001), the 

twelfth biggest individual contributor to value added and among the eight fastest growing 

UK companies (DTI, 2005; DTI, 2006). 

1 Pavitt’s essentially manufacturing-led perspective distinguished among three main types of firms; (1) supplier dominated (2) science-based, (3) 

production-intensive firms. 

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Table 2.1. Key indicators of UK retail performance and economic 

contribution, 1990-2006. 

Sales (£mn) 

UK 

GVA (£mn) 

Index of Services 

(Retail trade) 

Enterprises 

Employment (**) 

1990 

£ 159,519 

n/a 

n/a 

n/a 

2,101,882 

1995 

£ 171,535 

£29,598 

73.8 

209,386 

2,146,940 

2000 

£ 207,168 

£49,415 

86.4 

214,876 

2,978,000 

2006 

£ 255,438 

(*)£60,507 

112.5 

(*)201,420 

3,109,000 

90/95 

8% 

n/a 

n/a 

95/00 

Source: Office of National Statistics, 2007, 2003, 2000. (*) 2005 data; (**) Average during the year 

n/a 

2% 

21% 

67% 

17% 

3% 

39% 

00/06 (*05) 

23% 

(*)22% 

30% 

(*)-6% 

2.5 The contributions of retailing can be seen as economic, social and environmental in their 

nature. From an economic perspective, retailers make both: 

• Direct contributions towards GDP, employment and the supply of vital products 

and services to the population which stimulates demand and economic growth. 

(The output of the sector is considerable (see Table 2.1) and stretches across the 

whole services-to-goods continuum with offerings ranging from intangible-dominant 

‘pure’ services such as insurance or internet access, to tangible-dominant physical 

products such as food or furniture); as well as: 

• Indirect contributions, which are less easily recognised and work in the form of a 

multiplier effect. 

(For instance, by developing new services, new formats, new products, or new stores, 

retailers stimulate demand not only for goods for re-sale but also for a wide range of 

intermediate inputs which they may buy from other industries to produce their output 

and which stimulate business activities and employment outside the sector. Such 

inputs may be in the form of transportation and construction services, consultancy, 

ICT, advertising and other business services. Similarly, efficiencies and productivity 

gains within the sector create the potential for retail price deflation which in tandem 

with increases in consumer real income stimulates consumer spending and has a 

positive effect on economic growth (Hristov, Howard et al., 2004). 

“Between us, we've achieved a revolution in shopping over the past 10 years. The price deflation we've 

pushed through in clothing has even forced down the overall rate of inflation, which is pretty major 

stuff.” (Andy Bond, CEO, Asda) 

2.6 However, retailing has a role to play not only in economic but also in social terms. 

“Branding is the dominant strategy around which retail competition is structured. In the case of the retail 

sector, products, ranges and the company itself may be branded.” (Pettinger, 2004) 

Some retail brands (not always the largest) perform as cultural innovators, creating or 

assisting in the creation of trends for new products and services; or making such products 

and services more widely available to larger sections of the population. For example, 

4% 

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clothing retailer Zara’s quick response, vertically integrated business model made an 

opportunity of the transience of fashion to create distinctive competitive advantage, 

whilst Marks & Spencer’s growth of its Simply Food smaller format store was explicitly 

designed to bring ‘convenience foods to more convenient locations’. A retailer with 

strong brand equity will be able to convey clearer value to customers which in turn will 

provide a more rigorous basis for innovation within the firm. 

2.7 Finally, as in other sectors, retailing has also needed to come to terms with the 

contemporary challenge of the ‘triple bottom line’, where innovation has to service the 

need for environmental – and not just economic and social - performance. Partly because 

of their position in the value chain, in being closest to the consumer, retailers have also 

become reference points for their customers with regard to topical socio-economic or 

lifestyle debates about the environment, health, nutrition or fair trade. It is also in the 

nature of retail businesses to strive to understand their customers and to quickly respond 

to new trends, needs or wants and, in the process, retailers’ brands have increasingly to 

function as guarantors for product quality, traceability, authenticity, safety, reliability and 

convenience. 

b. Drivers of change 

2.8 The retailing that we see today is the product of four main forces: economic, social, 

features arising from changing levels of competition and innovation (including 

technology), and those derived from evolving regulation. In some cases, these influences 

act as constraints, in some cases they provide real opportunities for experimentation and 

innovation. We elaborate upon the specific drivers for innovation as perceived by retail 

firms themselves, from both within as well as outside their organizations, in Section 5. 

We discuss regulation in the context of barriers to innovation in Section 6. Here, in line 

with other Innovation in Services reports, we briefly enumerate the main factors driving 

change in the sector and identify the pressures to which it is responding. 

i. Economic drivers 

2.9 Table 2.1 demonstrates that for much of the past fifteen years, the UK economy’s 

development has been underpinned by extensive growth in domestic consumption. The 

broad consequence of this has been the relatively untrammelled growth of retail 

businesses and an optimistic and entrepreneurial outlook towards experimentation and 

expansion in a variety of ways. Most recently, the Bank of England has sought to rein in 

consumer spending through a series of interest rate rises. This, in combination with 

concern over rising levels of personal debt and more general economic uncertainty, has 

led to growth in retail spending faltering. 

2.10 In practice during this period, UK shoppers have experienced substantial price decreases 

in a number of categories of consumer products over the past fifteen years – in categories 

such as clothing by as much as 20% and in audio-visual goods by as much as 60% - 

(Office of National Statistics, 2007). However, the debt which is of concern to consumers 

has not necessarily been incurred in consuming retail goods, but as a result of higher 

utility, transport and housing bills. The pressure has therefore been upon retailers to 

clearly communicate fair, if not low, prices to those consumers for whom it is important. 

Those retailers which can continually demonstrate ‘value’ in their propositions will win 

out against those retailers with muddled price points or value propositions. 

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2.11 At the same time, retailers themselves have been exposed to cost inflation in much the 

same way as consumers: not least in terms of utilities, property and transport. The 23% 

growth in retail sales value looks strong beside a fall in telecommunications costs, catering 

cleaning and market research over the same 6-year period; but does not appear to have 

kept pace with increases in costs of waste disposal, transport & logistics, property rental 

and banking services. The introduction of the NMW, wage inflation and increased 

staffing levels has meant that the proportion that employment costs comprise of UK 

retail sales has increased from 10.5% to 13% over the past ten years. 

“Despite a slow down in growth [in corporate costs], the largest upward effect came from freight transport 

by road, reflecting increases in fuel prices. Other notable upward contributions came from: sewerage 

services, following the setting of new price limits by Ofwat; property rental prices following general increases 

across the industry; and waste disposal prices following general rises coupled with increases to landfill 

charges being passed onto customers.” 

(National Statistics Office, Corporate Services Prices Index, 2006) 

2.12 It has been argued that the combination of price deflation accompanied by cost inflation 

has led some retailers into an increasingly difficult financial position and focused 

attention upon some types of innovation (such as process-related innovation delivering 

productivity benefits) over others. Firms can put pressure on suppliers to reduce the cost 

of goods or can also accept a fall in margin; cut other costs, or persuade consumers to 

trade up to higher margin products within a category. 

ii. Demographic and consumer behavioural drivers 

2.13 We have already suggested that the paradox presented by consumers’ lack of appreciation 

of price falls in certain categories of consumer goods can be largely explained by the ‘halo 

effect’ of price increases occurring in more obvious categories - such as household 

utilities and transport. Many consumers are already inclined to believe that the selling 

price of a product is substantially higher than its ‘fair’ price would be. 

“Consumers also now play games with retailers – sitting tight and waiting for the discounts to come. 

Because purchases are not necessities (except food), they have more choice about when they buy.” 

(Retailer) 

Greater sensitivity to price and greater wariness of retailers’ promises on price, together 

with the growth of greater price information availability as a result of the Internet, has led 

to a greater focus on value formats by retailers. An increasing number of sectors have 

‘gone to value’. 

“Value retailers have 18% of the market [in the UK], but in the US it is 35%; there's plenty to go 

for.” (John King, Matalan) 

“This concern with value for money is actually embedded in much broader concerns that people have about, 

for example, what to put in their kids’ packed lunches, or about the health impacts of different sorts of 

foods on themselves and their loved ones.” (Barnett et al, 2005) 

2.14 Consumers have also begun to exert greater control within the buying process, not least 

in response to the non-price concerns expressed above, ranging from word of mouth 

effects to product boycotts. The National Consumer Council’s ‘Active Consumer Index’, 

which tracks switching trends for six services markets, has risen 52% since 2000. 

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Retailers have not been immune to this growing activism as it has extended into broader 

areas of social and environmental responsibility. Solutions for retailers run from ‘choice 

editing’ in product range, to the use of environmental or social sustainability as a 

differentiator in the creation and design of formats, to a complete ethical makeover. 

2.15 As a result, the largest retail firms are increasingly expected to take the lead over issues of 

social responsibility and accountability related to consumption. This brings new 

opportunities and challenges for innovative behaviour in the sector in terms, for example, 

of: 

• The environmental impact of commercial activities (for example, Wal-Mart’s 

Project Aurora will, amongst other things, invest $500 million in technologies that 

will reduce greenhouse gases from the companies’ stores and distribution centres 

by 20 percent over the next seven years); 

• Ethical sourcing (for example, the values expressed by Lush, the cosmetics 

grocer, lead it to buying only those ingredients which are not tested on animals, 

using vegetarian ingredients, made by hand with the minimum of packaging - 

http://www.lush.co.uk/LushLife/WeBelieve.aspx); and 

• Responsible consumption (for example, in addressing concerns over childhood 

obesity and healthier lifestyles, Sainsbury's has developed its ‘Active Kids’ 

campaign, spending £34mn over two years in subsidising the purchase of sports 

equipment by schools, scouts and guide movements, and has commissioned a 

research programme to discover what parents of young children buy and how 

that varies across regions and socio-economic groups). 

2.16 There is a potential dilemma for some firms in that the pressure towards providing value 

for money formats pushes firms towards cheaper, and potentially less sustainable, 

procurement. Similarly a contrasting growth in demand for service and experience 

amongst some consumers can be seen as both an attractive non-price differentiator when 

set against online competitors, but also a potentially costly consideration in designing new 

formats in the light of what we have said already about the increasing cost of space and of 

retail labour. Getting the balance right in response to consumer pressure is difficult: 

“It’s also finding the trade-off between what customers want (price, convenience, choice) and what retailers 

have to deliver to shareholders (profits, margins, sales growth). For example, unmanned kiosks may not 

be so pleasant for a customer as is the ‘live’ interaction with someone on the floor, but then the customer 

may trade off this inconvenience for the better price and the time saving.” (Finance Director, general 

merchandiser) 

iii. Competition and innovation drivers 

2.17 In general terms, levels of competition ultimately determine the mix and range of retailing 

on offer to consumers and the extent to which continual innovation is required to build a 

switching barrier between, say, one retail format and another. With increased levels of 

competition amongst larger scale retailers, achieving that differentiation on a sustainable 

basis is costly and requires retailers to make choices: 

“There’s a perception now that you can only pull some of the levers. You have to make a choice between 

price, choice and breadth because of increased levels of competition. You can’t compete on all the choice 

criteria.” (Director, variety store retailer) 

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2.18 Technology has played a complex role in relation to retail change. Retailers themselves 

have been generally reluctant adopters of technology (CEC, 1991). The majority of firms 

have tended to be adapters rather than innovators, using information technology to 

support existing operations. As a result, investment in ICT conferred little lasting 

competitive advantage even if it managed to raise rudimentary barriers to entry. Indeed, 

‘successful’ retail ICT for many in the 1990s comprised projects that did not involve long 

term research & development, provided a visible financial benefit, came without 

extensive capital commitment and provided for low risk, staged implementation. Even 

today, ICT accounts for extremely low levels of capital spend in the sector. However, a 

number of leading firms have used technology to achieve significant gains in productivity 

(Johnson, 2002). In addition, disruptive innovations driven by technology, such as ecommerce, 

have resulted in significant challenges for the sector. 2 For example, the 

anticipated compound annual growth rate between 2007 and 2012 for retail online 

spending is 14%. The expectation is that online sales in the EU will overtake those in the 

USA by 2011. 

2.19 One driver of domestic format innovation comes of course from continually growing 

international activity within the UK. Estimates made in 2005 suggested that over 500 

non-UK retailers currently trade in the UK, numbers which have been rising over the 

past twenty years, with high proportions of operators in clothing, footwear and 

accessories, health & beauty, toys and games and department & variety store retailing 

(Retail Knowledge Bank, 2005). 

iv. Regulatory drivers 

2.20 Regulation is often seen by retailers as an unnecessary cost to the business, but regulation 

can work to direct and focus innovation in unanticipated and otherwise unexplored ways, 

in seeking to attain specific social, economic and environmental goals. There is no central 

financial analysis of the administrative burden of regulation on UK business, although the 

estimate is of some £20-£40bn per annum across all firms (Better Regulation Task Force, 

2005). The Task Force also estimated that small retailers were disproportionately affected 

over large: with small shopkeepers spending 3-5 days a month dealing with a range of 

government administration (Better Regulation Task Force, 2001). 

2.21 There is some evidence that the burden of retail regulation on the sector has reduced 

(Figure 2.1). Recent work by OECD suggested that the UK fell from the 8 th to the 17 th 

most regulated market from 1998 to 2003, although the difference was not statistically 

significant (OECD, 2006). Regulation can affect retailers in two ways in relation to 

innovation. The overall economic viability of any retail business model might be adversely 

affected or constrained. Additionally, however, because of the nature of retail business, 

regulation also influences the possible locations available for a particular retail format and 

the costs of servicing those locations. 

2 Christenson & Tedlow (1999) define disruptive technologies as innovations that change the economics of an industry (even if they may not be 

initially profitable innovations). 

Page 14


Figure 2.1: Anti-competitive regulations in retail distribution, 1998-2003 

6.0 

5.0 

4.0 

3.0 

2.0 

1.0 

0.0 

Belgium 

Greece 

Spain 

Poland 

France 

Germany 

Norway 

Canada 

United States 

Finland 

Denmark 

Japan 

Source: OECD International Regulation Database, 2006. Note: Graph ranked by extent of regulation in 

2003. Scale of regulation from 0.0 to 6.0, with 6.0 being the most restrictive. 

2.22 The OECD study did not include these kinds of regulatory constraints in its analysis. In 

addition to planning and competition policy, such regulations might include: 

Italy 

• Modally-constrained access to town and city centres by consumers (such as 

bus lanes, greenways and park & ride schemes); 

• Delivery curfews (the British Retail Consortium suggested that some 32% of all 

retailers were adversely affected by a delivery curfew of some sort in 2005, at a 

cost of some £3.3mn), and the 

• Cost of parking (Parking revenues in London alone were an estimated £500mn 

in 2005.) 

Portugal 

United Kingdom 

Mexico 

Turkey 

Netherlands 

Korea 

Hungary 

Australia 

Ireland 

1998 

2003 

Switzerland 

Sweden 

Page 15


3. What are the distinctive characteristics of retail innovation? 

a. How different is retail innovation? 

3.1 What do conventional measures report as the extent of innovation in retailing? Data 

recording factors such as R&D intensity 3 and patent citation, suggests that retailing on a 

global scale scores relatively lowly compared to sectors such as pharmaceuticals, 

biotechnology or technology hardware and equipment. The Community Innovation 

Survey, a four-yearly pan-European examination of innovation activity, was extended to 

include services – and retailing – for the first time during its most recent iteration in 

2005. 4 Figure 3.1 below shows the extent and nature of retail innovation compared to 

other sectors. 40% of retail firms surveyed claimed to be ‘innovation active’ 5 . 

Figure 3.1. Extent of innovation in retailing 

per cent 

80 

70 

60 

50 

40 

30 

20 

10 

0 

57 

Innovation active 

Source: Community Innovation Survey (CIS4), 2005. 

3.2 The survey suggests that: 

40 

25 

Product innovator 

16 

59 

69 

of which, new to 

market 

16 

Process innovator 

7 

30 

29 

of which, new to 

industry 

54 

Innovation-related 

expenditure 

• UK retailers report lower levels of innovation than all sectors in the UK as a whole: 

40% of firms are ‘innovation active’, compared with 57% in the economy as a whole. 

The sector scores below the all sector average for every category of innovative activity 

but one; and is apparently significantly lower, for example, in terms of process 

innovation. 

• Retailing did score highly on ‘new to market’ product innovations (suggesting high 

levels of competition in the industry and/or constant search for new business streams 

and markets). 

3 R&D as % of sales 

4 Retailing comprised 1,545 of the total of 16,445 UK firms surveyed (9.3% of responses). Of these, 18% of respondent firms employed more 

than 250 people. The survey sought to capture activity between 2002 and 2004. 

5 Innovation in the survey is defined as “major changes aimed at enhancing competitive position, performance, know-how or capabilities for 

future enhancements. These can be new or significantly improved goods, services or processes for making or providing them. It includes spending 

on innovation activities, for example on machinery and equipment, R&D, training, goods and service design or marketing.” 

36 

30 

Either product or 

process innovators 

19 

11 

Both product and 

process innovators 

5 

13 

Cooperation 

agreements 

9 

33 

Wider Innovator 

21 

All sectors 

Retail trade (Div 10) 

Page 16


• Innovation-related expenditure of retailers is lower than the average; it looks as 

though this smaller number of innovations was both cheaper and had greater 

impact than on average. 

3.3 It is important to stress that these results are not dissimilar to other ‘low innovation’ 

engineering sectors and for other services (with the notable exception of knowledge 

intensive business services (KIBS)) 6 . And other evidence tells us of the capability of 

retailers to innovate in ways which lead to efficient economic performance, which 

suggests that the CIS does not capture the full picture. For example, decomposing 

productivity growth in the US from 1995 to 2000 suggests that the whole of its 

acceleration is driven by six sectors, the top three being wholesaling, retailing, and 

security and commodity broking. In fact the joint contribution of these three key sectors 

was twice as great as the next three i.e., electronic and electric equipment 

(semiconductors), industrial machinery and equipment (computers) and telecoms (Solow, 

Bosworth et al., 2001). The data since year 2000 suggests that retailing continues to be 

among seven sectors which altogether accounted for 85% of all the productivity growth 

of the US economy 7 . None of these, with the exception of computers and electronics, are 

among the conventionally R&D intensive sectors (Farrell, Bailey et al. 2005; Hughes 

2007). More recent figures from NAICS suggest that retailing continues to be among the 

top contributors to the US productivity growth (McKinsey Quarterly, 2006). About 12% 

of labour productivity gains in the second half of the 1990s could be traced back to one 

retailer alone: Wal-Mart (Johnson, 2002). 

3.4 One other major indicator of the level of innovation within UK firms is the regularly 

conducted R&D Scoreboard (DIUS, 2007). The 17 th annual Edition was published in 

2007 and shows that Tesco and Marks & Spencer are amongst the UK’s ‘R&D leaders’ 

and ‘fastest growing R&D spenders’ respectively 8 . In relation to the sector as a whole, 

however, there are significant deficiencies in the Scoreboard (including significant 

omissions, misallocation of firms – including pharmaceutical suppliers - to the retail 

sector and some evidence of double-counting) 9 . Whether this is as a result of nonresponse 

by major firms, the growth of private equity in the sector, a lack of an R&D line 

in public company accounts (or other accounting complexities arising from a firm’s 

diversified activities), or their not falling into the top 850 UK firms (or top 1,250 global 

firms), is unclear. For whatever reasons, however, the Scoreboard cannot therefore be 

regarded as a reliable indicator of retailing R&D. 

3.5 This evidence is alongside the increasing realisation is that the sole use of R&D intensity, 

patent registrations and other ‘hard’ measures of innovation fail to reflect the variety of 

innovation activities in knowledge based service firms. OECD’s ‘Frascati’ Manual 10 

acknowledges that hard measures need to be examined within a broader conceptual 

framework, 

6 A classification of those services defined as KIBS can be found at: http://www2.cst.gov.uk/cst/reports/files/knowledge-intensiveservices/services-study-annexes.pdf 

7 These were retailing, finance and insurance, computer and electronic products, wholesaling, administrative and support services, real estate and 

miscellaneous professional and scientific services. 

8 Tesco ranked 21 st of the top 850 UK firms in terms of its R&D expenditure in 2006 (+12% on the previous year). Marks & Spencer ranked 14 th 

of the top 850 UK firms in its increase of R&D expenditure in 2006. 

9 The limitations of the Scoreboard methodology are described at http://www.innovation.gov.uk/rd_scoreboard/?p=33. The firms allocated to 

food, drug and general retailers can be seen in the main tables, downloadable at 

http://www.innovation.gov.uk/rd_scoreboard/downloads/2007_UK_RD_Scoreboard_Web.csv 

10 The OECD Frascati Manual (2002) proposes standard practice for surveys of R&D 

Page 17


“that relates them both to other types of resources … intangible investment which covers not only 

R&D and related S&T activities but also expenditures on software, training, organisation, 

etc.” (OECD, 2002, p.14). 

In relation to services these sentiments are echoed by the recent report commissioned by 

the US National Science Foundation (RTI International, 2005). Measuring service sectors 

(such as retailing) with direct R&D measures does not account for R&D flows between 

the manufacturing and services sectors, neither does it account for the large volumes of 

R&D services outsourcing. This results in potential under-representation of nonmanufacturing 

sectors such as retailing. 

“Using both direct R&D expenditures and indirect R&D (consumed), such as R&D incorporated in 

equipment and intermediates, provides a different estimate of technology intensity for the service industry 

(RTI International, 2005, p. 2-3). 

3.6 There is also evidence that in ‘low innovation’ sectors such as oil production, 

construction or retail banking, large proportion of innovation is to a lesser extent 

technological, involving organisational and market change or melding technologies in 

delivering innovative services. This type of innovation remains largely ‘hidden under the 

radar’ of the traditional measures of innovation (NESTA, 2007). Similarly, Jorma Ollia, 

the Chairman of the Board of Directors of Nokia points out that currently the most 

fertile area of innovation today in effect could be found in management (Economist, 

2007). In this vein according the most recent BCG innovation survey among a cross 

section of senior executives, the retail sector appears among the most innovative; five 

retailers feature in the top twenty ‘most innovative’ firms of 2007; i.e., Wal-Mart (11), 

Starbucks (14), Target (15) and Amazon.com (20), with another four retailers in the top 

50 (i.e., Ikea, Costco, Best Buy, McDonalds) (Business Week, 2007). 

3.7 The Community Innovation Survey sought to uncover aspects of ‘hidden’ innovation for 

the first time in 2005. Wider innovation within firms was examined in the form of a 

question exploring “new or significantly amended forms of organisation, business 

structures or practices, aimed at step changes in internal efficiency of effectiveness or in 

approaching markets and customers.” This included the possible introduction of a new or 

significantly changed corporate strategy; advanced techniques such as knowledge 

management systems or an Investors in People initiative; organizational changes, such as 

out-sourcing or cross-functional team building; or marketing concepts or strategies, such 

as packaging or presentational changes to a product to target new markets, or new 

support services to open up new markets. Figure 3.2 shows a comparison between the 

retail sector, engineering and the survey average. 

Page 18


Figure 3.2. The extent of reported ‘wider innovation’ within retailing 

Marketing 

Organisational structure 

Management 

Corporate strategy 

WIDER INNOVATOR 

0 5 10 15 20 25 30 35 40 45 

Source: Community Innovation Survey 2004 (CIS4), 2005. 

per cent 

Retail trade Engineering All sectors 

3.8 Just over a fifth of retail enterprises reported having engaged in one or other form of 

wider innovation during 2002-04. The most popular form was marketing-related; the least 

connected with the introduction of advanced management techniques. However, levels of 

wider innovation were below the national average for all firms and well below that 

reported for engineering. 

3.9 So if there is a widespread perception that the best of UK retailing is creative and 

innovative, how might we explain such a discrepancy in terms of innovation performance 

according to the CIS4 innovation survey? There may be several explanations. Perhaps we 

are dazzled by the best practice of a few leading innovators in the sector, which serves to 

conceal a lack of innovative activity elsewhere in retailing. Or, as we have suggested, 

perhaps the environment for innovation in retailing is different and distinctive in some 

way that masks or changes its nature. Or it may be that retailers think about innovation 

differently, or conduct innovation of a somewhat different kind than that which is 

conventionally used as an indicator by the statistics. We examine some of these possible 

explanations below in identifying five distinguishing features of retail innovation and the 

environment in which it occurs. 

3.10 Discussions with retailers as part of this research suggested that a lot of retail innovation 

is more about changes in ‘how’, ‘where’ and ‘when’. Continuous and non-linear, 

innovation in retailing appears much closer to the entrepreneurial notion of innovation 

according to which it is immaterial whether innovations involve an element of scientific 

novelty or not. In this respect innovation is seen as an economic process of cause and 

effect which essentially involves putting available resources to new uses. According to 

Ogawa (1998), who explores supply chain innovations, retailers tend to develop 

functionally novel supply chain innovations in contrast to manufacturers who tend to 

develop innovations that improve on well-articulated needs. For instance in terms 

inventory-management systems retailers tend to focus on new approaches to inventory 

Page 19


management while manufacturers tend to develop improvements to the equipment used 

to deliver these new approaches. 

3.11 The ‘retail type’ of innovation appears more difficult to record than the manufacturer 

one, since manufacturing firms predominantly innovate in a ‘staircase’ mode characterised 

by identifiable step-wise jumps in product development, while large part of retail 

innovations tends to occur in a ‘continuous mode’ of organic change. This highlights the 

broader problem of under-recording services innovations in cases where innovation 

activities cannot be clearly described as definitive products or outcomes, for instance 

pertaining to process or organisational innovations which are hard to identify, define and 

grade. According to Tether (2005) the CIS, which was initially designed around the 

manufacturing continues to be more suited to record ‘staircase’ innovations and may be 

still significantly under-recording ‘continuous’ innovations more common service sectors 

such as retailing. 

b. Selected characteristics of retail innovation 

3.12 The classic function of a retailer is as an intermediary, which involves the creation of 

assortment, break of bulk and the facilitation of value creation for consumers at 

convenient times and in convenient places, alongside the provision of product 

information and appropriate pricing architectures. In this context, our research suggests 

that innovation in retail organizations has five distinctive features: (1) Retailers’ role as 

innovation hubs, facilitating ‘two-way’ innovation diffusion, (2) innovation in a retail 

environment of low appropriability, (3) predominance of non-technological innovation, 

(4) hybrid characteristics of retail innovation, (5) reverse innovation cycle (Hristov 2007). 

i. Retailers as innovation hubs 

3.13 First, retailers are increasingly innovating by acting as intermediaries well beyond their 

core retail propositions. Firms such as Tesco, Wal-Mart, Carrefour, Best Buy, El Corte 

Inglés, Nordstrom, Sainsbury’s & Metro are rapidly diversifying through tie-ups with 

suppliers into financial services, telecoms, utilities, travel, amongst others. In many of 

these cases they innovate by intermediating in the value chain and thus increase the 

efficiency of market exchange. They do this through what we can call a two-way diffusion 

process (see Figure 3.3) comprising supply diffusion - which conventionally aggregates, 

augments and defuses new products, services and technologies from suppliers 

downstream to consumers - and demand diffusion - a relatively new feature in which the 

retailer deciphers existing or impending market/consumer needs and communicates them 

upstream, thus initiating and often co-creating innovations with suppliers. (See Vignette 

3.1 – Best Buy, 3.2 – The Local Epicurean/Budgens, 3.3 – Marks and Spencer) 

3.14 This ‘innovation broadening’ role of modern retailers suggests that many of them are in 

the position to act as innovation hubs within their supply chains. For instance Hughes 

(2007) highlights the importance of the diffusion and use of ICT as a general purpose 

technology beyond the ICT and other R&D intensive high-tech producing sectors. This 

may help explain why so-called ‘unexpected’ user sectors with negligible conventional 

R&D spend such as retailing have been dominating movements in US aggregate 

productivity growth for the past ten years. The DIUS/BERR 2007 Scorecard exercise 

points towards similar examples of consumed R&D that is subsequently diffused by 

industries such as retailing and financial services (DIUS/BERR, 2007). 

Page 20


“In the supply chain, the retailer has the final responsibility towards the customers and thus for 

the whole chain” (Chairman of the Board) 

Figure 3.3. Two-way innovation diffusion 

Source: Hristov, 2007 

Retailers as 

intermediary 

innovators 

Supply ‐Generate 

‐Adopt 

Demand 

Diffusion 

‐Adapt 

‐Augment 

‐Diffuse 

Diffusion 

Efficiency Differentiation 

ii. The low appropriability of the retail environment. 

3.15 Secondly, the retail environment is one in which innovations can be easily copied. Teece 

(1986) defines what he calls ‘regimes of appropriability’ - environmental factors external 

to innovating firms which affect an innovator’s ability to extract profits from their 

innovation. Such regimes can comprise the availability of legal instruments for protecting 

innovations like patents or copyrights, alongside technological conditions including 

production cycles or codified and tacit knowledge. 

3.16 But operating in conditions of ‘low appropriability’ causes knowledge spillovers between 

firms resulting in the rapid erosion of any first mover advantage. Sir Terry Leahy, Tesco 

CEO, has observed that the average dwell-time of an innovation in grocery retailing is 

“around six weeks”. In retailing there are low barriers to protecting intellectual property 

and thus high risk of not being able to extract profit from innovation. 

“It is very difficult for retailers to make continuous big changes because they're constantly sort of 

measuring and matching each other” (Board Director). 

“In retailing generally you have those who create something new and those that copy. For example Home 

Depot has been copied everywhere by different retailers” (Marketing Director). 

3.17 If retail innovations can rapidly be copied, then continuous incremental change coupled with 

building ‘airtight’ market matching capabilities through the rapid scaling up of innovation to 

the point of profitability, or simply through sheer economies of scale are the kinds of 

defence mechanisms used by retailers to protect their innovations. For instance Tesco 

uses the strap line “start small, scale up, think big”. 

Page 21

iii. Predominance of non-technological innovation. 


3.18 Thirdly, retail innovation for the most part appears to comprise non-technological, 

customer facing activities which are driven by social-economic rather than technological 

forces. Of course, technology is a high profile and important enabler in what retailers do, 

as well as providing the capability for reaching out into untapped markets. Nevertheless, 

in contrast to manufacturing, technological trajectories are seen by retailers to have a 

relatively limited impact on the overall characteristics and focus of their innovation 

(Hristov & Reynolds, 2005). 

“I think technology is always important, however it’s not the be all and end all because, you 

know, at the end of the day customers don’t buy technology, not in our business, they buy the 

results of technology. So I think as long as it’s seen in terms of what the customer wants, does 

this provide things faster or better or cheaper, then you're in the right place.” (HR Director). 

iv. Hybrid characteristics of retail innovation. 

3.19 Fourthly, some vertically integrated retailers have their own production units or design 

facilities, such as Zara (Spain) part of Inditex, Migros (Switzerland), Tchibo (Germany), 

the S-Group (Finland) For instance Migros, the largest Swiss retailer is the second biggest 

chocolate producer in Switzerland (Hristov, 2004). Others consider themselves 

‘manufacturers without factories’ in the sense that they exert significant upstream 

influence over suppliers. These characteristics have specific consequences in terms of 

innovation. We might expect such retailers to exhibit many characteristics in common 

with manufacturers, such as a focus on step-wise rather than continuous innovation. On 

the other hand, all retailers provide services of various kinds and we might expect 

innovation here to be different from the predominantly linear innovation patterns of 

manufacturing. 

3.20 Therefore retail innovation displays ‘hybrid characteristics’ which are consistent with the 

complex nature of retail output. For instance, in the introduction of certain new product 

lines, there may be obligations on retailers to undertake scientific and quasi-scientific tests 

and trials. In many cases the NPD processes of retailers can be analogous to that of 

manufacturers. Sainsbury’s operate a five stage-gated system of NPD of (Stage 1) capture 

and develop ideas, (Stage 2) develop project, (Stage 3) develop concept samples to own 

brand strategy (Stage 4) production, trials and launch (Stage 5) product analysis and 

project performance. This is not an isolated example: similar linear innovation pipelines 

are used by ASDA, Boots and Marks & Spencer in their NPD. However in areas such as 

trading, customer services or sourcing, innovation appears non-linear and, at times, even 

ad-hoc. For instance some winning retail formats emerge from an opportunistic, 

experimental and incremental process, sometimes based more on intuition than rational 

analysis. 

“Inside the business development area, under the Business Development Director, there's a very 

structured point to the way we do things. But in some cases innovation is much less structured, 

in some cases it’s quite ad-hoc” 

(Managing Director) 

“But I would guess in retailing there isn't much organisation of innovation, I think it’s more 

experimental and haphazard and opportunistic because of the nature of the business” 

(CEO of Industry Association). 

Page 22

v. Retailers’ reverse innovation cycle. 


3.21 Finally, retailing can experience a reverse innovation cycle (where financial and 

organizational costs are incurred at the end of the innovation process rather than at the 

beginning). This has also been observed in the financial services sector (Barras, 1986). But 

among multiple retailers we can also see both reverse innovation development and 

innovation investment cycles similar to those of many manufacturing firms. In 

manufacturing, the biggest financial outlays tend to be associated with R&D and the 

following NPD process. Once the product gets to market radical innovation gives way to 

incremental improvements throughout the product life cycle (as in the software industry). 

In retailing, the initial idea - even at the stage of initial prototyping - is relatively cheap 

and largely experimental. However, the process of scaling up an idea across a large 

portfolio of stores often requires radical innovations (such as in organisation and process) 

and major investment and management resource. For example, it took Tesco nearly 12 

years from 1994 to 2006 to bring to full scale their initial idea of an Express store. That 

included trials of the concept, limited rollout, location planning, refinement of the 

concept and subsequent scaling up through the acquisition and re-branding of T&S 

Stores as well as organic growth to what is now a portfolio of over 730 stores. Once at a 

critical mass this innovation had a transformational effect on the market and led to a 

range of radical innovations in logistics and marketing. 

“I think the actual development of a concept is not complex and as soon as you know it works, then you 

do it. However let’s take PC World, it would have taken ten years from the point that it was clear that 

it was a success to having rolled out through the UK, and I don’t know how much longer it will take to go 

out to Europe” 

(CEO). 

Vignette 3.1: Best Buy 

Context: Retailers as innovation hubs 

Example: Best Buy, the biggest US electrical retailer has set up what it refers to as a Venture Capital Network (VCN) for 

identifying promising technologies for new products or services. The role of this VCN is to speed up the transition of these 

technologies from concept to market. This is achieved through the creation of external innovation networks linking up venture 

capital firms with innovation start-ups working on particular retailer projects. Best Buy stores are then used to hot-house and test 

the innovations in a retail environment. 

For a number of years the retailer has also been pursuing a ‘customer centricity’ program of segmenting their market and 

developing bespoke retail formats for each of the target segments, for instance affluent professionals seeking the best technology 

experience, younger males wanting cutting-edge new technology, fathers looking for technology to improve their lifestyle, 

mothers seeking technology to enrich their children's lives or small-business people using technology to improve their bottom 

line. The range and the services offered for each segment are tested in what the company refers to as ‘lab stores’, 68 of which are 

located throughout California. 

Page 23

Vignette 3.2: The Local Epicurean/Budgens 

Context: Innovation in a small retailer 


Example: The Local Epicurean was founded in 2006 by Andrew Thornton, a retail consultant who acquired his first food store 

from Budgens and joined the Musgrave-Budgens-Londis (MBL) franchise. Less than two years later his company The Local 

Epicurean operates two Budgens branded stores, the first one of 9,000 sq ft in London’s Crouch End and the second of 7,000 sq 

ft, located in Belsize Park. The company employs altogether 170 people and has an annual turnover of about £17 million. 

Budgens as a retail brand is owned by MBL - Ireland’s largest food and grocery distributor. The business model is based on 

independent retail operators who buy products from the company and to whom MBL provides sales, marketing, IT and logistical 

expertise. In the process the independent franchisees have a fair amount of freedom in terms of how they construct their ranges 

in view of local needs. According to Thornton: 

“Consumer needs can be very different from one place to another therefore the benefit of such entrepreneurial model is that individuals who own their stores 

will do what is absolutely right for the local community. There some guidelines you have got to follow in terms of brand entity, but within that, how you 

work with the local community is up to you.” 

Therefore while Thornton has to buy a substantial amount of his goods through the MBL system he does not have to buy all of 

them from there. 

“So you can buy from Musgrave your corn flakes at competitive prices but you can also buy your bread from the local baker who is just 50 yards across 

the street.” 

Thornton’s two stores serve over 22,000 local customers seven days a week. Competition in the area is intense. Just within a 

walking distance from of his Crouch End store there are one Tesco Express and a Marks & Spencer Simply Food - both 

formidable competitors. Therefore as a retail entrepreneur, he sees his role in keeping the business fresh and attractive to 

customers: innovation is not a matter of choice but a matter of survival. 

“We must innovate continuously and in a customer focused way to sustain and grow the business and my job is all about innovation really, business 

development, changing things making thins better. That’s how I would define innovation – basically ‘change in a business’ in line with what customers 

want.” 

New ideas are implemented through a team of managers whose concern is the smooth day-to-day running of the business. The 

innovation effort of the company is channelled in three broad directions: (1) local sourcing, (2) environmental initiatives and (3) 

retailing tailored for the local community. 

1. A distinctive store, localised product range and friendly services are seen as absolutely essential in establishing the two stores 

as local destinations. Since the acquisition, the Crouch End store has been refurbished to reflect Thornton’s vision of 

innovative food retailer. The revamp included the introduction of zones for delicatessen, beers, wines and spirits and the 

introduction of new lines with emphasis on local foods. Additionally a ‘food to go’ counter was installed replacing a chiller 

cabinet for pre-packed sandwiches. The new unit features juice and coffee bars for freshly made fruit juices, smoothies and 

Lavazza coffee and also offers freshly baked bread and made to order sandwiches. The store has an Epicurean Deli with 

fresh salads and meats all sourced locally. “There are a many good food producers around London which we want to bring in our stores. In 

fact we are organising a meeting in January with about 15 of them and will be working with them to introduce their products into our stores.” 

Both stores already offer a sizable range of ‘direct from the producer’ SKUs, sourced within 100 miles and free from artificial 

colours and preservatives. There is also the ‘product of the week’ initiative with regular supplier tasting in-store, shelf-edge 

labels clearly indicating the food miles of each of the local products. The stores offer fresh bread from Dunn’s - a local 

bakery, a range of food products from Suffolk and cheeses from Whitfield. 

2. In terms of the environment, the company innovates through a range of initiatives. ‘Pennies for plastic’ is one of them. “We 

want to encourage people to re-use their bags, therefore for every bag not used in our stores we are donating 1 penny to a local charity.” The 

campaign has helped raise money for building a new stage at the local school - Weston Park Primary. The message has been 

clearly publicised both in-store and through the media. The initiative has gradually gained momentum, the end result being 

that Budgens Crouch End has managed cut in 5 months their carrier bag usage by 55%. According to Thornton this is the 

first step towards altogether substituting the disposable plastic bags for the more environmental reusable and Jute bags. “In 

March next year we are planning to give away 15,000 reusable and Juke bags and then we shall stop altogether offering disposable plastic bags in 

our stores.” Other environmental initiatives include food composting, making sure that food products refuse is composted 

rather than to put in landfills and hoisting the heat emitted from the store chillers back into heating up the stores, thus 

reducing energy consumption. These initiatives are carried out in co-operation with environmental organisations, one of 

them - The Carbon Trust. 

3. The third direction for innovation according to Andrew Thornton is local community retailing. This includes a range of 

initiatives the aim of which is to make local independent retailers the preferred destination for shoppers. “There are many good 

independent retailers locally, but we have to market ourselves more effectively. The idea is make independent retailing in Crouch End more 

attractive and to encourage local shoppers to stop using their cars, travelling all that way to out of town shopping centres and instead just walking 

Page 24


down to their local high street to for their shopping.” Thornton refers to this set of initiatives as ‘The Crouch End Project’. The idea 

was initially developed with the head of the parents association at the local school where the Local Epicurean has built a new 

stage. 26 independent retailers have joined forces the project sponsoring the local fun run, school carol concerts, music, wine 

and cheese evenings. “We have even designed our very own Crouch End cotton shopping bag and we are experimenting with a Crouch End 

wedding list, that sort of innovations we develop with shoppers and retailers together. They are relatively inexpensive and easy to reverse if they don’t 

work. We keep innovating since that’s important both for us and our customers” (Hristov, 2007 - Company interview). 

Vignette 3.3: Marks & Spencer 

Context: Innovation in sustainable development, co-innovation; retailers’ reverse innovation cycle 

Example: In October 2007 Marks and Spencer unveiled its first eco-store in Bournemouth. The completely refurbished 51,000 

sq ft store incorporates a whole host of new eco-technologies. It is completely powered by renewable energy and is 25% more 

energy efficient. Its innovative footprint has been developed in line with the M&S’ Plan A in which the retailer has pledged £200 

m over 5 years on innovating on sustainable and ethical projects. For instance by year 2012, M&S aims to: 

− become carbon neutral, 

− send no waste to landfill, 

− extend sustainable sourcing, 

− set new standards in ethical trading, and 

− help customers and employees live a healthier lifestyle. 

The above is expected to be achieved in tandem with organisations such as WWF in the area of new sustainable store concepts, 

WRAP in area of eco-friendly packaging, and with their commercial suppliers on issues of reducing carbon emissions, and the 

development on new eco-products and healthier foods. The Bournemouth store which is the first of four planned in the next few 

years has its own green travel plan and bike racks to encourage customers and staff to cycle to the outlet. 

(www.marksandspencer.com, 23.10.2007) 

Page 25

4. How do retailers think about innovation? 


4.1 The retailers to whom we spoke as part of this research (Hristov, 2007) acknowledged 

overwhelmingly the crucial role of innovation for the performance of any retail business. 

Without innovation, they suggested, like-for-like growth and profit margins decline and 

organisations run into life-cycle issues: 

“You get about two years under the sun and then suddenly there is a new kid on the block … ever so 

often you have to take a long hard look at yourself” 

(CEO) 

But our findings also indicated that there is a real range of meanings and interpretations 

among retail practitioners as to what constitutes innovation in retailing, and this may 

contribute to under-reporting in conventional surveys. It’s seen not just as: 

• A necessary means to continued existence, but also as 

• Change with positive, long-lasting effects, 

• A cross-business process of generating and implementing commercially viable ideas 

that deliver benefits to customers, and 

• A process of implementation of new ideas which creates differentiation in the 

marketplace. 

4.2 Further, retailers acknowledged that defining and measuring retail innovation was difficult 

since innovations were largely dispersed across the business: requiring the co-ordinated 

effort of a wide constituency of people across functional areas and including suppliers 

and customers. As a term, therefore, ‘innovation’ often did not appear immediately self 

explanatory to retail practitioners. Or, as one senior consultant put it, 

“Innovation, its too big a term. To communicate it, one has to break it into its component parts.” 

4.3 With some notable exceptions most of the retailers in the sample pointed out that they 

did not use the term in their everyday vocabulary. Yet they felt that their organisations 

innovated all the time without having innovation directors or departments. Some referred 

to ‘innovation’ as a composite term which in practice needed to be translated into more 

concrete operational terminology such as: ‘new product development (NPD)’, ‘new 

SKUs’, ‘new categories’, ‘refreshing the range’, ‘new formats’, ‘new markets’, or ‘new 

applications of technology’. 

“It is very hard to define innovation. We are a fashion retailer; therefore every time you design a 

new product is that innovation? How different does it have to be, to be innovation? We innovate 

in the product, in our designs, in our store environment, we are creative in the way we brand 

ourselves and in the way we interact with our customers but there are many levers to pull, I think 

the trick is to pull these at the right time and at the right level, rather than thinking next year 

I'm going for my store refit, or next year I’m going to launch an all-new product offering, one has 

to be entrepreneurial about that.” 

(CEO Fashion Retailer). 

4.4 Some retailers perceive the term ‘innovation’ as a much more radical departure from 

‘business as usual’ rather than incremental change in operational practices and new 

product development. 

Page 26


“We prefer to use ‘newness’. Innovation somehow carries the meaning of a radically new idea. I guess it is 

associated with blue sky thinking or something that has never been done before. The majority of our 

incremental growth comes from newness, which I would describe as a stage below innovation. We also use 

reinvention” (Commercial Director). 

4.5 So what therefore constitutes innovation in retailing? Summarising the views of over 50 

senior industry practitioners, we suggest that a broadly acceptable definition might be: 

Elements of the retail offer (i.e., products, range, services, retail format, etc.) in tandem with the 

underpinning organisation and technologies needed to deliver these to the market, which are new or 

significantly improved as a result of the retailer’s existing market or technological knowledge. 

4.6 Whilst interviews with retailers indicated a plethora of meanings and views as to what 

might constitute innovation, it also found a distinction between those innovations which 

were strategic and these which were more operational in character. 

a. Strategic retail innovation 

4.7 Although retail innovation tends to follow a pattern of a ‘continuous change’ mode rather 

than the more pronounced manufacturing pattern of ‘series of step changes’ between 

periods of stability, there is evidence that more radical innovations are often qualified as 

strategic in the sense that they are guided by corporate strategy. Examples of these are 

‘sector hopping’ from food to non-food - for instance in the case of Sainsbury’s and 

ASDA - or pursuing new channels to market in the case of the John Lewis Partnership 

(Waitrose) with Ocado.com. (See also Vignette 4.1 – Hotel Chocolat.) Strategic 

innovations might also involve the development of new retail formats for international 

markets, in the case of Tesco’s new ‘Fresh and Easy’ concept for the US market. Similarly 

they involve innovative business models which combine a range of retail applications 

such as catering, retailing, entertainment and the internet often introduced by smaller 

retailers in rural communities. There are also examples of radically new approaches to 

sustainable development or retailer-supplier collaboration. (See Vignette 4.2 – Migros, 4.5 

- Zara and 4.6 – TK Maxx, 4.7 - Somerset Local Direct). 

b. Operational retail innovation 

4.8 At an operational level there seems to be a broad consensus that innovation is associated 

with new products, ideas or ways of operating. The predominant view suggests that 

operational retail innovations are mainly continuous, incremental and with a cost or 

value-added focus. They often involve planning, management sponsorship or resource 

allocation and have short innovation cycles of between 3 to 18 months. For example, one 

typical approach to innovation is experimentation through ‘test’ or ‘lab’ stores or through 

continuous store trials. The US electrical retailer Best Buy has opened over 60 ‘lab stores’ 

in which they test new ranges, technologies and services (discussed in Vignette 3.1, but 

see also 4.4). Similarly Metro set up its Future Store near Rheinberg in Germany (now 

closed) where alongside testing new technologies such self-checkouts, RFID and smart 

scales, they also tested and refined their new hypermarket footprint of Real Extra. 

Page 27


Sainsbury also has its own a technology store in Hazel Grove where it tests the appeal of 

new concepts to its core customer base 11 . 

c. The retail innovation pyramid 

4.9 What traditional innovation literature does not explore or explain at any length are the 

typical application areas in which retail innovation occurs. Our research has identified 

three such areas: (1) offer-related innovations, (2) support-related innovations and (3) 

organisation-related innovations. These areas are summarised in ‘the retail innovation 

pyramid’ in Figure 4.1 at the apex of which is the retailer’s overall corporate strategy 

(Hristov, 2007). 

Figure 4.1. The retail innovation pyramid 


4.10 Offer-related areas of innovation include innovations in product, service, category 

format, channel and market, etc. For example Tesco’s innovations in non-food categories 

including stationery, entertainment, house wares, clothing, electronics, financial services, 

telecoms and convenience store. For example the US retailer Whole Foods Market has 

extended their organic concept beyond their supermarket format into non-food by rolling 

out in 2005 their “Lifestyle” store of environmentally conscious clothing, house ware and 

other non-food products. By locating what they refer to as the ‘Lifestyle Annexe’ next to 

their full-range supermarkets the company is creating one-stop retail destinations for the 

rapidly increasing number of environmentally conscious consumers. (See also the 

example of retail service innovation in Vignette 4.3 – Retail Clinics). Such innovations are 

central for retailers since they involve customer interactions and have direct contribution 

to growth. They are often led by major functional areas like commercial (buying), retail 

operations, NPD or creative and marketing. In terms of deconstructing retail innovation 

11 http://www.igd.com, (26.03.2007) 

Strategy 

Offer‐related innovations 

Support‐related innovations Organisation‐related innovations 

Page 28


along the lines of the more ‘traditional’ innovation typologies of product versus process, 

incremental versus radical, we conclude that all these are seen amongst retail practitioners. 

Nevertheless their prevalence appears distinctly retailer specific, for instance in the case 

of the novelty mix of a retail range. (See also Vignettes 4.1 – Hotel Chocolat, 4.8 - 

Smiley’s Delicatessen, Farm Shop and Café). 

4.11 Support-related areas of innovation: On the other hand, support-related areas of 

innovation encompass innovations in technology, systems and the supply chain, etc. 

Examples of these are the development of extranet capabilities in terms of electronic 

stock control, payment, invoicing and delivery systems, similarly sharpening customer 

focus through the introduction of customer databases and loyalty schemes or innovating 

in in-store technologies in terms of sustainable energy consumption, shelf-management 

or payment systems. These are seen as key facilitators for the offer-related area and 

contributors to overall retailer efficiency and productivity (See Vignettes 4.9 - Boots and 

Tesco and 4.10 - The Mid Counties Co-op: payment systems innovation). 

4.12 Organization-related innovations comprise the third area, which includes innovations 

with strategic or operational significance that provide management and delivery 

frameworks for the previous two - such as innovations in the retail model, in 

administrative processes, cross-functional teams or in new activities which require 

coherent management mechanisms such as in the case of CSR, sustainability and ecology. 

(See Vignettes 4.5 - Zara and 4.6 – TK Maxx, 4.7 - Somerset Local Direct, 4.11 - ASDA 

and 4.12 - the Co-op). 

4.13 The management levels and areas of retail innovation described above are summarised in 

the organising framework shown in Figure 4.2. 

Figure 4.2. Organising framework of retail innovation 

Drivers of retail 

innovation: 

‐ external 

‐ internal 


Strategy 

Management of 

retail innovation: 

‐ strategic 

‐ operational 

Areas of retail 

innovation 

Market 

Page 29

Vignette 4.1: Hotel Chocolat: multi-channel format 

Context: Offer-related innovation 


Example: “British chocolate has been a joke for quite a while. We are at the forefront of its resurgence.” (Angus Thirwell, cofounder). 

Hotel Chocolat has exploited a vacant niche within UK retailing for authentic, high quality, British-made chocolate. 

Hotel Chocolat was founded as a catalogue business in 1993. Its first store did not open until 2004. It now operates a corporate 

gifts service and a tasting club with 100,000 members, in addition to its web site and 22 outlets in the UK., which generate £39mn 

in sales. It won Emerging Retailer of the Year Award at the Retail Week Awards in 2007 as well as being nominated as a 

CoolBrand and plans international growth. It is already available online in New York, Boston, Atlanta, San Francisco and 

Chicago. 

Vignette 4.2: Migros – sustainable brands 

Context: Brand innovation 

Example: Migros is the largest Swiss retailer with 2m co-operative members, 590 stores, and sales of CHF 21 billion. Over 

several years the retailer has agreed with its suppliers a set of ethical standards manifested through the launch of its range of own 

labels under the umbrella brand ‘Engagement’. Each individual label represents a kite mark for a particular initiative of Migros, for 

example the elimination of child labour, better living conditions and the conservation of tropical forests. These initiatives predate 

much UK activity. Examples of such labels are: 

– BIO is for organic products manufactured without the use of chemical-synthetic pesticides and fertilizers, 

– Max Havelaar (Maximal Fairness) is for products complying with our fair trade guidelines, 

– 7-point meat guarantee label is for healthy meat from healthy animals, 

– IP-SUISSE guarantees that the bread, flour, potatoes and rapeseed oil are produced in Switzerland under environmentally 

friendly conditions, 

– Marine Stewardship Council guarantees that the fish is from sustainable fishing grounds, 

– Forest Stewardship Council for timber from forests that are managed in an environmentally friendly and socially acceptable 

way 

– ECO is guaranteeing environmentally friendly production of clothes, home textiles and shoes, 

– Bio Cotton for organically grown cotton 

According to Claude Hauser the Chairman of Migros alongside technology and product extensions innovation in Migros is about 

principles. Although the company acknowledges that generally grocery markets are quite price sensitive there is also an increasing 

sensitivity among shoppers about ethical, environmental, and health issues underpinning the growing need for the Engagement 

brands (Hristov 2004; Migros 2006). 

Vignette 4.3: Retail Clinics 

Context: Co-innovation in new services 

Examples: Recent example of new service introductions in US retailing are the trials in-store retail clinics. In this case more than 

a dozen clinic operators in co-operation with retailers such as CVS, Wal-Mart, Target, Walgreens and Kerr Drug are piloting the 

idea in-store clinics which will be providing convenient but limited service at a low cost offering basic procedures such as 

inoculations and treating common ailments such as strep throat, ear infections and allergies. 

These walk-in clinics are seen as alternative to the more expensive doctors’ surgeries and emergency rooms, although this has 

provoked serious backlash from family doctors who call for tighter regulation of such practices. In the UK in 1999 Boots trialled 

dental clinics in some of their high street stores after the acquisition of Dental Body Corporate and Wilson's Dentistry Limited, 

the initiative was later abandoned. The company however continues to offer flu jabs and free prescription collection. 

(www.usatoday.com; www.ft.com; www. bbc.co.uk, 21.10.2007) 

Vignette 4.4: Wal-Mart – limits to format innovation 

Context: Retail format innovation 

Example: Having created the Supercenter years ago, Wal-Mart has continued to incrementally evolve the concept. Over time it 

has deliberately pushed the envelope creating new more productive versions of the format roughly 20 000 sq ft or more larger 

Page 30


than the initial one, gradually taking it from 120,000 sq ft up to 200,000 sq ft. The new stores are testing added features which are 

subsequently rolled out nationwide such as new lines of clothing, extended electrical department selling computers, iPods and 

DVDs and a full-range grocery department. The stores are also testing new media with TV screens navigating shoppers in store. 

However, the standard Supercenter format did not work as well in Japan or Germany. 

According to Wall Street Journal the company is also working on two new smaller store concepts in direct response to Tesco’s US 

grocery stores. The first is an urban C-store catering for more affluent tastes in city centres while the second is a standalone retail 

unit offering a wide range of health services and products. 

(Accenture 2005; www.walmartfacts.com; www.csnews.com, 23.10.2007 ) 

Vignette 4.5: Zara: threats to ‘fast fashion’ 

Context: Business model innovation 

Example: Zara, the retail subsidiary of Inditex was among the first proponents of the ‘fast fashion’ business model which was 

built on the basis of: 

− partial vertical integration, 

− in-house design, 

− buying of merchandise much closer to the season and 

− fast feedback from stores. 

The model allows for high stock turnover, 4 weeks at most lead times from concept to consumer. The result is a constantly 

refreshed product range of more than 12 000 SKUs (e.g., new styles every week in low production quantities) and on average 17 

customer visits per year. The ‘when-it’s-gone-it’s-gone’ approach also means far less price mark downs, i.e. higher profitability. 

However the ‘fast fashion’ model of Zara, Top Shop and H&M now appears to be under pressure from a new breed of clothing 

discounters such as Primark, Peakocks and fast growing grocery labels such as Cherokee (Tesco) and George (ASDA) which are 

managing to offer clothing with contemporary styling at discount prices. 

Vignette 4.6: TK Maxx: the ‘off price’ model 


Example: The ‘off-price’ business model of TK Maxx (the British affiliate of the US company TJX), suggests another type of 

innovation. The appeal of its offer comes from a wide range of well-known designer brands sold at 20 to 60% discount. TK Maxx 

is able to do this through its opportunistic buying strategy. Unlike more traditional department stores which commit to quarterly 

buying cycles, the merchandising teams at TK Maxx wait until both suppliers and retailers have committed to their orders and 

then look for excess or unwanted stock at discount prices (Ritson, 2006). 

Vignette 4.7: Somerset Local Direct 


Example: Somerset Local Food Direct is retailer offering their customers every day online the same quality of local foods as they 

can buy at farmers’ markets. The company was set up with the help of funding from DEFRA. The retailer’s philosophy is about 

supporting ‘local food culture’, providing value and convenience to customers and helping local agriculture survive in the face of 

imported produce. Most of its suppliers are farmers and producers who also sell at local farmers’ markets. 

Somerset Local Food Direct’s business model is simple. The company has a catalogue of locally sourced foods, augmented by 

organic and ethically sourced produce from further afield. It proudly emphasises the predominantly local nature of its range 

pointing out that 80% of suppliers can see the local landmark, Glastonbury Tor. The catalogue can be accessed online or as a 

paper copy. Customers can then place an order (80% do so on the web site, 20% by phone) up until Tuesday morning. The 

company then places orders with producers on Tuesday for exactly the amounts required to fulfil that week’s orders. Suppliers 

then deliver their produce to the Glastonbury warehouse on Wednesday and it is put out onto the shelves. The orders are picked 

and a fleet of vans delivers the orders to customers’ homes on Thursday and Friday. Produce is packed in insulated boxes to keep 

it fresh and this also means that customers do not need to be at home when it is delivered. 

Because of its origins, and numerous contacts in the farmers’ market movement, the company has been quickly able to develop a 

competitive product offer, achieving the necessary critical mass to be successful. Keys to profitability are strict control on costs, 

sufficient density of customers to make delivery viable and attractive range available in all seasons of the year. There is obviously 

a limit to the distance from the warehouse within which delivery is economic. Crucial to the whole operation is a computer 

Page 31


software system, developed in-house. Given the determinedly local scale of the operation, Somerset Local Food Direct offers a 

remarkable range of goods, amounting to well over a 1,000 SKUs including fresh locally produced meats, vegetables, dairy 

produce, eggs, breads, preserves and snacks. Such a range caters for a large proportion of the weekly requirements of customers 

which in tunrn generates additional customer loyalty. As a result, the average order value is healthy, with some customers ordering 

up to £80 worth of food at a time. This is important to the economics of the operation, as, even with a delivery charge of £3, 

small orders are unlikely to be economic to fulfil. This coupled with recommendations from satisfied customers has helped the 

delivery model of the retailer, which now operates on the basis of ‘delivery clusters’, where several drops are close together and 

thus make the delivery operation more efficient (www.localfooddirect.co.uk). 

Vignette 4.8: Smiley’s Delicatessen, Farm Shop and Café 

Context: Offer-related innovation in a small rural retailer 

Example: Smiley’s is not a standard village shop but a hybrid retail concept balancing the range of lines stocked and the different 

needs of teashop/café and the retail side. The shop’s range is tailored to the modern reality that most people buy their cans and 

packets at the large supermarkets and the role of local shops is to provide short life products bought between the weekly or 

fortnightly visits to large food stores. The shop has a large serve-over dairy and delicatessen section, with fresh produce, much of 

it local, a limited range of groceries (for the “I forgot to buy it at the supermarket” customer) together with a wide range of 

confectionery including loose sweets in jars for the nostalgic. Fresh produce is displayed with some flair in wicker baskets and in 

artistic piles. Friendly customer service is a key part of the offer together with a willingness to listen to customers’ requests for 

items not already stocked. 

However, the most interesting aspect of the shop is the mix of retail and café. The café section is totally integrated with the shop 

but delineated by a pillar and a change in floor tile colour. This has a French theme and feel. With 26 covers, the café provides 

informal eating with the possibility of evening service as well at weekends or other times. Lunch has proved very popular, in 

particular on Sundays. The challenge is to produce a menu that is interesting whilst being not too difficult to produce without a 

dedicated chef on the premises, that is “homemade” without eliciting the response, “Well, I could do it just as well at home”. 

Catering provides much higher gross profit margins than retail but there are higher costs as well, in terms of time required to 

prepare and serve the food, wastage, space, etc. Hence managing the balance between the two halves of a business like this is 

crucial - being able to cope with the inevitable peaks in customer demands. 

Theories of retailing might suggest that the demand from the village itself is too small to sustain the shop or cafe on its own. 

However, there is also significant passing trade on the A road that passes through Sandford, the shop having a large forecourt for 

parking (The Rural Shops Alliance 2007). 

Vignette 4.9: Boots and Tesco: customer-centric supply chain innovation 

Context: Supply chain innovation 

Examples: In 2005 Boots launched the first phase of its Store-Friendly Supply Chain (SFSC) programme taking a more 

customer-centric perspective to the way it organise its supply chain. The aim is to improve stock availability and free up staff time 

in store to serve customers instead of unpacking and sorting merchandise. Boots claims that as a result of SFSC, over 80% of 

items are arriving at stores ready to go straight onto shelves, a huge saving in time and energy for busy store managers and their 

teams. (Boots Annual Report 2006) 

Tesco is improving the efficiency of its in-store operations and on-shelf availability by innovating in what the industry experts 

refer to the ‘last 50 yards’. In shelf-replenishment terms this means increased use of new design merchandising units, easier to 

refill freezer units with drop down fronts, shelf-ready packaging (SRP) and trials of in-store applications of RFID. 

Vignette 4.10: The Mid Counties Co-op: payment systems innovation 

Context: Retail applications of biometric technology 

Example: The Mid Counties Co-op has introduced a finger-touch payment system, enabling customers to pay for their shopping 

by scanning their fingerprint at the checkout. The biometric payment system developed by a consortium of a technology firm in 

San Francisco, Fujitsu and Pay By Touch has been tested by the Mid Counties Co-op in three of its stores in the Oxfordshire 

area. Customers using the ‘Pay By Touch’ can set up an account at the store or over the internet. Once their fingerprint has been 

identified at the checkout the customer's bank account is automatically debited. The retailer’s own research suggests that ‘Pay by 

Touch’ has the capacity to be up to 20% than using ‘chip and PIN’. 

Page 32


According to the retailer the initial customer response to this innovation has been very encouraging. From a sample of 1000 Coop 

shoppers in the areas where the system is in operation half has already signed up to the scheme or planning to do so in the 

near future. The Co-op is the first retailer in the UK to launch this new technology which offers a secure and convenient way of 

payment. 

(www.software.silicon.com; www.imrg.org, 23.10.2007) 

Vignette 4.11: ASDA 

Context: Innovating in sustainable development 

Examples: 

− Fair trade: ASDA claims to be the largest seller of Fairtrade fruit and vegetables in the UK, and is extending its Fairtrade lines 

across the range. 

− Organics: ASDA has reported that it will increase its organic ranges from the current 300 SKUs to 1,000 SKUs by the end of 

2007. 

− Transport/logistics: The retailer has entered planning applications to install wind turbines at six of its UK distribution centres 

(www.planetretail.net, 03.08.2007). 

− Eco stores footprint: The company is planning to open its first sustainable timber frame with view of lowering its carbon 

footprint. This will eradicate the use 500 tonnes of steel and is expected to save 450 tonnes of carbon emissions while 

improving the energy efficiency of the stores by 20%. 

− The company aims to achieve zero waste going to landfill by 2010. (www.asda-press.co.uk, 18.10.2007) 

Vignette 4.12: The Co-op 

Context: Innovating in sustainable development 

Examples: The Co-operative Group strives to evolve its business model in a sustainable manner by undertaking a number of 

commitments and environmental initiatives such as: 

− 98% of outlets to be powered by green electricity 

− The initiation of wind farm projects 

− Solar power and micro-wind installations on two Head Offices 

− Commitment to reduce energy consumption by 25% by 2012 

− The entire own-brand household paper range sourced from responsibly managed forests and recycling facilities certified by the 

Forest Stewardship Council. 

(Presentation by Martin Beaumont, CEO, at the BRC conference (2007) “The secrets of retail success”) 

Page 33

5. What drives retail innovation? 


5.1 This section focuses on exploring the specific drivers of innovation in retailing as seen by 

the interview component of our research. Managers’ perceptions about the drivers of 

innovation help us to understand how organisational responses are shaped in terms of 

strategies, structures, directions and the ways in which innovation is measured. In most 

cases, there is broad agreement on what these drivers are and that they fall into two broad 

categories: those external to the firm and those internal: 

• Drivers external to the retailer drivers comprise (1) customer/consumer trends, (2) 

the competitive environment, (3) industry cycles and organisational growth, (4) the 

regulatory environment, (5) technology, and (6) retailer-supplier relations; 

• Drivers internal to the retailer comprise (1) strategy and business planning, (2) top 

management vision and leadership, (3) operational efficiency, (4) organizational 

culture and structure, (5) innovation reward mechanisms, and (6) availability of 

resources (financial and human) (Hristov 2007). 

Figures 5.1 and 5.2 summarise the relative importance of the six main drivers as seen by a 

sample of 34 interviewees. 

a. External to the retailer 

Figure 5.1. External drivers of innovation 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

65% 

Customer/consumer 

trends 

53% 

The competitive 

environment 

Source: Company interviews content analysis, (Hristov, 2007). 

47% 

Industry cycles and 

organisational growth 

18% 18% 

Technology The regulatory 

environment 

5.2 Customer/consumer trends: By a long way in terms of share of responses (65%) of 

managers consider changing consumer trends to be the major external driver of retail 

innovation. This is unsurprising because of the very nature of retailing as a consumer 

facing activity. Consumer trends are multidimensional and include socio-economic, 

technological, demographic components, like changes in terms of mobility, sustainable 

12% 

Retailer-supplier relations 

Page 34


consumption, consumer welfare, use of technology, fragmentation of demand, or the 

emergence of a global consumer. Interviewees acknowledged that commercial survival 

and success are intrinsically linked to their ability to innovate simultaneously across all 

these areas of change. This results in plethora of retail initiatives around the retail offer, 

delivery channels and the underpinning operations. One-stop shopping, the dollar store 

concept, in-store theatre, multi-channel retailing, fast fashion, EDLP or more holistic 

customer centricity initiatives are all innovative responses to changing consumer trends. 

Here the dilemma for senior managers seems to be to what extent retailers need to be 

customer-driven (focused on expressed consumer needs) and to what extent they could 

actually drive consumer demand by focusing on latent needs. 

“Ultimately of course all adds up to innovation in the proposition to the customer because the customer’s 

buying the product and the service and it’s happening through the supply chain and they're buying it through 

different channels” 

(Marketing Director) 

“I think the need to have competitive advantage over other people on the High Street, they want to be able 

to have that product that nobody else has got ahead of everyone else. I think they are very keen to improve 

the customer environment… I think they [retailers] are quite focused on the customer areas in terms of 

delivering innovation” 

(Senior Manager, Industry Association). 

5.3 The competitive environment: (a 53% share of responses.) Growing international 

competition coupled, with continued industry concentration and the effects of the 

Internet on consumer demand and shopping habits invariably affects the pace with which 

retailers innovate. Interviewees distinguished between two types of competition: the first 

are ‘competitive pressures’ from direct competition in the marketplace from incumbents 

in pursuit of market share and customer patronage. The second is what many retailers 

referred to as ‘fear from industry disruptions’ coming within or from outside the sector. 

These might include radically new retail business models, enabling technologies or even 

new product propositions which compete with retailing for share of consumer wallet. By 

definition, these often indirect competitive challenges are much more unpredictable. 

While ‘sustaining’ innovation is about incremental improvement along established 

industry trajectories, innovations that result from ‘disruptive’ competition are often 

simpler and cheaper, but require very different set of commercial capabilities which 

incumbents may find difficult to develop. 

“I think a lot of it is down to competition, it’s always trying to be one step ahead other people or watching 

the competition lead and then trying to follow very quickly” 

(Innovation Director). 

“A disruption to your normal business model from competitive activity, rapid market change - I think 

these are main drivers on a macro level.” 

(Marketing Director). 

5.4 Industry cycles and organisational growth has a 47% share of responses. Here 

managers associate industry cycles with their own organisational lifecycle. In this respect 

innovation is seen as the means for continued existence. Retailing experiences distinct 

phases of development, and change through innovation is seen by incumbents as critical 

for developing new differential advantages and revenue streams. This is nowhere more 

relevant than to retailers in mature and saturated markets. According to one Commercial 

Page 35


Director about fifty to sixty percent of like-for-like food retail growth in one of their 

markets comes from innovation rather than ‘business as usual’. This drives companies to 

change their strategies, structures and propositions. As the CEO of a leading discounter 

pointed out, 

“Innovation on a strategic level is about positive change and improvement, I don’t want to innovate and 

make things worse.” 

Sometime change entails radical innovation or reinvention of the business model which 

requires leadership from the very top of the organisation (Hristov and Reynolds, 2005). 

“Our department store model was in decline, we had to do something and go back to our routes of being 

more radically innovative. We had to redefine ourselves, and that’s what we did” 

(CEO). 

5.5 The regulatory environment was included in 18% of responses. However considering 

that the driver it becomes apparent it has a wide ranging area of impact associated with all 

other drives. A wide-ranging regulatory environment (addressing relates to competition 

and consumer protection legislation, planning, transportation and the environment) is 

seen as important in shaping the direction of many retail innovations. In their pursuit for 

growth retailers constantly see the need to adapt their strategies to the environments in 

which they operate. In the spatial planning regime has given rise to new types of 

shopping outlets at new locations (see Vignettes 5.1 – IKEA, 5.2 – responses to 

regulation and 5.3 – Currys customer recycling proposition). 

We grow organically through buying land and building the stores ourselves. This however is not always 

possible. In some markets such as the UK, there are hardly any locations left, and there we combine 

organic growth with possible acquisitions. 

(Executive Chairman) 

“In many service industries de- and re-regulation can trigger the scope for innovation. In retailing the 

liberalisation of opening hours of shops in combination with changes in the spatial planning regime has 

given rise to new types of shopping outlets at new locations” 

(van Ark, Broersma and den Hertog, 2003). 

5.6 Technology: (18% of respondents). The role of technology is seen increasingly as 

supportive to the customer facing functions in retail organisations. Without ignoring the 

technological dimension, interviewees appear, to reinforce the generally nontechnological 

focus of retail innovation. Indeed, some commentators point toward lack of 

enthusiasm among some retailers to innovate in the ICT area. There are however many 

notable examples of retailers who behave as early adopters or generators of retail 

technologies (Hristov and Reynolds, 2005). (See Vignettes 5.4 – Marks & Spencer and 5.5 

– Tesco in a Box) 

“Retailing is not like some aspects of manufacturing which is primarily about technological lead. In 

retailing these [factors] are going to be further down the interest list, retailers think in terms of ‘how can 

we better understand our customers, listen to customers, deliver what they need in the right format and so 

on’… ‘oh, and by the way, how can we usefully deploy technology in order to achieve that?’” 

(Strategy Director). 

Page 36


“Big, big, big, which is why I do development and IT, because the two are interlinked, whether it be new 

software that allows us to do things we haven't done before like link together databases, whether it be new 

technology like handsets, what mobile phones are going to do with Bluetooth, 3G, I mean all of that is a 

driver of innovation… So it’s how you tie the technology into practical usage at some point in the future,” 

(Business development and IT Director). 

5.7 Retailer-supplier relations: (12%) This final driver of innovation highlights the 

importance of the relationship between retailers and their suppliers as an intrinsic part of 

the two way innovation diffusion innovation. The link appears particularly strong in retail 

areas such as NPD, buying, logistics and ICT. The continuous growth of retailer brands, 

diversification, geographical expansion, and multi-channel retailing, coupled with the 

constant quest for greater efficiency strengthen this complex but essential relationship. 

(See Vignette 5.6 – Waitrose.) 

We don’t manufacture anything, so although we have product development technologists and buyers here, 

obviously with our suppliers there's an equivalent team, so there would be product developers, technologists 

and commercial people there. And we talk about a partnership and there's this constant well who does 

the innovation, where do the ideas come from” 

(NPD Director). 

b. Internal to the retailer 

Figure 5.2. Internal drivers of innovation 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

71% 

Strategy and business 

planning 


36% 

Organisational culture and 

structure 

32% 

Top management vision 

and leadership 

5.8 Strategy and business planning account for 71% of all responses. Senior managers 

characterise strategic planning as a decision making process which translates the retailer’s 

intent into a realized strategy. This involves the development of sales, profit or 

competitive objectives in line with the retailer’s business model and in pursuit of 

opportunities in the market place. ‘Strategizing’ involves the allocation of financial, 

human resources into new competences. The interviewees drew clear connections 

between strategy and innovation. The predominant view is that strategy drives innovation 

21% 

12% 

Operational efficiency Innovation reward 

mechanisms 

9% 

Availability of resources 

Page 37


in terms of direction, resources availability and timelines. Evidence of that is the existence 

of ‘organizational routines’ such as annual planning cycles, regular board meetings with 

innovation on the agenda, strategic and range reviews in the course of which innovation 

is discussed and planned. 

“Innovation is not always about ideas, many people have ideas, it is not even about skills - many have 

these as well - it is about the will of implementing new ides, the dogged determination to bring them the 

market through a well thought-out strategy” 


5.9 Top management vision and leadership: 32% of respondents highlighted the role of 

the top management team in innovation. Practitioners see the role of retail directors as 

the ‘leading entrepreneurs’ of the business who provide strategic and operational support 

for innovation, sponsoring as well as producing new ideas (Hristov and Reynolds, 2005). 

Beyond their strategic role, senior executives see the need to get involved in front-end 

decisions, which keeps them in touch with the operational side of the business and 

ensures a feedback loop for bottom-up creative ideas. 

“As a manager I deal with both strategic and operational issues. At present we have more than 750 

stores across five markets … I have approved every single location and have personally opened most of our 

major stores. I travel a lot between the markets, meeting managers and people important to our business. 

With our store managers I discuss the local ranges, what sells and what doesn’t and how we can improve 

our position. There is always room for improvement” 

(Executive Chairman). 

Senior management also see their role in achieving the right balance between the 

‘business as usual’ which generates revenues ‘here and now’ and the need for new 

revenue streams which will deliver future growth. Many of them acknowledge the 

potential tensions between these two seemingly disparate business areas. 

“Innovation is a balancing act. I feel conscious that even if an organisation is doing well I still have to 

provoke its innovation instincts” 

(CEO). 

5.10 Operational efficiency: 21% of practitioners emphasised that much innovation in 

retailing is driven by the need to improve operational efficiency. There are fundamentally 

two ways of increasing output: (1) to increase the number of inputs into the value 

creation process, or (2) to find new ways of increasing the output from the same number 

of inputs. The second one gives rise to cost driven innovation. Evaluation of key 

performance indicators such as space productivity, asset productivity, financial 

productivity or employee productivity provides scope for innovative solutions to reduce 

operating costs. Therefore considerable innovation occurs in the ‘support areas’ of a retail 

business – its systems, logistics or store operations. 

“The efficiency side, yes, seeking to do more for less, if you like, to drive profit growth. I guess that’s 

because we feel that that’s more under our control” 


“…we've had to really kind of refine and refine our processes and our systems to make ourselves a much 

more productive beast” 

(Business Development Director). 

Page 38


5.11 Organizational culture and structure: This driver accounts for 36% of responses. 

Senior managers see culture and structure as closely related. A retail culture is manifested 

through patterns of shared beliefs, values, attitudes and behaviour (“the way we do things 

around here”) in relation to organisational goals and strategies. A particular organizational 

structure (including innovation delivery mechanisms) has the capacity to reinforce a 

culture of innovation by channeling and streamlining the decision making process. This 

must be carefully handled, however. Some interviewees pointed out that ‘over structuring’ 

the culture could actually work to stifle a more entrepreneurial culture. 

“For us innovation is a strategic priority, we made this conscious decision a few years ago. It is part of our 

intention to continue as the market leader. This meant that we had to instil a culture of innovation 

consistent with our heritage and the structure to support it. It seems simple but not that easy, it takes 

time”. 

(Marketing Director) 

“In a turnaround situation it is somewhat easier to be innovative in a radical way. I had to change the 

business and to take away a whole management layer to make sure that innovation ideas do not loose 

their edge by the time they get to me” 

(CEO). 

5.12 Innovation reward mechanisms: This factor featured in 12% of the responses from 

senior executives. This relatively low score could be explained in that some retailers do 

not have specific mechanisms for rewarding innovation, most appear to maintain broader 

staff development or appraisal systems which reward job performance but may not 

necessarily encourage innovation orientated behaviour. Nevertheless, there are some 

examples of innovation specific schemes among some retailers. 

“We have clear performance appraisals and people have growth targets which hopefully encourages 

innovation, we don’t give a specific reward for innovation, so there's nothing direct but there is something 

indirect” 

(Head of Format Development). 

“No, I don’t think we do specific mechanisms for rewarding innovative behaviour, perhaps with the 

exception of a suggestion scheme which is primarily targeted at staff in-store, and they do receive a small 

share of any saving or benefit that comes from the suggestion up to a capped amount” 

(IT Director). 

5.13 Availability of resources (human and financial) as a driver featured in only in 9% of 

the responses but nevertheless it pointed towards the fact that any lack of such resources 

can be a significant barrier to innovation. Resource availability determines the scope, scale 

and timing of the innovation initiatives undertaken during the planning cycle. According 

to some retailers, ‘good’ resource allocation means funnelling the right resources at the 

right time, others suggest a ‘fixed capacity approach’ to innovation, recognising the limits 

of how much innovation a business can cope with at any one point: once one initiative is 

through the innovation funnel then another can replace it. 

“Sometimes people have too much on, too many priorities in the business. We don't have the spare 

capacity or time to innovate. Innovation needs a separate delivery framework and ring fenced resources. 

Page 39


New ideas can easily get suppressed and eliminated simply in the quest for earnings, growth and 

performance” (CEO). 

“There are some markets that you may want to go into, because of the opportunities they provide, but this 

may involve a period of sustained investment, which could mean that you have to go down before you go 

up. It is a balancing equation of how much you can loose before you gain. This could be a challenge to 

innovation. You have to make a commercial decision which ideas you are going to exploit and which not. 

Some ideas have to get parked for a while” (HR Director). 

Vignette 5.1: IKEA, Coventry 

Context: The regulatory environment as a driver for innovation 

Example: IKEA’s need to develop its business in the UK coincided with the opportunity to experiment with its first multi-level 

(more than 2 storey) store in the context of the Town Centres First policy. The 23,850 m2 gross development (on four levels, 

with three levels of car parking), proposed for the city centre of Coventry, follows a five-year site search in and around the city. 

The company’s trading concept - its retail format - is well-established and has hitherto varied little in the 34 countries in which the 

firm trades. The concept is based on self service (with the requirement for a self-serve warehouse), a Market Hall for home 

furnishing accessories, and a Showroom. 

IKEA has made several significant compromises in the development of the Coventry concept. In the Coventry design, customers 

will park on one of the three lowest levels, or will arrive by bus or on foot, and will start their shopping in the showroom on the 

topmost, sixth level. The market hall is on the floor below, and the self serve warehouse split between levels four and three. 

Home delivery and bistro facilities are on the ground floor. Up to 15 HGVs a day will provide a regular supply of goods inward. 

Car parking provision is well below the current Government maximum. Further adaptation had been resisted, however. 

Disaggregation of the IKEA concept into separate units had been acknowledged by the Secretary of State to be inappropriate. 

IKEA stresses that doing this would have led to higher prices. 

Vignette 5.2: Drivers of innovation 

Context: The regulatory environment 

Examples: Retailers’ strategies and the attractiveness of particular technologies are influenced and directed by the regulatory 

environment within which retailers operate. For instance: 

− An unanticipated consequence of a more restrictive planning policy towards out- and edge-of-town retail development, 

combined with adoption of congestion charging or road pricing may be to reinforce the attractiveness of e-commerce 

technologies amongst consumers and retailers. Already, e-commerce market shares in the UK are running broadly twice as 

high as in the US. UK total online sales for 2006 reached £30.2bn, exceeding the forecasted £30bn. 

− Another significant emerging driver is that around future environmental regulation. Firms with extensive property portfolios, 

such as retailers, are substantial energy users. Further, increased responsibilities for recycling will add complexity to the 

logistics function. Technologies – such as design simulation and modelling applications – are likely to be important in 

producing more energy efficient stores. Similarly, improved materials handling and vehicle utilisation systems will materially 

assist retailers seeking to meet their recycling responsibilities cost effectively. For instance Boots are aiming to reduce reliance 

on landfill by reusing and recycling over 17 different types of material which otherwise would be disposed of to landfill. 

Many grocery retailers use backhauling of waste to increase fleet utilisation through minimising empty running or trailers back 

from stores. 

(Reynolds 2005; www.imrg.org; www.bitc.org.uk, 18.10.2007) 

Page 40

Vignette 5.3: Currys customer recycling proposition 

Context: Using regulation to improve customer service 


Example: In July 2007 the UK Government introduced the Waste Electrical and Electronic Equipment (WEEE) Directive. 

Many retailers elected to join the Government’s own take-back scheme, where consumers take goods to designated recycling 

facilities. Others retailers charged for collection. 

Currys, whose parent company DSGi had the experience of implementing the Directive in 12 countries, instead offered a 

different customer alternative to the Directive: the UK’s first and only free in-store and home collection recycling service. 

Customers are able to return their old products to any store, even if the original item was not bought at Currys. Home delivery 

customers can have appliances collected at the same time. 

In addition to investing in the scheme infrastructure, Currys has invested in promoting free in-store and home collection of 

recyclable goods through its latest TV advertising campaign. This has the dual benefit of raising awareness in recycling and shows 

Currys as willing to go the extra mile for customers. 

The scheme is providing Currys with the opportunity to deliver (and communicate) better customer service, and customer 

feedback has been overwhelming. Customers are delighted to have the opportunity to recycle without the inconvenience of 

transporting old equipment themselves. 

Since the scheme was launched in store on 1 July, the number of products collected has been almost double Currys’ expectations. 

Approximately 85% of all appliances are recycled and many products are reused some for charity. Currys is delighted that its 

innovative solution to a piece of legislation has been so successful. 

In addition, the transportation of the equipment has not added any additional miles to the supply chain as Currys’ existing delivery 

lorries – that would otherwise return to the Newark national delivery centre empty are being used for collections (DSGi, 2007) 

Vignette 5.4: Marks & Spencer and RFID 

Context: Applications of new technologies 

Example: Following a successful trial in 42 stores in May 2007 Marks & Spencer has completed installation of RFID 

infrastructure in its 120 largest stores which allows for better supply chain visibility, more accurate and efficient stock taking and 

improved availability of products in their stores. The company is also finalising training some of its staff on the BT RFID 

technology (Friedlos 2007). 

Vignette 5.5: Tesco in a Box 

Context: Applications of new technologies 

Example: ‘Tesco in a Box’ is Tesco’s solution to the need for consistency of execution when entering a new market. It comprises 

a centralised web-based management information system which measures stores against key business performance indicators. 

Tesco in a Box went live in the first store in Turkey in March 2005 and has been rolled out to the company's Japanese and 

Chinese businesses. A later version incorporates supply chain and merchandise management software. “Business intelligence can 

be reproduced in other countries at minimal cost” (Company). 

Page 41

Vignette 5.6: Waitrose 

Context: Innovating in sustainable development, retailer-supplier relations 


Example: Waitrose is looking for innovative ways in delivering the ‘triple bottom line’, in terms of economic, social and 

environmental performance. The supermarket is championing seasonal British produce from local producers. This is part of its 

‘transport optimisation’ initiative to reduce food miles by ensuring more effective utilisation of its lorry fleet. The company is also 

allowing local producers to deliver directly to stores. While this has positive effect on local farming communities and satisfies the 

growing consumer need for local produce this also needs to be balanced in environmental terms. The retailer’s own research 

suggests that in logistical terms growing flowers, for instance, in Kenya and flying them in to the UK could be more energy 

efficient than growing these flowers in glasshouses in the Europe and transporting them by road to the UK. 

The supermarket’s relationship with farmers is increasingly built on its own farming experience. In Leckford north Hampshire, 

Waitrose operates 4000 acre farm. The farm has more than 1,000 cattle, 12,000 hens, an apple orchard and mushroom producing 

facilities which are the sole supplier of white mushrooms to the supermarket. The farm has been in ownership of John Lewis 

since 1946 and although it is far from being the major provider of agricultural produce for the Group it nevertheless is a source of 

practical experience about understanding the challenges of modern farming. “Such insights are invaluable at a time when 

supermarket-supplier relationships have come under scrutiny from regulators at the Competition Commission” (Davey, 2007; 

John Lewis, 2007). 

Page 42

6. What are the barriers to retail innovation? 


6.1 Conventional analyses of barriers to innovation within the Community Innovation Survey 

and elsewhere tend break down the likely obstacles into four broad sets of factors: costs 

and knowledge (linked to difficulties internal to the firm) and market-related and other, 

largely regulatory, factors (linked to difficulties external to the firm). The CIS responses 

are based on a specific question asking ‘what factors constrained your innovation or 

influenced you not to innovate?’ In some senses, the barriers represent the obverse of the 

drivers discussed in the previous section, and will not bear duplication, but this section 

draws attention to a small number of distinctive features of barriers to retail innovation. 

Figure 6.1. Retail Trade Barriers to Innovation 

Other 

factors 

Cost factors Knowledge factors Market factors 

Need to meet EU regulations 

Need to meet UK Government regulations 

Uncertain demand for innovative goods or services 

Market dominated by established enterprises 

Lack of information on markets 

Lack of information on technology 

Lack of qualified personnel 

Avaibility of finance 

Cost of finance 

Direct innovation costs too high 

Excessive perceived economic risks 


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 

Not experienced Low Medium High 

6.2 At the aggregate level, (shown in Figure 6.1), we might conclude that the majority of 

retailers do not perceive there to be any barriers to innovation within their firms. 

Amongst those that do, the biggest barriers are reportedly in relation to costs, in 

particular the cost of finance and the perceived economic risks of innovation. These 

results were reinforced by comments we received in consulting over this research, as 

illustrated in the quotations below: 

“There is difficulty in encouraging risk and innovation in challenging business conditions.” 

“Financial uncertainty. Innovation never occurs when people are worried about job security.” 

“People resources and business pressures to achieve financial targets stifle innovation.” 

6.3 The smallest range of barriers is reportedly in relation to level of knowledge. The majority 

of retailers would seem to know their markets well and to have little concern that lack of 

knowledge about technological possibilities works to prevent innovation. The greatest 

concerns in this area are over the availability of skilled personnel: 

Page 43


“On occasion there is a lack of technical skills, but more often there is a lack of leadership skills to 

drive/demand innovation and tie everything together” (Retailer). 

“Research institutes were also a source of talent so their decline has aggravated the skills shortage” 

(Retailer). 

6.4 In relation to regulation, EU regulations are perceived to be less of a barrier than are 

domestic regulations. However, there is relatively little difference between the retail sector 

and the responses to the survey from all sectors in relation to barriers: the majority of all 

firms report no experience of barriers preventing innovation, although concerns about 

erosion of components of the science and research base, supported by Government, do 

prompt comment: 

“There has been an erosion of government funding into research institutes. E.g. Silsoe Institute no longer 

exists. They developed the concept of Precision Agriculture in response to concerns about labour shortages 

and pesticides” (Retailer). 

As do concerns over the availability of allowances for mitigating some of the risks of 

innovation: 

“Risk allowance for business, allowing shared risk in terms of financial investments” (Retailer). 

There are some specific concerns expressed in relation to the regulation of sustainable 

technology: 

“Planning regulations: wind turbines, solar panels, mezzanines and expansion of stores.” 

6.5 But perhaps the biggest concern (which relates to sustainability but to other areas of 

Government’s attitude and policies towards innovation) is: 

“Lack of inter-departmental co-operation within government and lack of common agendas.” 

6.6 One of the most significant market factors inhibiting or shaping innovation in retailing is 

derived, as we have suggested, from the ease with which many innovations can be copied. 

Another way of illustrating this is to examine the extent of protection of innovation 

employed by innovation active firms. Figure 6.2 shows this for the retail sector. 

Page 44


Figure 6.2. Nature of protection of innovation employed: retail trade 

Formal Strategic 

Lead-time advantage on 

competitors 

Complexity of design 

Secrecy 

Copyright 

Confidentiality agreements 

Patents 

Trademarks 

Registration of design 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 

Not used Low Medium High 


6.7 Relatively low levels of innovation protection are employed by retail firms and there is a 

tendency to use informal (such as secrecy) over formal methods (such as patents). In part, 

this relates to the nature and incidence of retail innovation – often not patentable or 

capable of being trademarked, and where designs may be much less complex than in, say, 

manufacturing. Retailers appear to rely more on secrecy and lead times in protecting the 

new things they do from competitors. But the majority in every case who do not employ 

either formal or informal protection mechanisms reinforces the visibility and – in many 

cases – transparency of retail innovations, particularly customer-facing ones. 

6.8 When compared to the protection employed by, say, engineering firms, (Figure 6.3) the 

irrelevance of all kinds of protection for retailing becomes clear. The nature of often 

complex proprietary engineering projects leads to very low levels of appropriability and 

the likely greater success of informal mechanisms, whilst the tangible nature of much 

innovation in engineering lends itself also to formal protection mechanisms. Engineering 

projects are habitually front-loaded in terms of cost and often require more complex 

financing; retailing innovation is more incremental, cheaper, and can be turned off 

relatively quickly if it fails or becomes more expensive than originally budgeted. Retail 

projects are more often back-loaded from the point of view of finance, as we have 

suggested. Retailers appear to be more confident of their markets and relevant technology 

better, but the relative difference in relation to technology not as high. Finally, the two 

sectors are closer on regulatory barriers, but engineering appears more affected by EU 

regulation than UK. We might speculate that this reflects actual or perceived lack of 

services legislation at EU level. 

Page 45


Figure 6.3. Comparisons of perceived barriers to innovation: retail trade vs. 

engineering 

Other 

factors 

Cost factors Knowledge factors Market factors 

Need to meet EU regulations 

Need to meet UK Government regulations 

Uncertain demand for innovative goods or services 

Market dominated by established enterprises 

Lack of information on markets 

Lack of information on technology 

Lack of qualified personnel 

Avaibility of finance 

Cost of finance 

Direct innovation costs too high 

Excessive perceived economic risks 

0 50 100 150 200 250 300 350 400 

Retail trade Engineering 

Extent of barrier (weighted score, max= 1,000) 


Page 46

7. What are the measures of retail innovation? 


7.1 Innovation needs to be measured in order to be successfully managed. The focus of this 

section is to explore the ways in which the senior managers interviewed as part of this 

research seek to measure innovation. Wider meanings of innovation as ‘new ideas to 

market’ are typically cascaded across the business and translated into business specific 

operational terminology and targets such as, new SKUs, new product categories, new 

retail formats, number of new products in the range or share of customers, etc. In this 

case retailers strive to put measurement systems into place in order to be able to monitor 

and review levels of business performance and the extent to which their initial strategies 

are being realised. Measurement of innovation in retailing can be categorised in terms of 

its ‘type’ (1) financial and (2) non-financial and its ‘level of application’: (1) project 

specific, (2) functional and (3) corporate level (Hristov, 2007). The Community 

Innovation Survey does not ask questions about innovation measurement. 

a. The extent of measurement 

7.2 With some notable exceptions, most senior managers pointed out that retail firms tend 

not to use innovation-specific metrics or KPIs 12 , rather they measure their innovation 

activities by adapting existing performance measures. In part, this is because retail 

innovation is largely incremental, iterative and often dispersed across different divisional 

budgets, considerable perceptual differences exist as to what exactly is recorded as 

innovation as opposed to simply good business practice within different functional areas 

such as product design, buying or retail operations. Measuring retail innovation tends to 

be focused most on short term tangible performance outputs, based on cost benefit 

analysis and captured through traditional measures of performance and much less on the 

longer term commercial impact of innovation as a value added activity. 

“It's very difficult, I mean it is very, very difficult, to define and measure innovation in some parts of the 

business. For instance funnily enough, our design team don’t get financially bonused for being innovative, 

that’s part and parcel of what they do … our buying teams on the other hand do get heavily incentivised 

on bonuses and operations” 

(CEO, Fashion Retailer). 

“People traditionally tend to overestimate the short term impact of innovation and technology and 

underestimate their long term benefits, and I think that's probably happening here” (Strategy Director). 

7.3 From the 37 senior managers who were asked to think about how innovation was 

measured in retailing, all gave examples where aspects of innovation are measured by 

non-specific performance measures, nearly a fifth were of the opinion that retailers 

generally do not use specific measures related to innovation while 16% of practitioners 

pointed out that although they use general performance measures they adapt these and 

attach to then predetermined or completely adapted success criteria designed to give 

innovations the chance to succeed. 

“So each product you launch has predetermined success criteria, and the sales of new lines are monitored 

against such criteria on a weekly basis. But only a third of what we launch hits its success criteria” 

(Director NPID). 

12 Key Performance Indicators (KPI) are metrics that management managers have identified key important variables reflecting the organisational 

or operational performance. 

Page 47


“We have completely different criteria for new products, yes, completely different criteria because it depends 

on the stage the project or the range or the brand [has reached]. … we do have completely different 

criteria for the mature brands” (Business Development Director). 

7.4 Therefore measuring innovation in retailing often boils down to measuring business 

organisational and operational performance with more traditional although 

organisationally adapted measures of performance. Practitioners appear not to be short of 

such measures: 

“We are very measurement-driven, so on the non-food side we’ll know performance by category, by 

product, evolution by product, percentage, innovation, all of those things we have” 

(CEO). 

7.5 But retail practitioners also realise that the soft benefits of innovation - in terms of brand 

value, or total impact on the business - are less well measured, due to limitations in the 

management accounting systems, and the lack of integration between pre-existing 

budgeting silos. As a result, they are not sufficiently understood. Further, most retail 

measures tracking innovation are designed for products, and are fewer available to 

measure process innovation – and precious little focus on organisational innovations or 

longer term drivers of growth. 

“I think that the difficulty comes more when you try and set strategic targets for innovation where a 

measure like, say; in five years time X percent of our sales will come from new products” 

(Senior Manager, Strategy Department). 

“I don’t think retailers are very good at assessing the soft benefits of innovation. The language that talks 

to them best is money, bottom line, and how much extra is in the till, that's how they tend to think of it” 

(Retail Consultant). 

Figure 7.1. Usage of financial and non-financial measures of innovation 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

84% 


65% 

Overal financial measures Overall non-financial Financial and non-financial 

measures 

59% 

Page 48

. Types of Measures 


7.6 Although the precise nature of the retail measures of innovation varies among companies, 

depending on sub-sector or upon managerial choices, there are broadly two main types: 

(1) financial and (2) non-financial measures (Figure 7.1). 

i. Financial measures 

7.7 Financial measures provide visibility about the concrete contribution of innovation to the 

top and bottom lines of the business. The role of these measures is to ensure continuous 

performance improvement based on the evaluation of the data about rates of return, 

profit margins, costs-benefit ratios etc. They are seen as essential for delivering the 

necessary data for setting the strategic objectives (where do we want to go?), for deciding 

upon resource allocation (how might we get there?) and for continuous tracking, review 

and corrective actions along the way (how do we check progress?). 

7.8 84% of our respondents essentially use at least one or more financial measures, the top 3 

measures being sales and market share measures, rate of return measures and measures of 

profitability: 

“I look at all the things that are going to affect change, ninety-nine of them are financial-related- they have 

a financial benefit. There are some that have a financial cost, [such as] ‘we were innovative in the way 

that we pay our store managers’, that’s going to increase our costs - but we think long-term it will reduce 

training, so it’s an economic deal” 

(CEO). 

“Well fundamentally we measure sales, margin, and return on invested capital” 


• Sales and market share measures have a 78% share of responses. These include 

measures of sales in volume and value, incremental sales from new products and 

services, like-for-like sales since launch, sales densities (per sq ft/sq m) of new 

products, categories, or retail formats. Some retailers have sales targets for new 

products or share of new products in the range, whilst others use broader measures 

such as overall share of market, share of customers or share of wallet. 

“For a first year we actually set a target for a number of fresh products. That will be one of the 

KPIs, where historically it has not been a KPI” 


“Like for like sales volumes, and sales per sq ft of the different brands and how they compare 

with the overall performance of the chain as well two-year payback for new initiatives. Very, very 

simple, it’s part of the mechanics of the business” 

(CEO). 

• Rate of return measures i.e., ROI, ROIC, ROS 13 . (64%). The sector uses rates of 

return of new products, services or other innovation initiatives as financial measures 

of innovation. These include ROI from 6 to 12 months for new products (depending 

13 ROI – return on investment, ROIC – return on investment capital, ROS – return on sales 

Page 49


on product), ROI from new retail formats, ROI from new projects, ROS targets after 

product launch, discounted cash flow, etc. (See Figure 7.2). 

“It’s always return on investment (ROI) - at the end of the day we are here to make a profit. But 

because of new brand considerations, we are also now starting from their perspective to look at things like 

web page impressions…” 

(E-commerce Manager). 

“We have a realistic Finance Director who is aware of the value of marketing but is encouraging us to 

qualify everything on an ROI basis” 

(Marketing Director, Grocery Retailer). 

• Profit margins: 37% of practitioners considered profit margins as an essential 

measure for tracking the success or failure of new products and as a contributing 

factor (among others) in continuing or discontinuing a new product or a category. 

“I think we measure its performance using all the standard financial matrixes that we use for the 

mainstream business, but you have to have a more of a relaxed investment targets for it. I think if 

you expect the same rate of payback or the same rate of return you get from investment in your core 

business, you’ll never support a new start-up business” 

(CEO). 

Figure 7.2. Key financial measures of innovation 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

84% 

0% 

Overal financial 

measures 


78% 

ii. Non-financial measures of innovation 

7.9 Non-financial measures of innovation have been relatively recently applied in retailing. 

They are designed to track the share of new activities in the broader context of the 

business, over a longer period of time, or to measure on a regular basis some of the soft 

benefits of innovation such as customer perceptions about the retailer and its brand (i.e., 

levels of satisfaction, awareness, loyalty, perceived quality, image or positioning vis-à-vis 

competition, etc.). These are of three types: (1) number of (or % of) new products, (2) 

consumer insights and (3) time-related measures (see Figure 7.3). 

65% 

Sales and market share Rate of return measures 

(ROI, ROIC, ROS, etc.) 

37% 

Profit margins 

Page 50


• Number of (or %) new products: 59% of the senior managers interviewed gave 

example of at least one of these: for instance overall number of new products, SKU, 

categories, or introductions of modified products versus entirely new products. Some 

referred to these as ‘semi-innovation’ versus ‘true innovation’, others as ‘straight 

swaps in the range’ substituting old products with new ones, or the percentage of 

sales coming from new products. One large DIY retailer, for example, tracks the 

percentage of product purchasing versus the percentage of project purchasing (i.e., a 

kitchen unit versus a whole new kitchen). 

Some NPD departments track their performance as percentage of sales of all own 

brand products introduced in the range for one year period. Some managers see these 

measures as a fairly crude indication of innovativeness, emphasising the importance 

of quality over quantity of launches. Other practitioners believed that these measures, 

when tracked longitudinally, served to highlight the overall rate of innovation. 

“Percentage of sales of new products is something I measure but we don’t think that big is always 

good any more. It’s a measure but it’s not a measure that is in proportion to how [successful we are]. 

We don’t want to see more necessarily in fact we want to see fewer but more successful new products 

launched … rather than more” 

(NPID Director). 

• Consumer insights: 34% of managers believed that customer insights were essential 

non-financial indicator for levels of successful innovation in the business. Markets 

change, consumer needs change and retailers need to continuously innovate in 

anticipation of these changes. 

“Our customers are changing and so are their needs, innovation keeps us relevant…without innovation 

our like-for-like growth will not succeed, you get into product life cycle issues, you’ll degrade your margins 

and profitability, and will end up commoditising your offer” 

(Commercial Director). 

Here retailer KPIs include changing levels of consumer acquisition and retention, lifetime 

value, measures of loyalty such as ‘net promoter scores’, satisfaction, usage rates, 

conversion rates, frequency of purchase and repeat purchase. 

• Time-related measures: Time span (pre- or post-launch) will depend on the overall 

strategic value of the opportunity. These are often referred to as milestones for 

tracking market penetration levels (for example, the first milestone might be 6 

months, then 8 months or 6 weeks from launch). Other measures might include time 

to market or speed to market. 

7.10 59% of respondents gave examples of combining financial with non-financial measures 

of innovation (see Figure 7.1). 

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Figure 7.3. Key non-financial measures of innovation 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

65% 


c. Levels of application 

59% 

Overall non-financial Number (or %) of new 

products 


7.11 Finally, retailers measure the benefits of innovation at different levels. The interview 

responses we analysed pointed towards three main levels of measures: (1) project specific 

measures (KPIs), (2) functional level measures (function-specific KPIs), and (3) corporate 

level measures (corporate performance measures). 

7.12 Project metrics are most bespoke and detailed. They are designed with specific project 

outcomes in mind and measure the extent to which the project objectives are met in 

terms of inputs, outputs, timescales for product development, budget limits, perceived 

risks and the amount of management time involved. Senior managers saw the projects at 

functional level as the responsibility of the functional budget holders: i.e., heads of 

functional areas or departments. The metrics are drawn from within those departments 

with input from management accounting. For projects at a corporate level in some 

retailers, the practice is that project specific measures will emerge through a consultation 

process or will be produced by cross-disciplinary teams from the departments involved in 

the project. In other retailers, the CFOs and their teams will be responsible for setting the 

KPIs alone or together with business development departments who are often 

responsible for the planning and delivery of the project. 

7.13 Functional measures are designed to reflect levels of innovation input and output within 

individual functional areas. For instance NPD departments will have a clear set of 

measures in terms of profitability, cost benefit, time management and a range of 

reflecting technology and operational processes. These metrics are designed to measure 

newness “with functional flavour” as well as the functional contribution to innovation 

and present a mix of financial and non-financial measures of performance. Innovation in 

functional areas may be managed as part of the core business activities or as separate 

projects as described above. 

7.14 Corporate measures track the incremental contribution of innovation to the business as a 

whole and may comprise input and output measures, as well as financial and non- 

35% 

24% 

Customer insights Time Measures 

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financial measures. Corporate level measures may assess, for instance, the overall input of 

financial of non-financial resources in new initiatives such as the development of new 

ranges of product, new retail formats or the impact of moving into new markets. 

7.15 Overall product-related innovation measures appear most developed and most commonly 

used. In general most retail measures are non-specific, adapted to measure innovation or 

mostly its ‘hard’ benefits - for instance in areas like NPD, where the innovation process 

resembles the linearity characteristic to the patterns of innovation found in 

manufacturing. Much less susceptible to measurement are the process, wider service 

innovations and organisational innovations undertaken by retailers - those associated with 

change, process design, marketing or training and development. According to some of 

our interviewees, these innovations are not sufficiently understood, nor are they 

sufficiently measured. In terms of timescale most of the discussed measures of innovation 

are relatively short-term, often following the retailers’ planning cycles and frequently do 

not account for the longer term effects or commercial benefits of innovation like learning 

or new competence building (Hristov, 2007). 

Page 53


8. Recommendations to stimulate and support innovation in retailing 

8.1 Understanding the sources of information and methods of co-operation conventionally 

employed by the retail sector in relation to innovation provides a useful backdrop to the 

development of recommendations of ways in which Government might stimulate and 

support innovation in the sector. The Community Innovation Survey identifies four 

broad sources of support and co-operation: 

• Internal to the firm, 

• Market-related (including customers, competitors and suppliers), 

• Institutional (including government and university sources) and 

• Other (which include conferences, industry associations and scientific journals) 

Figure 8.1. Sources of information & co-operation for innovation 

Institutional 

sources Other sources 

Internal Market sources 

Technical, industry or service standards 

Professional and industry associations 

Scientific journals 

Conferences, trade fairs, exhibitions 

Government or public research institutes 

Universities or other HEIs 

Consultants, commercial labs, private R&D institutes 

Competitors 

Clients or customers 

Suppliers 

Within your enterprise or enterprise group 

Source: Community Innovation Survey (CIS4), 2005. Base: all innovation active 

0% 10% 20% 30% 40% 50% 

per cent 

60% 70% 80% 90% 100% 

Not used Low Medium High 

8.2 Predictably, retail innovators appeared most reliant on market sources for their 

information with over 50% of both customers and suppliers identified as relevant to 

innovation (and 19% of innovation active firms suggesting that customers were ‘very 

important’ to their innovation activities). These sources were well ahead of consultants or 

private R&D resources. Competitors comprised useful information resources, partly 

because much customer-facing innovation in retailing is inherently visible (even if not 

easily capable of emulation). All these sources comprise excellent examples of retailers 

exploiting so-called ‘open innovation’, as well as providing evidence to support our 

notion of retailers acting as ‘innovation hubs’. 14 A smaller proportion of firms (42%) 

claimed to make use of internal sources, whilst of ‘other sources’, attendance at 

conferences and trade fairs appeared to be most highly regarded. Finally, only a small 

minority (between 10-11% of firms) considered any institutional sources of information 

14 Open innovation is defined as ‘the exploitation of ideas generated from outside the traditional enterprise unit’. 

Page 54


or stimulation to have been at all important; and – notably - no single respondent felt that 

government played a ‘highly important’ role in this regard. 

8.3 It is important to put these findings into context in a number of ways. First, in line with 

earlier analysis, retailers appeared to rely less on any single source of information than 

UK firms on average, apart from their particular interest in conferences, trade fairs & 

exhibitions. Whilst low levels of importance are also attributed both to universities and to 

government by firms in general, such institutional sources appeared less than half as 

important for the retail sector (Figure 8.2). Secondly, it has been suggested by the sector 

that more recently, the largest retail firms have engaged more extensively with universities 

and other research institutions, although such evidence is necessarily anecdotal. For 

example, in 2006 five leading fashion retailers came together in a joint initiative with 

Government to fund the Fashion Retail Academy 15 under the auspices of the University 

of the Arts London, and in 2007 Tesco announced a £25mn Sustainable Consumption 

Institute (SCI) at the University of Manchester 16 . Finally, the position in the UK is not 

universally reflected elsewhere in Europe. The European level data from the Community 

Innovation Study suggests, for example, that service firms in Nordic countries have more 

extensive links with Government and HEI sources than is the case in other markets. 

Figure 8.2. Sources of information & co-operation for innovation: retail sector 

and all sector comparison (weighted data) 

Institutional 

sources Other sources 

Internal Market sources 

Technical, industry or service standards 

Professional and industry associations 

Scientific journals 

Conferences, trade fairs, exhibitions 

Government or public research institutes 

Universities or other HEIs 

Consultants, commercial labs, private R&D institutes 

Competitors 

Clients or customers 

Suppliers 

Within your enterprise or enterprise group 

0 50 100 150 200 250 300 350 400 450 

Importance of source of innovation (weighted, max = 1,000) 

Source: Community Innovation Survey (CIS4), 2005. Base: all innovation active. Note: weighted data. High 

importance=*10, medium importance=*5, low importance=*1; not important=0 

8.4 Governments around the world have recognised their responsibility for supporting and 

stimulating innovative activity by firms. Similarly, however, many governments have also 

historically shared a preoccupation with the manufacturing sector over services, and 

support for technological over non-technological forms of innovation. In the 

Netherlands, for example: 

15 See http://www.fashionretailacademy.ac.uk 

16 See http://www.manchester.ac.uk/aboutus/news/archive/list/item/index.htm?year=2007&month=september&id=123544 

Retail trade 

All sectors 

Page 55


“a bias remains towards supporting technological innovation in mainly manufacturing firms.” 

(den Hertog, Segers and van Ark, 2003). 

This has led to a number of initiatives at both international and national levels to remedy 

the perceived imbalance (CEC, 2007, Forfás Ireland, 2007). The Council of the European 

Union reached broad-ranging conclusions in its deliberations on competitiveness in 

November 2007, highlighting the increased role of services and: 

“the importance of supporting all forms of innovation including non-technological innovation” (Council 

of the European Union, 2007) 

The present UK Government initiative into Innovation in Services forms part of this 

broader response. 

8.5 It has been suggested that existing Government policies towards innovation can be 

adapted to the needs of service sector firms in three particular ways: 

• Deepening of existing policy 

(by making innovation policies more ‘service-friendly’); 

• Broadening of existing policy 

(by recognising that innovation within the service sector are more likely to span firms 

as well as whole value chains); and 

• Horizontalisation of existing policy 

(by recognising that other policies not explicitly designed to stimulate innovation may 

– indirectly – improve the climate for service sector innovation. Such initiatives 

include those in relation to human capital (training and development) and 

deregulation (den Hertog et al, 2003)). 

8.6 If the UK Government is perceived to do less in stimulating innovation in services, or 

existing policies fail to recognise the distinctive characteristics of the sector, then this 

might serve to explain why the retail sector extensively discounts Government’s influence 

on firms’ thinking in this area. In practice, Oxford’s research reveals that the Government 

is engaged in a significant number of activities with varying degrees of relevance to retail 

innovation. This section reviews in summary what Government already does that is 

relevant to stimulating and supporting innovation in retailing. The review is not designed 

as an exhaustive catalogue of Government services, but a prioritised appreciation of 

current activity, which can be seen in three distinct areas: 

• Provision of support mechanisms for retail innovation; 

• Promoting innovation in sustainability by the retail sector; and 

• Fostering skills and organizational innovation in the retail sector. 

8.7 Alongside this review, it makes recommendations for those areas in which the 

Government might better focus and communicate existing activity, in addition to 

potentially providing new stimuli which might matter particularly to retailers. For each 

recommendation, the report follows a standard structure: 

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• Desired outcome 

• Background 

• Evidence 

• Analysis (including the impact of the recommendation, the potential benefits arising 

from action or risks arising from inaction) 

• Conclusions/next steps 

Early drafts of these recommendations have benefitted from feedback by the practitioner 

member’s of BERR’s Retail Innovation Group and the authors of this report are grateful 

for their commentary. 

a. Provision of support mechanisms for retail innovation 

8.8 The role of Government in providing support mechanisms for retail innovation as in 

other sectors should be to encourage risk-taking and innovation, particularly in 

challenging business conditions. Such mechanisms can be of several different kinds: 

offering information broking, educational and horizon scanning services; advising on 

protection of intellectual property linked to innovation; financing or subsidising R&D 

through grants or tax credits, or even targeting public procurement to favour innovative 

activities. Much of Government’s current activity directly in relation to retail innovation 

falls within the first category. 

i. Information, education and horizon scanning 

8.9 There is widespread informational broking activity provided by different levels of UK 

Government potentially to support innovation in retailing. This comes from BERR, 

DEFRA, DIUS, the Department for Transport, DCLG, the Regional Development 

Agencies and numerous other governmental and non-departmental public bodies 

(NDPBs), as well as Local Authorities. Thinking about the future is an area where 

Government has already played a part in bringing together interested parties and acting as 

a catalyst, or retail ‘knowledge hub’. The retail futures work undertaken by Forum for the 

Future and sponsored by Tesco and Unilever might usefully be made available to a wider 

audience. Similarly, in relation to specific areas of interest expressed by the sector – such 

as retail crime – activities by Government have led to tangible outcomes. For example, 

discussions with the Home Office and the Design Council may lead to the rolling out of 

the Home Office ‘Design Against Crime’ initiative across service sectors. This may be a 

good example of a new way of government working with retailers - as a catalyst for 


8.10 However, retailers feel that the lack of inter-departmental co-operation within 

government (a ‘single voice’) and lack of an integrated agenda can make communication 

of these activities confusing and sometime conflicting. Retailers themselves – apart from 

perhaps the very largest firms – have limited resources that they can devote to such 

conversations. Leading retailers and their trading associations have been active in 

supporting many of the Government’s recent initiatives 17 . But even for the largest firms 

such requests must be prioritised on the basis of their commercial, or broader social or 

environmental, potential. Of course, from the Government’s point of view, evidence that 

17 See for example recent Government consultations involving the retail sector: 

http://www.brc.org.uk/ConsResp04.asp?iMode=3. 

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the sector was responding with purpose and conviction to any integrating efforts would 

be an important demonstration of commitment. 

8.11 Some of the most significant informational initiatives in relation to innovation are the 

Knowledge Transfer Networks (KTNs)). The 22 UK Knowledge Transfer Networks 

currently in existence are the main plank of the Government’s investment in technology 

transfer and knowledge exchange between industry and the science base. The first KTNs, 

funded by the Government, Regional Development Agencies and the Research Councils, 

were established in 2005 and the number continues to grow. The opportunity of creating 

a Retail KTN has been explored on a number of occasions, but has not been taken up by 

the sector. However, Quotec identified 14 existing KTNs with “skills and expertise of 

relevance to the retail sector” within five specific areas: 

• Innovation in retail products 

• Technology to improve the manufacture, marketing & sale of retail products 

• Sustainability, efficient use of resources and the reduction of waste; 

• Retail logistics, transport and security and 

• Health & safety (Quotec, 2007). 

Table 8.1 summarises the 14 KTNs and their particular points of relevance. 

Table 8.1. KTN relevance to retail sector 

KTN 

Product 

Innovation 

Improved 

manufactur 

ing, 

marketing 

& sales 

Sustainable 

use of 

resources 

Resource Efficiency � 

Logistics, 

transport & 

security 

Health & 

safety 

Electronic-Enabled Products � � � 

Bioscience for Business � � � 

Food Processing � � � � 

Industrial Mathematics � � 

Sensors � � � � 

Industrial Pollution 

Management 

� 

Grid Computing Now! � � 

Materials � � � � 

Location & Timing � � 

UK Displays and Lighting � � � � � 

Low Carbon & Fuel Cell 

Technologies 

� � 

Modern Built Environment � � 

Health Technology � 

Source: Knee, 2007; www.ktnetworks.co.uk 

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8.12 It is important to recognise that KTNs are essentially technology-focused networks 

grounded in the UK science & R&D base and may be less appropriate vehicles for 

stimulating the kind of wider innovation sought by retail firms. However, of the 14 

KTNs to have pointed to the relevance of their activities to retailing, few have been able 

to generate direct contacts within the sector. For example, companies and academics 

within the Displays and Lighting KTN are developing the new technology platform of 

Plastic Electronics which has widespread implications for retail processes. But they have 

yet to engage with significant end-users from the sector. Some KTNs have reported 

difficulty reaching the most appropriate individuals within retail firms; retailer attendance 

at relevant events has been relatively poor and only a small number of individual retailers 

have fielded speakers at KTN conferences. However, retailers have worked on a limited 

number of specific issues with certain KTNs in the past, some, but not all, of which have 

been technology-focused. For example: 

• Project E-Flex (Electronics-Enabled Products KTN) explored the efficiency of home 

delivery, including vehicle, software and refrigeration design, in which the John Lewis 

Partnership participated. 

• Project NAPSTER (Industrial Mathematics KTN) examined the effect of weather 

upon operations, using data from Marks & Spencer. 

• Smart Textiles (Materials KTN) working with an unspecified ‘range of leading 

retailers’ to support their introduction of smart textiles and nanotechnology. 

• Electronic shelf edge labels (Displays & Lighting KTN) the former ‘in volume trial at 

a number of major store locations’. 

KTN activities in respect of innovation in sustainability are dealt with separately below. 

8.13 Identifying specific application areas (often technological) where there are common 

concerns has led to effective action which generates real business benefits to retailers. For 

example, an event run by BERR with BRC - by retailers for retailers, followed by the 

setting up of the RFID Business Benefits Action Group is an example of where 

government can work effectively with the retail sector on a technology issue. 

Page 59



Improve the effectiveness of innovation-related support activity within Government. 

Desired outcomes: Better integration and clear and simple communication between the innovation-related 

information, education and horizon scanning services and networks funded by 

Government, and the retail sector. An improvement in Government credibility with 

the sector. The provision of a ‘single voice’ for retailing within Government. 

Background: The informational activities undertaken by Government, funded agencies of 

Government and academics that are relevant to retailers are poorly integrated and 

often poorly aligned with the commercial priorities of the sector. For example, the 

considerable numbers of initiatives which arise from KTN activities are not 

communicated in a coherent or appropriate way to retail firms. Such firms (even the 

largest) also lack the resources to become aware of or respond to ad hoc initiatives. 

Evidence: Poor attendance at events, lack of access to key retail managers for advice on policy 

formulation, limited retailer awareness of and participation in projects, particularly 

amongst smaller firms – but also within some large businesses. 

Analysis: Three specific actions flow from this desired outcome: 

Conclusion/Next 

Steps: 

1.1 A more systematic approach to co-ordinating information & expertise in 

Government & NDPBs (e.g. KTNs, Envirowise, Chemistry Leadership 

Council) which mimimises bureaucracy and improves access. The provision of 

a ‘one stop shop’ hosting information on initiatives, support and services 

available to the sector, especially to SMEs. 

1.2 A better mechanism for identification, prioritising and channelling of 

commercial, innovation-related initiatives and research to firms (a ‘single 

voice’). 

1.3 Encouragement of longer term horizon scanning that is more relevant to 

retailing: facilitating the showcasing of new ideas with commercial potential 

and supporting projects ‘on the margin’. 

The benefits of action in this area includes the demonstration of better value for 

money from existing Government activity and the possibility of mutual agreement 

between the sector and Government on priorities in innovation-related support. The 

risks of inaction are that the fragmented nature of knowledge-broking activity of 

relevance to retailers combined with retailers’ limited human resources leads to a cycle 

of failure in support. The sector becomes de-emphasised in future work by agencies 

such as the KTNs and a mindset develops amongst retailers that such Government 

activity is not helpful or relevant to their commercial activities. 

Identify an appropriate mechanism or intermediary to channel innovation-relevant 

initiatives simply and efficiently to the correct individuals within the sector and to 

prioritise those of most commercial relevance to the sector. Develop appropriate KPIs 

to measure success (e.g. impact on smaller, hard-to-reach SME sector; direct attribution 

of innovation to Government initiatives). Evidence that the sector was responding 

with purpose and conviction to any integrating efforts by the Government would be an 

important demonstration of commitment. 

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ii. Advising on protection of intellectual property linked to innovation 

8.14 A second role played by government in relation to innovation more generally is in 

providing advice on IP issues linked to the protection of innovation by firms. The 

Community Innovation Survey indicated that retailers tend not to use formal mechanisms 

such as trademarks and patents to protect retail innovation, in preference to 

confidentiality agreements or simple secrecy. In part, this was related to the nature of 

wider innovation in the sector and the difficulty of patenting incremental, customerfacing 

or service process-related service innovations. Broadly-based service innovations 

are themselves often inherently complex, collaborative and therefore difficult to copy. 

Further, software, or particular business methods, are not patentable in Europe at present 

(and the prevailing view is that the latter may not be defensibly patentable in any case). As 

a result, we do not feel that a particular recommendation to Government is yet necessary 

in this area, since retailers appear to be well able to employ informal methods of 

protection. 

iii. Financing or subsidising R&D by the retail sector 

8.15 As well as supporting innovation ‘in kind’ through information provision and broking 

and through advice on the protection of innovation, Governments also have the option 

to directly subsidise or indirectly support through such vehicles as tax credits or the 

targeted funding of institutional research programmes, the innovative activities 

undertaken by firms. For example, the UK Government introduced a tax credit scheme 

in April 2000 designed to reward those companies – both large and SME - engaging in 

R&D (Table 8.2). The international evidence to date suggests that such tax incentives are 

effective in stimulating R&D intensity (Harrison & Simpson, 2003). But such support has 

tended to be most attractive to those sectors most closely associated with the science 

base. Around 5,500 companies claim per year, (and there had been up to 20,000 claims by 

2006) 18 but we understand that, in a typical year, less than 1% of applications for tax 

credits have tended to be directly attributable to retail firms. Why is this so? 

Table 8.2. Comparison of the two UK R&D tax credit schemes 

SME scheme Large company scheme 

150% rate of enhanced deduction 125% rate of enhanced deduction 

Payable credit of up to £24 for every £100 of 

qualifying expenditure on R&D 

No payable credit 

Company can claim for expenditure on R&D it Company can only claim for expenditure on 

sub-contracts to others 

R&D it carries out itself, unless it sub-contracts 

R&D to certain qualifying bodies, individuals or 

partnerships of individuals 

Company cannot claim for contributions to Company can claim for contributions to 

independent research 

independent research 

Claim can be reduced if the R&D project is 

subsidised or a grant is received in respect of it 

No reduction for grant or subsidy 

Company must own the intellectual property Company need not own the intellectual 

arising out of the R&D 

property arising out of the R&D 

Source: HMRC, 2007. 

18 http://www.hmrc.gov.uk/randd/, HM Treasury/BERR, (2007), Productivity in the UK: 7. Securing long-term prosperity, November, para. 2.18. 

Page 61


8.16 In part, it arises from the scheme’s use of a technology-focused definition of R&D 

employed which is linked to the OECD’s Frascati manual. This in turn is linked to the 

need to conform to related accounting definitions of R&D expenditure 19 . As a result, it is 

unlikely that the definition will be diluted, but one consequence is that it has been more 

difficult to determine whether certain types of innovation (for example hidden, nontechnological, 

process-based or even some innovation involving software applications) 

with less tangible inputs and measureable outputs qualify for relief. 

8.17 R&D tax incentives are used widely internationally to encourage innovation, with 

schemes being either volume-based or incremental 20 . The US retail sector is often cited as 

being more innovative and productive than that in the UK. In the US, federal and state 

tax credits schemes are certainly much more readily utilised by the retail sector, although 

the same bias to certain sectors exists within both jurisdictions. Nevertheless, from 1998- 

2001, $186mn was directly claimed in R&E 21 tax credits by US retailers, representing 3% 

of claim volume and 7% of returns (National Science Foundation, 2005). Indeed, such 

has been the growth of interest in federal R&E credits, mediated by third party tax 

advisers, that the IRS has designated research and experimentation credit claims as a ‘tier 

one’ compliance issue. Using a somewhat different definition of R&D/R&E in the US 

potentially allows the scheme to recognise many of the particular kinds of innovation 

practiced by retail firms, including own brand development and service-oriented ICT 

systems in areas ranging from merchandising, price optimization, point of sale, sales 

audit, labour scheduling, transportation management, space utilization and warehouse 

management, to e-commerce 22 . For example, the wages paid to a retailer’s textile 

development specialists, designers, process engineers, and others involved in new product 

and process development may qualify for the research credit. 

8.18 The scheme as operated in the UK has also been viewed by commentators as inconsistent 

and overcomplicated in relation to qualifying costs, subcontracting and the applications 

and inspection process itself 23 . For example, the nature of retail innovation amongst 

larger firms means that complex subcontracting rules fail fully to accommodate the 

notion that retailers can act as ‘innovation hubs’ for the value chain – and indeed for the 

industry as a whole. They do this by stimulating suppliers into developing new and 

innovative products and services on their behalf which can be brought to market, creating 

attractive spillover effects. Or by accommodating open innovation, which would also 

benefit the sector as a whole. Further, whilst HMRC make clear that “the Government wants 

companies undertaking R&D to get the reliefs to which they are entitled in a simple way” 24 this does 

not appear to have been the experience anecdotally from retailers to date. For example, in 

terms of administration, few even large firms will have the kinds of project accounting 

systems which could make these kinds of applications more straightforward. Whilst 

Business Link offers a useful online eligibility assessment 25 , smaller firms find that they 

19 R&D for tax purposes in the UK takes place when a project seeks to achieve an ‘advance in underlying science or technology’. Those activities 

which directly contribute to this advance through the ‘resolution of scientific or technological uncertainty’ are defined as R&D. Certain qualifying 

indirect activities also count. (HMRC, 2004). 

20 A useful summary of international R&D tax incentives can be found at: 

http://public.deloitte.com/media/0424/Global%20Incentive%20Matrix.pdf 

21 R&E: Research and Experimentation 

22 See the discussion in Deloitte, (2007), Research and Development Tax Incentives for the Retail and Textile Industries, Deloitte Development LLC, 

http://www.deloitte.com/dtt/cda/doc/content/US_Tax_r%26dretail_101607.pdf 

23 See, for example, Arnott, S., (2006), ‘Industry calls for R&D tax credit shake-up’, Computing, 15th March, 

http://www.computing.co.uk/computing/news/2151992/industry-calls-tax-credits 

24 http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD85100.htm 

25 

http://www.businesslink.gov.uk/bdotg/action/logicToolStart?r.l1=1073858808&r.l3=1077465866&type=BLTTOOL&itemId=1077460433&r.l2 

=1073859200&r.s=sc 

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often require specialist tax advice in order to navigate the application process and this can 

be burdensome and disproportionately expensive: 

“…many companies remain unaware of the potential relief available or are sceptical of their ability to 

make a valid claim” (Deloitte, 2007). 

8.19 Efforts have recently been made to increase awareness of tax credits amongst smaller UK 

firms and improve the regional administration of applications. New specialist HMRC 

units have been established to counter the dominance of applications from London and 

the South East, as well as to create centres of expertise. Towards the end of 2006, tax 

inspectors undertook training to improve their understanding of software-related 

applications. However, it is too early to judge the effectiveness of these measures in 

stimulating uptake of incentives. 

8.20 Whilst there might not be scope for dilution of R&D tax credits, there might be potential 

for a degree of extension and simplification. For example, the i2010 working group 

recommended that R&D tax credits might be extended to include capital expenditure 

(allowed in other jurisdictions, including Canada) which would allow those companies 

capitalising manpower costs to be eligible to apply (Information Age Partnership, 2007). 

The working group also suggested that the scheme could be widened to allow the cost of 

overhead activities indirectly supporting R&D work to be included. 

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Increase the take-up of R&D tax credits by the retail sector. 


Desired outcome: Improved awareness and utilisation of R&D tax credits within the UK retail sector. 

Background: R&D tax credits were originally launched in April 2000 to reward innovation by firms, 

but favour a ‘manufacturing mindset’. They are less appropriate for some kinds of 

innovation, particularly the wider innovation practised by retail firms, and by suppliers 

on their behalf. This mindset is out of step with tax incentives in other jurisdictions. 

R&D tax credits are a potentially attractive way for stimulating certain types of 

innovation in retailing. The nature of larger retail firms as ‘innovation hubs’ increases 

the possibility of attractive spillover effects, with retailers acting as a catalyst for 

innovation within the value chain amongst suppliers, and with benefits for the sector as 

a whole: thereby enhancing UK productivity and competitiveness. Industry groups 

have lobbied for the refining of the R&D tax credit system for some time. 

Evidence: Exceptionally poor levels of take-up of tax credits by the sector; high rejection rates of 

applications which do not conform to relatively restrictive rules; lack of appropriate 

training amongst inspectors to recognise legitimate claims from more ‘intangible’ 

applications nevertheless involving technology. Retail firms in more enlightened 

jurisdictions benefit more from such incentive schemes. 

Analysis: Increasing awareness and take-up will require: 


Steps: 

2.1 Identifying and prioritising the kinds of activities undertaken by retailers and 

by suppliers on their behalf which might qualify for support under both large 

business and SME schemes. 

2.2 Improving awareness of the schemes and of these priorities amongst retailers, 

particularly retail SMEs outside London and the South-East. 

2.3 Improving the speed and transparency of the application process to reduce 

uncertainty 

2.4 Investigating the extent to which, without diluting the existing mechanisms, 

the R&D tax credit scheme might be both deepened and broadened to benefit 

service innovation 

Risks of inaction: retailers will fail to fully exploit an existing financial mechanism for 

the stimulation of innovation. 

BERR/HMRC to work with retailers and key third party suppliers to clarify the kinds 

of activities undertaken by and for retailers which would qualify for tax credits and to 

examine ways in which the application and inspection process for tax relief on such 

activities might be further streamlined. 

Page 64

. Promoting innovation in sustainability 


8.21 One of the biggest areas of uncertainty for retail businesses at present is the area of 

sustainability and for this reason we devote a separate section of the report to this topic. 

Competing standards, a growing number of independent agencies and organizations 

seeking to claim legitimacy in solutions provision, rapidly evolving (and sometimes 

conflicting) Government policy, quickly changing consumer sentiment and potentially 

high costs create an atmosphere in which innovation in sustainability can be seen as risky, 

short-term or simply cosmetic. This perception is not just reflected at the national level. 

The Corporate Leaders Group on Climate Change (whose retail members include the 

John Lewis Partnership, Tesco and Kingfisher) have called for a binding agreement on 

climate change at the Bali summit, in order to encourage businesses to innovate and 

invest in low-carbon technologies 26 . Larger firms are facing increasingly significant 

international challenges in terms of seeking innovative solutions to managing carbon 

emissions and whilst smaller firms with correspondingly smaller carbon footprints have 

quantitatively smaller objectives, they are often equally challenging. 

8.22 Government itself is very rapidly expanding its involvement with sustainability and 

policies and programmes to combat climate change. A number of important Government 

initiatives are directly relevant to the potential stimulation of sustainable innovation in the 

retail sector: 

● In terms of sustainable consumption, the Government provides £2.1mn via 

EPSRC for a Green Logistics project which aims to improve the environmental and 

social sustainability of the UK freight transport industry (of which retail logistics is a 

significant component), while maintaining or improving its economic sustainability. 

The research involves a consortium of universities lead by the University of Leeds 

and supported by Cardiff, Heriot-Watt, Westminster, Southampton and Lancaster 

Universities. The project started in June 2006 and will lasts for 4 years. For example, 

one of the areas of interest is in determining the most sustainable channel through 

which to sell different products (such as digital games versus loaves of bread). 

● In relation to low-carbon technology, Government investment in commercialising 

such technologies in the UK will exceed £370 million from 2008-2010, with an 

increase of £170 million for the cross-Government Environmental Transformation 

Fund (ETF). The retail sector could potentially benefit from the scheme’s interest in 

low carbon buildings. An Energy Technologies Institute will raise up to £1.1 billion 

to spend on low carbon energy technologies over the next ten years. 

● In relation to energy efficiency and the financing of sustainable innovation, 25% of 

the UK’s carbon output is emitted from non-domestic buildings, with 10-15% of 

carbon output incurred during construction and 10% during decommissioning. For 

retailing, this means working more closely with the development and construction 

sectors and highlights the potential of mixed use developments. For small and 

medium-sized retail businesses, interest-free energy efficiency loans are available. 

SMEs in England and Scotland, and all businesses in Wales that have been trading for 

at least 12 months, can borrow from £5,000 to £100,000 in the form of a loan 

repayable over a period of up to 4 years. 

26 http://www.balicommunique.com/index.html. Other retail and retail-related signatories include: the Body Shop, eBay, Gap Inc., Lend Lease, 

Marks & Spencer, Nike, Sainsbury’s and the Warehouse. 

Page 65


• In terms of packaging and waste, data from the Environment Agency show that in 

the UK the amount of retail waste increased from around 8.5 million tonnes in 

1998/99 to 12.5 million tonnes in 2002/03. WRAP suggests that as much as 50% of 

household waste, which ultimately ends up in landfill, has originated from a purchase 

from the top 5 retail supermarket chains. Packaging and waste is a very visible aspect 

of sustainable consumption and one over which consumers express most concern 

(70% of global consumers expressed similar levels of concern about packaging 

waste) 27 . This is one area in which innovative solutions by the retail sector have 

abounded. For example, in relation to plastic carrier bag use, Waitrose has trialled 

‘carrier bag free’ stores and checkouts; Tesco has pledged to reduce packaging by 

25% and provide on-pack information on recyclability; Asda has committed to 

reducing own label packaging by 25% over the next year, but only Netto have moved 

beyond trials to charge for bags everywhere. Yet the evidence in relation to, for 

example, in relation to plastic bag levies is still unclear (Lamb, 2005), tensions still 

exist between commercial and environmental objectives and there is a lack of good 

practice in non-foods where 1mn tons of textiles are thrown away each year. 

• In relation to standards, BSI and the Carbon Trust’s draft product carbon 

footprinting standard, just out for technical consultation, is hoped to provide a 

reliable and consistent framework for sustainable product innovation by retail firms, 

although product carbon footprinting is not without its challenges. Recently, Tesco 

announced that it would work with the Trust to assess the carbon footprint of 30 

own-brand products. 

• In relation to skills, research by the Australian Greenhouse Office identified several 

years ago that training of retail staff on the awareness of environmental issues so that 

they were “equipped and motivated to handle customer questions” is key, for 

example, to the development of innovative environmental systems that promote cocreated 

recycling solutions. Work by the Resource Efficiency KTN has supported this 

finding in the UK and the KTN has been working with SkillSmart Retail and the 

Basingstoke College of Technology to develop a 1-day basic level environmental 

awareness skills programme. 

• Finally, the ‘horizontalisation’ of policy (to create an appropriate infrastructure for 

sustainable innovation) is illustrated by the Department for Transport’s recent 

consultation paper on a new low carbon transport infrastructure (Department for 

Transport, 2007). 

8.23 This is just a small snapshot of the widespread consultations, initiatives and projects in 

relation to sustainability, all of which have complex and interlocking implications for the 

retail sector. But what should be the priorities for retailers’ attention? Care must be taken 

to avoid ‘initiative-itis’, which can risk adding to the uncertainty of retail firms, rather than 

providing the kind of integrated, authoritative guidance that will provide the retail sector 

with a framework within which it can pursue innovation with confidence. It is important 

that the retail sector can have confidence in the long-term direction and integration of 

Government policies on sustainability in order to secure the sector’s willing participation 

in both projects and consultations. 

27 AC Nielsen, 2007. 

Page 66


8.24 With a few notable, widely publicised, exceptions, retailers’ innovation in relation to 

sustainability has tended to be somewhat piecemeal. In part, again, this reflects a lack of 

resource – both financial and human – within the sector; but it also reflects the difficulty 

in positioning this kind of innovation in relation to more explicitly commercial demands 

on the business, alongside a relatively low awareness and - even when aware - a degree of 

uncertainty in relation to the relevance of Government policy and initiatives in this area. 

It will be critical to identify the most important priorities not just for large, higher profile, 

retail businesses but also for SMEs. 

8.25 Much of this uncertainty has to do with the absence of appropriate standards. For 

example, one of the chief barriers cited to innovation in relation to environmental 

objectives was the persistence of an accounting methodology that fails to recognise the 

triple bottom line: which accounts for the costs but fails to distinguish the environmental 

benefits that lead to carbon footprint reduction. Standards in relation to accounting 

practices are needed to permit the correct attribution of spending towards environmental 

goals. There remain inconsistencies in accounting practices in relation to environmental 

outlays, which are primarily due to lack of sufficient and uniform authoritative accounting 

standards and ever-changing public policy and regulatory standards. 28 

8.26 The SIGMA Project (a collaborative exercise between BSI Global, BERR and the notfor-profit 

organization AccountAbility) launched guidelines in 2003 to assist firms in 

developing a standards-based framework for managing sustainability. Alliance Boots and 

Marks & Spencer have been the only retail partners in this initiative: 

“The Boots Group has a long standing commitment to incorporate sustainable development principles into 

its business operations. Collaboration with the Sigma project is a natural progression of this philosophy. 

Using the latest thinking, Sigma has provided the stimulus to develop new processes, enabling us to 

remain a leading edge sustainable business and reinforce the trust our customers place in the Boots name.” 

But there are still significant challenges, as AccountAbility comments: 

“There are now over 300 standards aimed at assisting businesses in meeting the goal of sustainability. 

Convergence towards a global architecture of standards that are not just compliance or risk management 

mechanisms is crucial.” (AccountAbility) 

28 Razaee, Z. et. al., (1995), ‘Corporate governance and accountability for environmental concerns’, Managerial Auditing Journal, 10(8), 27-33. 

Page 67


Promote innovation in sustainability. 


Desired outcomes: The reduction of risk for retailers innovating in sustainability through the application of 

a meaningful sustainability framework, hard measures of performance against this 

framework, and prioritisation of funding support and advice to the retail sector to 

stimulate appropriate innovation. 

Background: A small number of very large retailers, together with a number of smaller speciality 

businesses with strong ethical values, have developed relatively clear strategies in 

relation to sustainability which have resulted in innovative products, processes as well 

as wider, more intangible innovation. However, the remainder of the sector struggles to 

come to terms with the challenge largely because of the cacophony of conflicting 

advice and guidance from a wide variety of sources. 

Evidence: The lack of widespread retail support for the work of organisations as varied as the 

Carbon Trust and the Resource Efficiency KTN, alongside disjointed, often populist 

(and potentially ineffective) innovation in sustainability. 

Analysis: Eight specific measures which might act as stimuli for innovation in sustainability have 

been identified by the sector: 

• Support mechanisms 

3.1 VAT reductions to stimulate green product innovation 

(work at the European level required to reduce VAT in relation to such 

products as energy efficient light bulbs & DIY materials) 

3.2 Business rate relief on energy efficient buildings 

(There is disagreement on the extent to which rates relief might stimulate 

innovation. This should be further investigated for retailers in the context of 

the business requirement to display Energy Performance Certificates) 

3.3 Encourage development of shared waste facilities by SMEs 

(Most attention has focused on the largest retail firms. Innovative solutions are 

required to ensure higher recycling rates amongst the UK’s 167,000 smaller 

retail enterprises) 

• Reduction of barriers 

3.4 Faster and easier planning regimes for sustainable technologies relevant to 

retailing 

(for example, the need to distinguish between applications for microwind 

projects and large scale wind turbine schemes) 

3.5 Foster a standards-based framework to manage sustainability and reduce 

uncertainty and risk 

(for example, in relation to accounting standards) 

3.6 Work towards identifying sustainability metrics and require retailers to publicly 

report on their achievement of these 

(for example within Social Responsibility paragraphs of annual reports) 

• Foster skills 

3.7 Build environmental awareness amongst retail staff 

(through incentivising or providing appropriate training and development) 

3.8 Low carbon technology skills to support growth in retail initiatives 

(for example, increasing the number of trained technicians available to work 

on low-carbon technology projects) 

Page 68


Steps: 


The creative and entrepreneurial zeal of the retail sector is perfectly capable of adapting 

its talents to innovation in sustainability, given well-structured, consistent and carefully 

targeted advice and support from Government and related agencies and partners, 

which include the Resource Efficiency KTN, the Carbon Trust, WRAP and the Forum 

for the Future. The risks of inaction include the perpetuation of isolated, piecemeal and 

potentially ineffective actions by firms which hampers the sector’s progress towards 

sustainability targets. 

Government should work with the retail sector in identifying and disseminating 

priorities for innovation in sustainability. This should occur through the development 

of a meaningful framework for action, including the provision of evidence for the 

effectiveness of funding incentives, priorities for barrier reduction and any skills 

shortages or gaps which can be addressed at the national or regional level. 

Page 69

c. Fostering skills and organizational innovation 


8.27 The third broad area for our recommendations is in relation to the fostering of skills and 

organizational innovation relevant to retail innovation. The Government has already 

played an extensive role in the broader skills arena for retailing, through Skillsmart Retail, 

via the Regional Development Agencies and through brokerage services administered by 

Business Link. However, we are particularly interested in the extent to which innovationrelated 

skills are identified and supported. Skills issues in relation to retail innovation arise 

in relation to four particular areas: the specialist or technical skills, often cross-sectoral 

in nature, required to deliver specialised products or processes; the skills needed to 

fostering a culture of innovation, the skills related to the management of innovation 

or of innovation projects, as well as the somewhat particular needs in relation to 

innovation skills of the SME sector. 

8.28 In its sponsoring of Skillsmart Retail as one of the first Retail Sector Skills Councils in 

2002, the Government demonstrated the importance of the sector in terms of job 

creation as a ‘gateway’ employer and in developing a skilled workforce in the UK. 

SkillSmart Retail has since developed National Occupational Standards, specialised 

Diplomas and foundation degree programmes. 28 UK universities now deliver 42 retailspecific 

degree courses (Figure 8.2) 

Figure 8.2. Retail skills training and qualifications available in England 

Source: Skillsmart Retail, 2007. 

8.29 The Retail Sector Skills Agreement is the largest collaborative research project of its kind, 

and is designed to identify and address the sector’s skills needs. The Council has a 

responsibility to retail firms of all sizes and a concern not just for core retail skills, but 

also in relation to future skills needs. A National Skills Academy for Retail will be 

established in April 2008 “to give access to world class skills and business support for retailers 

whatever their size and wherever they are located.” Core skills and store management training and 

qualifications necessarily lie at the heart of this support, rather than such areas as 

innovation, creativity and new product and process development per se. Nor is the 

Page 70


Academy likely to prioritise specialised ICT or technical development in-post, nor 

especially strategic leadership issues. These are important gaps, since out respondents 

observed that innovation in retailing is often hindered by: 

“…on occasion a lack of technical skills, but often a lack of leadership skills to drive/demand innovation 

and tie everything together.” 

8.30 On the ground locally, wider activity is currently taking place on the skills agenda, but 

only part of this activity is relevant to innovation-specific skills. This includes the 

integration of the Train to Gain skills broking service with Business Link’s Information, 

Diagnosis and Brokerage (IDB) service, managed by the Regional Development 

Agencies; the Qualification and Curriculum Authority’s current consultation on the 

accreditation of employers’ own ‘in-house’ training; and specific work around innovation 

being undertaken in the regions by the Regional Development Agencies and Higher 

Education Institutions (although the relationships and clusters established here have 

again been mainly in respect of the science & technology base 29 ). However, feedback 

from retailers suggests a degree of dissatisfaction with the priority accorded to the sector 

by Business Link amongst its many responsibilities. 

8.31 Many of the kinds of specialist skills required to support retail innovation are as likely to 

come from other sector skills councils as from Skillsmart. These include: 

• e-skills UK (ICT and telecoms skills); 

• Skills for Logistics (freight logistics and wholesaling industry); 

• Skillset (broadcast, film, video, interactive media and photo imaging); 

• SummitSkills (building services engineering); and 

• Skillfast UK (fashion and textiles) 

8.32 During 2007, the 25 Sector Skills Councils established the Alliance of Sector Skills 

Councils (TASSC), whose purpose is to support the SSCs in achieving their collective 

agenda, including taking greater responsibility for their own collective action and 

performance. The Alliance sees the link between innovation and the expressed shortage 

in technical skills as shared in common by a number of sectors and is encouraging the 

SSCs, where appropriate, to work collaboratively to address these needs. 

8.33 The Leitch Review of Skills made some helpful observations in this area. It noted the 

increasing specialisation of skills as new ways of producing goods and services (such as ecommerce) 

evolved. It pointed to retailing as being a sector where specialisation was 

accelerating. For example, e-skills UK has drawn attention to the lack of e-business skills 

(rather than just professional ICT skills) which are needed to address the longer term 

development needs of firms. In many ways these are cross-disciplinary skills: comprising 

business, creative and technical skills partially learned in: ‘business studies, commerce, 

multimedia, multimedia, information systems, fine art, librarianship, journalism, film 

studies, photography …’ (Expert Group on Future Skills Needs 2001). As the retail 

sector grapples with a multi-channel future, innovation will increasingly be driven by a 

range of overlapping skill sets. This is particularly the case given that innovation within 

the service sector is as likely to span firms and whole value chains as well as channels to 

market. But outsourcing the problem or relying upon the expertise within supplier 

29 See for example the discussion of the creation of ‘science cities’ in RDA National Secretariat, (2006), ‘Bringing Regional Prosperity’, Regional 

Insight, Sept/Oct. 

Page 71


companies – as some firms have done – simply transfers the problem (and in some cases 

the innovation potential) to those firms. 

8.34 It is difficult if not impossible to train to deliver an innovation culture, but it is possible 

to train for management of the innovation process, or for the management of 

organizational change. Project management skills (required to implement innovative ideas 

within the sector) also appear sought after. In relation to strategic leadership skills, the 

Leitch Review suggested that the “highest level of skills drive and facilitate innovation, leadership 

and management” and urged Government to provide employers with clearer incentives and 

mechanisms to engage and invest in Higher Education, through lifelong learning. 

Reinforcing this, the Lambert Review of the UK’s HE system stressed the need to ensure 

that courses put on by Universities in particular areas were relevant to the needs of 

business. 

8.35 Finally, for retail SMEs, attitudes towards innovation and preferences for exposure to 

innovation-related skills development may be rather different from those of larger firms. 

For example, the general reluctance to engage in formal ‘training’ has been noted by a 

number of commentators and forms of peer-to-peer mentoring appear to offer better 

results, but good practice is isolated 30 . Different kinds of innovation may also be 

important to smaller firms to allow them to think differently about their businesses – for 

example, new approaches to product buying and presentation can provide for a 

distinctive form of innovation. 

8.36 Support for innovation by retail SMEs has tended to be provided at a regional or local 

level. The RDAs have conventionally been seen as the home for such involvement and 

investment, alongside work by Business Link and Job Centres Plus. Skillsmart Retail has 

also identified the importance of local context in assisting retail SMEs. The council’s 

‘location model’, developed by its in-house research team, has proved a useful vehicle for 

focusing awareness relation to skills and personal development at the local level when it 

has been conducted. For example, following a mystery shopper exercise and local market 

review in Colchester, 35 independent retail businesses attended a discussion of 

opportunities to improve their performance. A significant proportion of these firms 

subsequently engaged in training initiatives. Skillsmart Retail’s ‘Location Wise’ and ‘Skill 

Shops’ initiatives – outlined in its most recent Sector Skills Agreement report – seeks to 

consolidate the learning from the location model as a mechanism for providing “practical 

advice and best practice for those wishing to design interventions that are relevant for 

their locations” (Skillsmart Retail, 2007b). 

8.37 The skills council’s proposed Coaches and Mentors 4 Retail scheme seeks to build upon the 

preference for mentoring amongst SMEs by coaching smaller retailers in “bite-size 

chunks to match the phasing of the retail year”. This complements its online RetailDetail 

toolkit, launched in 2005 31 . However, replicating skills support and mentoring activity at 

the local level nationwide presents a number of resourcing challenges and it would seem 

sensible for a further degree of integration and collaboration between providers to be 

encouraged, to improve the clarity and accessibility of support on the ground. Moves in 

this direction would also be consistent with the principles of BERR’s Business Support 

Simplification Programme. 

30 See for example http://www.dormen.org.uk/main.asp and Kent, T., C. Dennis, and S. Tanton, (2003), ‘An evaluation of mentoring for SME 

retailers’, International Journal of Retail & Distribution Management, p. 440. 

31 http://www.skillsmartretail.com/retaildetail/features.htm 

Page 72



Identify and support the complex sets of skills required for retail innovation. 

Desired outcome: Development of appropriate mechanisms to identify and support in a more integrated 

way the skills required within retail businesses to stimulate, manage and sustain 

innovation - within both large and small retail firms. 

Background: Strategic innovation within retailing requires increasingly complex and varied sets of 

skills. Retail employers, in common with many other service sectors, are in the market 

for a number of scarce skill-sets, such as those in relation to project management, ebusiness, 

logistics, building services engineering and fashion and textile design. SMEs 

have less complex but nonetheless still challenging skills needs in relation to 


Evidence: Expressed technical skills shortages, gaps and mismatches reported in the sector. 

Shortage of skills in innovation and project management for SMEs. 

Analysis: Five specific actions flow from this desired outcome: 


Steps: 

4.1 Provision of innovation awareness training amongst employees 

(promoting a culture of retail innovation) 

4.2 Provision of ‘management of innovation’ skills training 

(leadership and project management of innovation often lacking) 

4.3 Provision of cross-sector technical skills training capability 

(sharing employer needs across sector boundaries); and for SMEs 

4.4 Development of innovative approaches to areas such as product buying and 

presentation for SMEs 

(SME’s lack skills to source and market new products) 

4.5 Provision of an integrated support structure for retail SME skills and mentoring at 

the local level which further reduces present duplication. 

The risks of inaction in this area include wasteful duplication of investment and 

business support activity, and resultant confusion amongst retail business, especially 

SMEs at the local level. The absence of required skills may work to stifle innovation. 

Identify the lead co-ordinating agency on retail skills at the local level. Take steps to 

better integrate the work of the existing relevant agencies to meet both large and small 

retail business requirements in relation to retail innovation skills. 

Page 73

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Appendix 1 

Research Methodology 

35000 

30000 

25000 

20000 

15000 

10000 

5000 


Technological Innovation 

Service Innovation 

Retail Innovation 


Apart from being difficult to measure only with traditional input and output measures or may be 

because of that innovation in retailing is also vastly under-researched in academic terms. For 

example, whilst the title keyword ‘innovation’ generated some 32,861 peer reviewed academic 

publications within a leading journal aggregator, and ‘technological innovation’ 13,916, only 155 

featured ‘service innovation’ and a mere 12 explored ‘retail innovation’ 32 

Figure 1. Under-researched nature of innovation in retailing 

The report draws on extensive 

secondary and primary research in order 

to establish a more coherent, sectorspecific 

characterization of innovation. 

It analyses for the first time the retailspecific 

responses to the most recent 

Community Innovation Survey. It brings 

together a wide range of secondary 

material dealing with innovation 

(examining its relevance through a retail 

lens) and with Government activity and 

policy potentially appropriate to the 

stimulation and support of retail 



0 

2005 

27601 

2006 

31339 

2007 

32861 

The primary research draws upon 

selected insights from a series of indepth 

interviews and discussions 

Technological Innovation 11858 12920 13916 

conducted by one of the authors as part 

Service Innovation 127 136 155 

of his doctoral research. with over 50 

Retail Innovation 13 12 13 

senior retail executives and other 

industry experts from over 30 retail 

businesses, consulting firms and industry associations within the UK and elsewhere on how they 

define, encourage and manage innovation 33 . 

The mixed purposive sample was selected in a way ensure adequate representation of both large- 

and medium-sized firms from 12 different retail sub-sectors, thus the sample included retailers 

with a turnover of between £15bn and £15m from 12 different retail sectors 34 . 

Qualitative interviews and the case study approach are established methodologies in management 

science for exploring novel or complex social phenomena such as innovation and for 

understanding behaviours, values and believes and their context (Calori, Johnson et al., 1992; 

Boiral, 2003; Adams, 2004; Bryman, 2004; Hristov and Reynolds, 2005). The degree of 

generalisability which is a consideration in qualitative research, because of its tendency to employ 

case studies or smaller samples has been minimised to some extent through the use of a larger 

mixed purposive sample of interviews and the triangulation of primary with secondary data. 

32 EBSCO’s Business Source Premier (01.08. 2007) 

33 Hristov (2007) 

34 Hristov (2007) 

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Appendix 2 

Glossary of Abbreviations 

BERR Department for Business, Enterprise & Regulatory Reform 

BRC British Retail Consortium 

BSSA British Shops and Stores Association 

CIS Community Innovation Survey 

CSR Corporate social responsibility 

DEFRA Department for the Environment, Food and Rural Affairs 

DIUS Department for Innovation, Universities and Skills 

EDLP Every Day Low Price 

EPSRC Engineering and Physical Sciences Research Council 

ETF Environmental Transformation Fund 

FCO Foreign & Commonwealth Office 

ICT Information & Communications Technology 

IGD Institute for Grocery Distribution 

IP Intellectual Property 

IRS Internal Revenue Service 

ISO International Standards Organization 

KIBS Knowledge Intensive Business Services 

KPI Key performance indicator 

KTN Knowledge Transfer Network 

NAICS North American Industry Classification System 

NESTA National Endowment for Science, Technology and the Arts 

NMW National Minimum Wage 

NPD New product development 

OXIRM Oxford Institute of Retail Management 

RFID Radio Frequency Identification 

ROI Return on investment 

ROIC Return on investment capital 

ROS Return on sales 

SKU Stock-keeping unit 

UKTI United Kingdom Trade & Investment 

VCN Venture Capital Network 

WRAP Waste & Resources Action Programme 

WWF World Wildlife Fund 


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Innovation in the UK Retail Sector - Nesta

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