Innovation in the UK Retail Sector - Nesta
Innovation in the UK Retail Sector - Nesta
Innovation in the UK Retail Sector - Nesta
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Report for<br />
NESTA<br />
December 2007<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong>
Preface<br />
Oxford Institute of <strong>Retail</strong> Management (OXIRM)<br />
Authors<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
The Oxford Institute of <strong>Retail</strong> Management (OXIRM) is a lead<strong>in</strong>g centre of retail<br />
studies based at <strong>the</strong> Saïd Bus<strong>in</strong>ess School, University of Oxford. OXIRM was<br />
created <strong>in</strong> 1985 to relate sound scholarship to <strong>the</strong> practical needs of retailers,<br />
service companies and public sector agencies. It undertakes management<br />
development programmes for companies, conducts research with direct relevance<br />
to practitioners and acts as a centre for education and network<strong>in</strong>g activity.<br />
Latchezar Hristov and Dr. Jonathan Reynolds<br />
Latchezar Hristov is a senior lecturer <strong>in</strong> market<strong>in</strong>g at Sheffield Hallam University and doctoral<br />
researcher <strong>in</strong> <strong>the</strong> area of management and <strong>in</strong>novation at Saïd Bus<strong>in</strong>ess School, University of<br />
Oxford.<br />
Dr. Jonathan Reynolds is a lecturer <strong>in</strong> management studies at <strong>the</strong> University of Oxford’s Saïd<br />
Bus<strong>in</strong>ess School, and Director of <strong>the</strong> Oxford Institute of <strong>Retail</strong> Management.<br />
Page 2
Contents<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
0. Executive Summary 4<br />
1. Introduction 8<br />
2. The nature and contribution of retail<strong>in</strong>g as a sector 9<br />
a. The size and growth of <strong>the</strong> retail sector<br />
b. Drivers of change<br />
3. What are <strong>the</strong> dist<strong>in</strong>ctive characteristics of retail <strong>in</strong>novation? 16<br />
a. How different is retail <strong>in</strong>novation?<br />
b. Selected characteristics of retail <strong>in</strong>novation<br />
i. <strong>Retail</strong>ers as <strong>in</strong>novation hubs<br />
ii. The low appropriability of <strong>the</strong> retail environment<br />
iii. Predom<strong>in</strong>ance of non-technological <strong>in</strong>novation<br />
iv. Hybrid characteristics of retail <strong>in</strong>novation<br />
v. <strong>Retail</strong>ers’ reverse <strong>in</strong>novation cycle<br />
4. How do retailers th<strong>in</strong>k about <strong>in</strong>novation? 26<br />
a. Strategic retail <strong>in</strong>novation<br />
b. Operational retail <strong>in</strong>novation<br />
c. The retail <strong>in</strong>novation pyramid<br />
5. What drives retail <strong>in</strong>novation? 34<br />
a. External to <strong>the</strong> retailer<br />
b. Internal to <strong>the</strong> retailer<br />
6. What are <strong>the</strong> barriers to retail <strong>in</strong>novation? 43<br />
7. What are <strong>the</strong> measures of retail <strong>in</strong>novation? 47<br />
a. The extent of measurement<br />
b. Types of measures<br />
c. Levels of application<br />
8. Recommendations to stimulate and support <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g 54<br />
a. Promot<strong>in</strong>g <strong>in</strong>novation<br />
b. Facilitat<strong>in</strong>g barrier reduction<br />
c. Foster<strong>in</strong>g skills and organizational <strong>in</strong>novation<br />
d. Promot<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability<br />
9. References and fur<strong>the</strong>r read<strong>in</strong>g 74<br />
Appendix 1: Research Methodology 78<br />
Appendix 2: Glossary of Terms<br />
Page 3
Executive Summary<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
1. In <strong>the</strong> current discussion on <strong>the</strong> stimulation of <strong>in</strong>novation <strong>in</strong> services, <strong>the</strong> practice of <strong>in</strong>novation <strong>in</strong><br />
retail<strong>in</strong>g is poorly understood and <strong>in</strong>adequately measured. And yet retail<strong>in</strong>g is <strong>the</strong> eighth biggest sector<br />
of <strong>the</strong> world economy <strong>in</strong> terms of total market value and accounts for 7% of total value-added and<br />
10% of <strong>the</strong> <strong>UK</strong>’s work<strong>in</strong>g population. The retail sector makes direct contributions to GDP and<br />
employment, but also makes <strong>in</strong>direct contributions to demand and economic growth through its work<br />
with suppliers and bus<strong>in</strong>ess service firms, as well as to <strong>the</strong> <strong>UK</strong>’s social and environmental<br />
performance. <strong>Innovation</strong> by retailers plays a critical role <strong>in</strong> allow<strong>in</strong>g <strong>the</strong> sector to make <strong>the</strong>se<br />
contributions. The 17th annual edition of <strong>the</strong> <strong>UK</strong>’s R&D Scorecard notes that Tesco and Marks &<br />
Spencer are amongst <strong>the</strong> <strong>UK</strong>’s ‘R&D leaders’ and ‘fastest grow<strong>in</strong>g R&D spenders’ respectively.<br />
2. However, conventional measures of <strong>in</strong>novation suggest that <strong>the</strong> retail sector scores relatively lowly<br />
compared to sectors such as pharmaceuticals, biotechnology or knowledge-<strong>in</strong>tensive based services.<br />
40% of <strong>UK</strong> retail firms claimed to be ‘<strong>in</strong>novation active’ <strong>in</strong> 2005. Whilst <strong>the</strong>se results are not<br />
dissimilar to those for many o<strong>the</strong>r service sectors, it also suggests that conventional measures of<br />
<strong>in</strong>novation may not capture <strong>the</strong> full picture. Is <strong>the</strong>re less <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g, or do retailers<br />
<strong>in</strong>novate differently?<br />
The dist<strong>in</strong>ctive characteristics of retail <strong>in</strong>novation<br />
3. Our research suggests that <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g has several dist<strong>in</strong>ctive characteristics which are not<br />
easily captured by conventional measures of <strong>in</strong>novation. Firstly, retailers are act<strong>in</strong>g as <strong>in</strong>novation<br />
broadeners <strong>in</strong> <strong>the</strong> value cha<strong>in</strong>, or <strong>in</strong>novation hubs, decipher<strong>in</strong>g exist<strong>in</strong>g or impend<strong>in</strong>g consumer needs<br />
and communicat<strong>in</strong>g <strong>the</strong>m upstream to suppliers. Secondly, <strong>the</strong> retail environment is one <strong>in</strong> which<br />
<strong>in</strong>novations can be easily copied. Such a low appropriability environment causes <strong>in</strong>novat<strong>in</strong>g retailers to<br />
work differently, perhaps start<strong>in</strong>g small, or work<strong>in</strong>g <strong>in</strong>crementally, before rapidly scal<strong>in</strong>g up hi<strong>the</strong>rto<br />
hidden <strong>in</strong>novative activities. Thirdly, much retail <strong>in</strong>novation is non-technological <strong>in</strong> nature. Whilst<br />
technology is important, it has a smaller role <strong>in</strong> relation to <strong>in</strong>novation than <strong>in</strong> o<strong>the</strong>r sectors. Fourthly,<br />
however, some retailers have hybrid characteristics which can make <strong>the</strong>m more than purely service<br />
bus<strong>in</strong>esses. Some retailers are vertically <strong>in</strong>tegrated (such as Zara or Migros). O<strong>the</strong>rs may exhibit a<br />
‘manufactur<strong>in</strong>g’ approach to product <strong>in</strong>novation – for example, <strong>in</strong> relation to own brands. F<strong>in</strong>ally,<br />
retailers can experience a reverse <strong>in</strong>novation cycle, where – unlike <strong>in</strong> manufactur<strong>in</strong>g – f<strong>in</strong>ancial and<br />
organizational costs attached to <strong>in</strong>novation are low at <strong>the</strong> beg<strong>in</strong>n<strong>in</strong>g and high at <strong>the</strong> end, follow<strong>in</strong>g<br />
perhaps an extended roll-out.<br />
4. <strong>Retail</strong>ers recognise <strong>the</strong> crucial role of <strong>in</strong>novation for <strong>the</strong> performance of any retail bus<strong>in</strong>ess, but<br />
attribute a real range of mean<strong>in</strong>gs to <strong>the</strong> term, which may contribute to under-report<strong>in</strong>g <strong>in</strong> surveys.<br />
Whilst <strong>in</strong>novation is seen by all as a necessary means for survival and growth, how to stimulate,<br />
manage and measure it is a matter of organizational choice. <strong>Retail</strong>ers make <strong>the</strong> dist<strong>in</strong>ction between<br />
strategic retail <strong>in</strong>novation and operational retail <strong>in</strong>novation. Strategic <strong>in</strong>novation represents more a radical<br />
departure from ‘bus<strong>in</strong>ess as usual’, (develop<strong>in</strong>g a wholly new onl<strong>in</strong>e offer, or a new format) whilst <strong>the</strong><br />
majority of operational <strong>in</strong>novation comes from what many prefer to call ‘newness’, or a ‘stage below<br />
<strong>in</strong>novation’. Such <strong>in</strong>novation is <strong>in</strong>evitably <strong>in</strong>cremental, and might <strong>in</strong>clude anyth<strong>in</strong>g from <strong>the</strong> extension<br />
of own brand ranges through to experimentation with checkout queue management techniques.<br />
Fur<strong>the</strong>r, retail <strong>in</strong>novation appears to occur <strong>in</strong> three ma<strong>in</strong> applications areas: offer-related, (<strong>in</strong> product,<br />
service category, channel or format), support-related (technology, systems and <strong>the</strong> supply cha<strong>in</strong>), and<br />
organization-related (provid<strong>in</strong>g <strong>in</strong>novative management and delivery frameworks for <strong>the</strong> previous two).<br />
The drivers of retail <strong>in</strong>novation<br />
5. There is broad agreement amongst retailers as to <strong>the</strong> drivers of <strong>in</strong>novation with<strong>in</strong> <strong>the</strong> sector: both<br />
those external and those <strong>in</strong>ternal to <strong>the</strong> firm. As might be expected from a customer-fac<strong>in</strong>g <strong>in</strong>dustry,<br />
<strong>the</strong> most significant external driver of retail <strong>in</strong>novation is <strong>the</strong> customer. One-stop shopp<strong>in</strong>g, <strong>the</strong> dollar<br />
store concept, <strong>in</strong>-store <strong>the</strong>atre, multi-channel retail<strong>in</strong>g, fast fashion, EDLP or more holistic customer<br />
centricity <strong>in</strong>itiatives are all <strong>in</strong>novative responses to chang<strong>in</strong>g consumer trends. Grow<strong>in</strong>g <strong>in</strong>ternational<br />
competition coupled, with cont<strong>in</strong>ued <strong>in</strong>dustry concentration and <strong>the</strong> disruptive effects of <strong>the</strong> Internet<br />
on consumer demand and shopp<strong>in</strong>g habits also <strong>in</strong>variably affect <strong>the</strong> way <strong>in</strong> which and <strong>the</strong> pace with<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
which retailers <strong>in</strong>novate. In terms of <strong>in</strong>ternal drivers, <strong>the</strong> majority of retailers th<strong>in</strong>k that strategy drives<br />
<strong>in</strong>novation <strong>in</strong> terms of its direction, <strong>the</strong> resources available for it and <strong>the</strong> timel<strong>in</strong>es devoted to it, s<strong>in</strong>ce<br />
<strong>in</strong>novation often requires susta<strong>in</strong>ed support. Many also talked about ‘<strong>the</strong> will to implement new ideas’<br />
be<strong>in</strong>g as important as <strong>the</strong> ideas <strong>the</strong>mselves and highlighted <strong>the</strong> role of <strong>the</strong> vision and leadership of<br />
senior management as ‘entrepreneurs of <strong>the</strong> bus<strong>in</strong>ess’ and <strong>in</strong> creat<strong>in</strong>g a culture with<strong>in</strong> <strong>in</strong>novation<br />
could flourish.<br />
Barriers to retail <strong>in</strong>novation<br />
6. The majority of retailers do not perceive <strong>the</strong>re to be any barriers to <strong>in</strong>novation with<strong>in</strong> <strong>the</strong>ir bus<strong>in</strong>esses.<br />
Amongst those that do, <strong>the</strong> biggest barriers are reportedly <strong>in</strong> relation to costs, <strong>in</strong> particular <strong>the</strong> cost of<br />
f<strong>in</strong>ance and <strong>the</strong> perceived economic risks of <strong>in</strong>novation (especially for SMEs). Shortages are seen <strong>in</strong><br />
relation to technical, leadership as well as project management skills. The majority of retailers claim to<br />
know <strong>the</strong>ir markets well and to have little concern that lack of knowledge about technological<br />
possibilities works to prevent <strong>in</strong>novation. In relation to regulation, <strong>the</strong> majority of retail firms report<br />
no experience of barriers prevent<strong>in</strong>g <strong>in</strong>novation, although a number of specific issues do emerge.<br />
These <strong>in</strong>clude: <strong>the</strong> availability of allowances for mitigat<strong>in</strong>g some of <strong>the</strong> risks of <strong>in</strong>novation, as well as a<br />
lack of a common agenda across Government to stimulate <strong>in</strong>vestment <strong>in</strong> susta<strong>in</strong>able <strong>in</strong>novation,<br />
which often results <strong>in</strong> conflict<strong>in</strong>g outcomes on <strong>the</strong> ground for firms.<br />
Measur<strong>in</strong>g retail <strong>in</strong>novation<br />
7. <strong>Innovation</strong> needs to be measured <strong>in</strong> order to be successfully managed. <strong>Retail</strong>ers tend to focus most on<br />
short term tangible performance outputs, based on cost benefit analysis and captured through<br />
traditional measures of performance but much less on <strong>the</strong> longer term commercial impact of<br />
<strong>in</strong>novation as a value added activity. Measures are adapted from exist<strong>in</strong>g KPIs, ra<strong>the</strong>r than be<strong>in</strong>g<br />
<strong>in</strong>novation-specific, s<strong>in</strong>ce retail <strong>in</strong>novation is often <strong>in</strong>cremental and dispersed across different<br />
divisional budgets. The vast majority are f<strong>in</strong>ancial are relate to sales and market share impact, rate of<br />
return and measures of profitability. <strong>Retail</strong>ers also recognise that <strong>the</strong> soft benefits of <strong>in</strong>novation - <strong>in</strong><br />
terms, for example, of brand value, or total impact on <strong>the</strong> bus<strong>in</strong>ess - are less well measured, due to<br />
limitations <strong>in</strong> management account<strong>in</strong>g systems, but some progress is be<strong>in</strong>g made <strong>in</strong> track<strong>in</strong>g <strong>the</strong> share<br />
of new activities <strong>in</strong> <strong>the</strong> broader context of <strong>the</strong> bus<strong>in</strong>ess, <strong>in</strong>clud<strong>in</strong>g customer perceptions about <strong>the</strong><br />
retail and its brand.<br />
Stimulat<strong>in</strong>g and support<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g<br />
8. Governments around <strong>the</strong> world have recognised <strong>the</strong>ir responsibility for support<strong>in</strong>g and stimulat<strong>in</strong>g<br />
<strong>in</strong>novative activity by firms. Similarly, however, many governments have also historically shared a<br />
preoccupation with <strong>the</strong> manufactur<strong>in</strong>g sector over services, and support for technological over nontechnological<br />
forms of <strong>in</strong>novation. This is now chang<strong>in</strong>g and <strong>the</strong> present <strong>UK</strong> Government <strong>in</strong>itiative<br />
<strong>in</strong>to <strong>Innovation</strong> <strong>in</strong> Services forms part of this broader response. Exist<strong>in</strong>g Government policies<br />
towards <strong>in</strong>novation can be adapted to <strong>the</strong> needs of service sector firms <strong>in</strong> three particular ways:<br />
• Deepen<strong>in</strong>g of exist<strong>in</strong>g policy (mak<strong>in</strong>g <strong>in</strong>novation policies more ‘service-friendly’);<br />
• Broaden<strong>in</strong>g of exist<strong>in</strong>g policy (recognis<strong>in</strong>g that <strong>in</strong>novation with<strong>in</strong> <strong>the</strong> service sector are more<br />
likely to span firms as well as whole value cha<strong>in</strong>s); and<br />
• Horizontalisation of exist<strong>in</strong>g policy (recognis<strong>in</strong>g that o<strong>the</strong>r policies not explicitly designed to<br />
stimulate <strong>in</strong>novation may – <strong>in</strong>directly – improve <strong>the</strong> climate for service sector <strong>in</strong>novation.)<br />
9. We identify four dist<strong>in</strong>ct areas of policy focus which provide <strong>the</strong> basis for our recommendations:<br />
a. Provision of support mechanisms for retail <strong>in</strong>novation;<br />
b. Promot<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability by <strong>the</strong> retail sector; and<br />
c. Foster<strong>in</strong>g skills and organizational <strong>in</strong>novation <strong>in</strong> <strong>the</strong> retail sector.<br />
10. We also make recommendations for those areas <strong>in</strong> which <strong>the</strong> Government might better focus and<br />
communicate exist<strong>in</strong>g activity, <strong>in</strong> addition to potentially provid<strong>in</strong>g new stimuli which might matter<br />
particularly to retailers because of <strong>the</strong>ir commercial benefits.<br />
Page 5
Recommendation 1:<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Improve <strong>the</strong> effectiveness of <strong>in</strong>novation-related support activity with<strong>in</strong> Government.<br />
This will require:<br />
• A more systematic approach to co-ord<strong>in</strong>at<strong>in</strong>g <strong>in</strong>formation & expertise <strong>in</strong> Government & NDPBs<br />
which mimimises bureaucracy and improves access. The provision of a ‘one stop shop’ host<strong>in</strong>g<br />
<strong>in</strong>formation on <strong>in</strong>itiatives, support and services available to <strong>the</strong> sector, especially to SMEs.<br />
• A better mechanism for identification, prioritis<strong>in</strong>g and channell<strong>in</strong>g of commercial, <strong>in</strong>novation-related<br />
<strong>in</strong>itiatives and research to firms (a ‘s<strong>in</strong>gle voice’).<br />
• Encouragement of longer term horizon scann<strong>in</strong>g that is more relevant to retail<strong>in</strong>g: facilitat<strong>in</strong>g <strong>the</strong><br />
showcas<strong>in</strong>g of new ideas with commercial potential and support<strong>in</strong>g projects ‘on <strong>the</strong> marg<strong>in</strong>’.<br />
Government should identify an appropriate mechanism or <strong>in</strong>termediary to channel <strong>in</strong>novation-relevant<br />
<strong>in</strong>itiatives simply and efficiently to <strong>the</strong> correct <strong>in</strong>dividuals with<strong>in</strong> <strong>the</strong> sector and to prioritise those of most<br />
commercial relevance to <strong>the</strong> sector. Evidence that <strong>the</strong> sector was respond<strong>in</strong>g with purpose and conviction<br />
to any <strong>in</strong>tegrat<strong>in</strong>g efforts by <strong>the</strong> Government would be an important demonstration of commitment.<br />
Recommendation 2:<br />
Increase <strong>the</strong> awareness and take-up of R&D tax credits by <strong>the</strong> retail sector.<br />
This will require:<br />
• Identify<strong>in</strong>g and prioritis<strong>in</strong>g <strong>the</strong> k<strong>in</strong>ds of activities undertaken by retailers and by suppliers on <strong>the</strong>ir<br />
behalf which might qualify for support under both large bus<strong>in</strong>ess and SME schemes.<br />
• Improv<strong>in</strong>g awareness of <strong>the</strong> schemes and of <strong>the</strong>se priorities amongst retailers, particularly retail SMEs<br />
outside London and <strong>the</strong> South-East.<br />
• Improv<strong>in</strong>g <strong>the</strong> speed and transparency of <strong>the</strong> application process to reduce uncerta<strong>in</strong>ty.<br />
• Investigat<strong>in</strong>g <strong>the</strong> extent to which, without dilut<strong>in</strong>g <strong>the</strong> exist<strong>in</strong>g mechanisms, <strong>the</strong> R&D tax credit<br />
scheme might be both deepened and broadened to benefit service <strong>in</strong>novation<br />
Government should work with retailers and key third party suppliers to clarify <strong>the</strong> k<strong>in</strong>ds of activities<br />
undertaken by and for retailers which would qualify for tax credits and to exam<strong>in</strong>e ways <strong>in</strong> which <strong>the</strong><br />
application and <strong>in</strong>spection process for tax relief on such activities might be fur<strong>the</strong>r streaml<strong>in</strong>ed.<br />
Recommendation 3:<br />
Promote <strong>in</strong>novation by retailers <strong>in</strong> susta<strong>in</strong>ability.<br />
Eight specific measures which might act as stimuli for <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability have been identified by<br />
<strong>the</strong> sector:<br />
Provision of support mechanisms<br />
• VAT reductions to stimulate green product <strong>in</strong>novation,<br />
• Bus<strong>in</strong>ess rate relief on energy efficient build<strong>in</strong>gs, and<br />
• Encourage development of shared waste facilities by SMEs.<br />
Reduction of barriers<br />
• Faster and easier plann<strong>in</strong>g regimes for susta<strong>in</strong>able technologies relevant to retail<strong>in</strong>g<br />
• Foster<strong>in</strong>g a standards-based framework to manage susta<strong>in</strong>ability and reduce uncerta<strong>in</strong>ty and risk<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
• Work<strong>in</strong>g towards identify<strong>in</strong>g susta<strong>in</strong>ability metrics, requir<strong>in</strong>g retailers to publicly report on <strong>the</strong>ir<br />
achievement.<br />
Foster<strong>in</strong>g of skills<br />
• Build<strong>in</strong>g environmental awareness amongst retail staff<br />
• Tra<strong>in</strong><strong>in</strong>g for low carbon technology skills to support growth <strong>in</strong> retail <strong>in</strong>itiatives<br />
The Government should work with <strong>the</strong> retail sector <strong>in</strong> identify<strong>in</strong>g and dissem<strong>in</strong>at<strong>in</strong>g priorities for<br />
<strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability. This should occur through <strong>the</strong> development of a mean<strong>in</strong>gful framework for<br />
action, <strong>in</strong>clud<strong>in</strong>g <strong>the</strong> provision of evidence for <strong>the</strong> effectiveness of fund<strong>in</strong>g <strong>in</strong>centives, priorities for barrier<br />
reduction and any skills shortages or gaps which can be addressed at <strong>the</strong> national or regional level.<br />
Recommendation 4:<br />
Identify and support <strong>the</strong> complex sets of skills required for retail <strong>in</strong>novation.<br />
This will require:<br />
• Provision of <strong>in</strong>novation awareness tra<strong>in</strong><strong>in</strong>g amongst employees<br />
• Provision of ‘management of <strong>in</strong>novation’ skills tra<strong>in</strong><strong>in</strong>g<br />
• Provision of cross-sector technical skills tra<strong>in</strong><strong>in</strong>g capability and, for SMEs,<br />
• Development of <strong>in</strong>novative approaches to areas such as product buy<strong>in</strong>g and presentation for SMEs<br />
• Provision of an <strong>in</strong>tegrated support structure for retail SME skills and mentor<strong>in</strong>g at <strong>the</strong> local level<br />
which fur<strong>the</strong>r reduces present duplication.<br />
The Government should identify <strong>the</strong> lead co-ord<strong>in</strong>at<strong>in</strong>g agency on retail skills at <strong>the</strong> local level. It should<br />
take fur<strong>the</strong>r steps to better <strong>in</strong>tegrate <strong>the</strong> work of <strong>the</strong> exist<strong>in</strong>g relevant agencies to meet both large and<br />
small retail bus<strong>in</strong>ess requirements <strong>in</strong> relation to retail <strong>in</strong>novation skills.<br />
Page 7
1. Introduction<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
1.1 There is a broad consensus that <strong>in</strong>novation deals with <strong>the</strong> successful exploitation of ideas<br />
which leads to susta<strong>in</strong>able economic growth. However, <strong>the</strong> precise mean<strong>in</strong>gs, practices,<br />
measurements of and potential support for <strong>the</strong> <strong>in</strong>novative activities of firms largely<br />
depend on <strong>the</strong> context <strong>in</strong> which <strong>the</strong>y occur. The present <strong>Innovation</strong> <strong>in</strong> Services <strong>in</strong>itiative<br />
recognises that <strong>in</strong>novation <strong>in</strong> services may be different <strong>in</strong> its nature, <strong>in</strong>cidence and<br />
measurability than that <strong>in</strong> more tangible sectors of <strong>the</strong> economy, and that different<br />
actions and policies may be required of Government <strong>in</strong> support of service sector<br />
<strong>in</strong>novation. What, <strong>the</strong>n, of <strong>in</strong>novation <strong>in</strong> <strong>the</strong> retail sector, one of <strong>the</strong> largest <strong>in</strong> terms of<br />
value added and employment with<strong>in</strong> <strong>the</strong> <strong>UK</strong> service sector? <strong>Retail</strong><strong>in</strong>g is considered to be<br />
a service but is, of course, a hybrid economic activity perform<strong>in</strong>g a bridg<strong>in</strong>g role between<br />
production and consumption, <strong>in</strong> which firms br<strong>in</strong>g toge<strong>the</strong>r assortments of goods<br />
relevant to <strong>the</strong> needs of consumers. Yet <strong>the</strong> nature of <strong>in</strong>novation <strong>in</strong> this important sector<br />
is often poorly understood and <strong>in</strong>adequately measured.<br />
1.2 Over <strong>the</strong> last forty years, <strong>UK</strong> retailers have become much more active <strong>in</strong> <strong>the</strong>ir own right<br />
with<strong>in</strong> <strong>the</strong> value cha<strong>in</strong>. Indeed, large, professionalised, organizations now run most of <strong>the</strong><br />
retail<strong>in</strong>g <strong>in</strong> western economies and are now com<strong>in</strong>g to do so <strong>in</strong> emerg<strong>in</strong>g economies. In<br />
addition to be<strong>in</strong>g substantial commercial enterprises, such retailers have also become<br />
trusted brands with, <strong>in</strong> some cases, retailers’ own label brands be<strong>in</strong>g regarded as of similar<br />
or higher quality than those of branded manufacturers. Now retail<strong>in</strong>g is <strong>the</strong> legitimate<br />
focus of bus<strong>in</strong>ess strategy, market<strong>in</strong>g, operations management and o<strong>the</strong>r conventional<br />
bus<strong>in</strong>ess discipl<strong>in</strong>es. How do such companies <strong>in</strong>novate, and what k<strong>in</strong>d of <strong>in</strong>novation<br />
matters for such firms? How do small and medium-sized enterprises – firms which<br />
contribute to <strong>the</strong> vital entrepreneurial ‘froth’ of <strong>the</strong> sector - undertake <strong>in</strong>novation?<br />
1.3 This report has been commissioned by NESTA to exam<strong>in</strong>e <strong>in</strong>novation <strong>in</strong> <strong>the</strong> retail<br />
sector. It seeks to answer <strong>the</strong> follow<strong>in</strong>g questions, us<strong>in</strong>g a common format and structure:<br />
• What is <strong>the</strong> ‘<strong>in</strong>novation that matters’ <strong>in</strong> <strong>the</strong> sector?<br />
• What is driv<strong>in</strong>g this <strong>in</strong>novation?<br />
• What are <strong>the</strong> barriers to fur<strong>the</strong>r <strong>in</strong>novation?<br />
• How is this <strong>in</strong>novation evidenced with<strong>in</strong> <strong>the</strong> sector, and how might this <strong>in</strong>form <strong>the</strong><br />
development of new metrics and tools for benchmark<strong>in</strong>g <strong>in</strong>novation performance? It<br />
f<strong>in</strong>ally considers and makes recommendations for:<br />
• The role for Government <strong>in</strong> support<strong>in</strong>g <strong>the</strong>se particular forms and systems of<br />
<strong>in</strong>novation to create greater economic and social value<br />
1.4 The report comb<strong>in</strong>es f<strong>in</strong>d<strong>in</strong>gs from a variety of sources. It analyses for <strong>the</strong> first time <strong>the</strong><br />
retail-specific responses to <strong>the</strong> most recent Community <strong>Innovation</strong> Survey. It draws upon<br />
selected <strong>in</strong>sights from a series of <strong>in</strong>-depth <strong>in</strong>terviews and discussions conducted by one of<br />
<strong>the</strong> authors as part of his doctoral research with over 50 senior retail executives and o<strong>the</strong>r<br />
<strong>in</strong>dustry experts from over 30 retail bus<strong>in</strong>esses, consult<strong>in</strong>g firms and <strong>in</strong>dustry associations<br />
(with<strong>in</strong> <strong>the</strong> <strong>UK</strong> and elsewhere) on how <strong>the</strong>y def<strong>in</strong>e, encourage and manage <strong>in</strong>novation. It<br />
br<strong>in</strong>gs toge<strong>the</strong>r a wide range of secondary material deal<strong>in</strong>g with <strong>in</strong>novation (exam<strong>in</strong><strong>in</strong>g its<br />
relevance through a retail lens). It reviews exist<strong>in</strong>g Government activity <strong>in</strong> this area.<br />
F<strong>in</strong>ally, <strong>the</strong> report makes recommendations on <strong>the</strong> particular ways <strong>in</strong> which Government<br />
may improve <strong>the</strong> effectiveness of its stimulation and support of <strong>in</strong>novation with<strong>in</strong> <strong>the</strong><br />
sector.<br />
Page 8
2. The nature and contribution of retail<strong>in</strong>g<br />
a. The size and growth of <strong>the</strong> retail sector<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
2.1 <strong>Retail</strong>ers were once seen as ‘downstream resellers of products’, simply ciphers <strong>in</strong><br />
manufacturers’ distribution channels, <strong>in</strong>termediaries whose only role was to enable <strong>the</strong><br />
flow of goods and services between suppliers and consumers - and who were of<br />
<strong>the</strong>mselves <strong>in</strong>capable of <strong>in</strong>novation. This conclusion could be attributed partly to <strong>the</strong><br />
dom<strong>in</strong>ant n<strong>in</strong>eteenth century view that manufactur<strong>in</strong>g ra<strong>the</strong>r than services provided <strong>the</strong><br />
primary motor of economic growth and partly to <strong>the</strong> fact that <strong>in</strong> many developed<br />
markets, until <strong>the</strong> early 1970s <strong>the</strong> retail <strong>in</strong>dustry was fragmented, ma<strong>in</strong>ly consist<strong>in</strong>g of<br />
s<strong>in</strong>gle-store and smaller cha<strong>in</strong> retailers.<br />
2.2 This is a view, curiously, reflected until very recently <strong>in</strong> <strong>the</strong> way <strong>in</strong> which <strong>in</strong>novation is<br />
def<strong>in</strong>ed and measured. As little as fifteen years ago, <strong>the</strong> late Keith Pavitt (1984) <strong>in</strong> seek<strong>in</strong>g<br />
to expla<strong>in</strong> variations <strong>in</strong> <strong>the</strong> nature and impact of <strong>in</strong>novation between sectors, <strong>in</strong> terms of<br />
<strong>the</strong>ir contribution to technological change 1 , suggested that <strong>in</strong>novation <strong>in</strong> retail firms was<br />
essentially supplier-dom<strong>in</strong>ated. Firms <strong>in</strong> <strong>the</strong> sector, he suggested, were passive adopters of<br />
supplier technologies ra<strong>the</strong>r than more active non-technological <strong>in</strong>novators. Such views<br />
have been strongly contested, but have become embedded <strong>in</strong> policy. Accord<strong>in</strong>g to<br />
McGoldrick (2002, p.2) it is equally, if not more, realistic to talk about ‘channels of<br />
supply’ with<strong>in</strong> a retailer-centred vertical market<strong>in</strong>g system.<br />
2.3 Indeed, today, retailers are no longer hired l<strong>in</strong>ks <strong>in</strong> a manufacturer’s supply cha<strong>in</strong> but<br />
comprise an <strong>in</strong>dependent market, <strong>the</strong> focus of a large group of customers for whom <strong>the</strong>y<br />
buy (McVey, 1960; Spriggs, 1994; Reynolds, 2004). They provide readily identifiable<br />
locations where f<strong>in</strong>al consumers enter <strong>in</strong>to <strong>the</strong> transactions by which <strong>the</strong>y acquire goods<br />
and services sourced by <strong>the</strong> retailer. In addition, <strong>the</strong>y provide support services of various<br />
k<strong>in</strong>ds. As such retail<strong>in</strong>g is an extremely significant economic activity which bridges<br />
production and consumption and affects most of <strong>the</strong> population every day (Burt, 2003).<br />
It is <strong>the</strong> eight-biggest sector of <strong>the</strong> world economy <strong>in</strong> terms of total market value<br />
(F<strong>in</strong>ancial Times, 2006). Whilst as recently as 1990, <strong>the</strong>re were no retailers <strong>in</strong> <strong>the</strong> US<br />
Fortune 500, by 2006 Fortune reported that nearly one fifth was now made up of general<br />
merchandisers, food & drug store and speciality retailers alone (Fortune, 2006).<br />
2.4 In <strong>the</strong> US, retail trade accounts for 9.2 % of <strong>the</strong> GDP and employs 17.4% of <strong>the</strong> total<br />
work<strong>in</strong>g population (Hristov, Cuthbertson et al., 2004). In <strong>the</strong> <strong>UK</strong> <strong>the</strong> sector represents<br />
7% of total value-added and employs 2.6 million (10%) of <strong>the</strong> total work<strong>in</strong>g population<br />
(Burt, 2003). In 2006 general retail<strong>in</strong>g was <strong>the</strong> <strong>UK</strong>’s eighth biggest contributor to value<br />
added. Tesco is <strong>the</strong> biggest <strong>UK</strong> private employer (240,000 employees) (FT 500, 2001), <strong>the</strong><br />
twelfth biggest <strong>in</strong>dividual contributor to value added and among <strong>the</strong> eight fastest grow<strong>in</strong>g<br />
<strong>UK</strong> companies (DTI, 2005; DTI, 2006).<br />
1 Pavitt’s essentially manufactur<strong>in</strong>g-led perspective dist<strong>in</strong>guished among three ma<strong>in</strong> types of firms; (1) supplier dom<strong>in</strong>ated (2) science-based, (3)<br />
production-<strong>in</strong>tensive firms.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Table 2.1. Key <strong>in</strong>dicators of <strong>UK</strong> retail performance and economic<br />
contribution, 1990-2006.<br />
Sales (£mn)<br />
<strong>UK</strong><br />
GVA (£mn)<br />
Index of Services<br />
(<strong>Retail</strong> trade)<br />
Enterprises<br />
Employment (**)<br />
1990<br />
£ 159,519<br />
n/a<br />
n/a<br />
n/a<br />
2,101,882<br />
1995<br />
£ 171,535<br />
£29,598<br />
73.8<br />
209,386<br />
2,146,940<br />
2000<br />
£ 207,168<br />
£49,415<br />
86.4<br />
214,876<br />
2,978,000<br />
2006<br />
£ 255,438<br />
(*)£60,507<br />
112.5<br />
(*)201,420<br />
3,109,000<br />
90/95<br />
8%<br />
n/a<br />
n/a<br />
95/00<br />
Source: Office of National Statistics, 2007, 2003, 2000. (*) 2005 data; (**) Average dur<strong>in</strong>g <strong>the</strong> year<br />
n/a<br />
2%<br />
21%<br />
67%<br />
17%<br />
3%<br />
39%<br />
00/06 (*05)<br />
23%<br />
(*)22%<br />
30%<br />
(*)-6%<br />
2.5 The contributions of retail<strong>in</strong>g can be seen as economic, social and environmental <strong>in</strong> <strong>the</strong>ir<br />
nature. From an economic perspective, retailers make both:<br />
• Direct contributions towards GDP, employment and <strong>the</strong> supply of vital products<br />
and services to <strong>the</strong> population which stimulates demand and economic growth.<br />
(The output of <strong>the</strong> sector is considerable (see Table 2.1) and stretches across <strong>the</strong><br />
whole services-to-goods cont<strong>in</strong>uum with offer<strong>in</strong>gs rang<strong>in</strong>g from <strong>in</strong>tangible-dom<strong>in</strong>ant<br />
‘pure’ services such as <strong>in</strong>surance or <strong>in</strong>ternet access, to tangible-dom<strong>in</strong>ant physical<br />
products such as food or furniture); as well as:<br />
• Indirect contributions, which are less easily recognised and work <strong>in</strong> <strong>the</strong> form of a<br />
multiplier effect.<br />
(For <strong>in</strong>stance, by develop<strong>in</strong>g new services, new formats, new products, or new stores,<br />
retailers stimulate demand not only for goods for re-sale but also for a wide range of<br />
<strong>in</strong>termediate <strong>in</strong>puts which <strong>the</strong>y may buy from o<strong>the</strong>r <strong>in</strong>dustries to produce <strong>the</strong>ir output<br />
and which stimulate bus<strong>in</strong>ess activities and employment outside <strong>the</strong> sector. Such<br />
<strong>in</strong>puts may be <strong>in</strong> <strong>the</strong> form of transportation and construction services, consultancy,<br />
ICT, advertis<strong>in</strong>g and o<strong>the</strong>r bus<strong>in</strong>ess services. Similarly, efficiencies and productivity<br />
ga<strong>in</strong>s with<strong>in</strong> <strong>the</strong> sector create <strong>the</strong> potential for retail price deflation which <strong>in</strong> tandem<br />
with <strong>in</strong>creases <strong>in</strong> consumer real <strong>in</strong>come stimulates consumer spend<strong>in</strong>g and has a<br />
positive effect on economic growth (Hristov, Howard et al., 2004).<br />
“Between us, we've achieved a revolution <strong>in</strong> shopp<strong>in</strong>g over <strong>the</strong> past 10 years. The price deflation we've<br />
pushed through <strong>in</strong> cloth<strong>in</strong>g has even forced down <strong>the</strong> overall rate of <strong>in</strong>flation, which is pretty major<br />
stuff.” (Andy Bond, CEO, Asda)<br />
2.6 However, retail<strong>in</strong>g has a role to play not only <strong>in</strong> economic but also <strong>in</strong> social terms.<br />
“Brand<strong>in</strong>g is <strong>the</strong> dom<strong>in</strong>ant strategy around which retail competition is structured. In <strong>the</strong> case of <strong>the</strong> retail<br />
sector, products, ranges and <strong>the</strong> company itself may be branded.” (Pett<strong>in</strong>ger, 2004)<br />
Some retail brands (not always <strong>the</strong> largest) perform as cultural <strong>in</strong>novators, creat<strong>in</strong>g or<br />
assist<strong>in</strong>g <strong>in</strong> <strong>the</strong> creation of trends for new products and services; or mak<strong>in</strong>g such products<br />
and services more widely available to larger sections of <strong>the</strong> population. For example,<br />
4%<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
cloth<strong>in</strong>g retailer Zara’s quick response, vertically <strong>in</strong>tegrated bus<strong>in</strong>ess model made an<br />
opportunity of <strong>the</strong> transience of fashion to create dist<strong>in</strong>ctive competitive advantage,<br />
whilst Marks & Spencer’s growth of its Simply Food smaller format store was explicitly<br />
designed to br<strong>in</strong>g ‘convenience foods to more convenient locations’. A retailer with<br />
strong brand equity will be able to convey clearer value to customers which <strong>in</strong> turn will<br />
provide a more rigorous basis for <strong>in</strong>novation with<strong>in</strong> <strong>the</strong> firm.<br />
2.7 F<strong>in</strong>ally, as <strong>in</strong> o<strong>the</strong>r sectors, retail<strong>in</strong>g has also needed to come to terms with <strong>the</strong><br />
contemporary challenge of <strong>the</strong> ‘triple bottom l<strong>in</strong>e’, where <strong>in</strong>novation has to service <strong>the</strong><br />
need for environmental – and not just economic and social - performance. Partly because<br />
of <strong>the</strong>ir position <strong>in</strong> <strong>the</strong> value cha<strong>in</strong>, <strong>in</strong> be<strong>in</strong>g closest to <strong>the</strong> consumer, retailers have also<br />
become reference po<strong>in</strong>ts for <strong>the</strong>ir customers with regard to topical socio-economic or<br />
lifestyle debates about <strong>the</strong> environment, health, nutrition or fair trade. It is also <strong>in</strong> <strong>the</strong><br />
nature of retail bus<strong>in</strong>esses to strive to understand <strong>the</strong>ir customers and to quickly respond<br />
to new trends, needs or wants and, <strong>in</strong> <strong>the</strong> process, retailers’ brands have <strong>in</strong>creas<strong>in</strong>gly to<br />
function as guarantors for product quality, traceability, au<strong>the</strong>nticity, safety, reliability and<br />
convenience.<br />
b. Drivers of change<br />
2.8 The retail<strong>in</strong>g that we see today is <strong>the</strong> product of four ma<strong>in</strong> forces: economic, social,<br />
features aris<strong>in</strong>g from chang<strong>in</strong>g levels of competition and <strong>in</strong>novation (<strong>in</strong>clud<strong>in</strong>g<br />
technology), and those derived from evolv<strong>in</strong>g regulation. In some cases, <strong>the</strong>se <strong>in</strong>fluences<br />
act as constra<strong>in</strong>ts, <strong>in</strong> some cases <strong>the</strong>y provide real opportunities for experimentation and<br />
<strong>in</strong>novation. We elaborate upon <strong>the</strong> specific drivers for <strong>in</strong>novation as perceived by retail<br />
firms <strong>the</strong>mselves, from both with<strong>in</strong> as well as outside <strong>the</strong>ir organizations, <strong>in</strong> Section 5.<br />
We discuss regulation <strong>in</strong> <strong>the</strong> context of barriers to <strong>in</strong>novation <strong>in</strong> Section 6. Here, <strong>in</strong> l<strong>in</strong>e<br />
with o<strong>the</strong>r <strong>Innovation</strong> <strong>in</strong> Services reports, we briefly enumerate <strong>the</strong> ma<strong>in</strong> factors driv<strong>in</strong>g<br />
change <strong>in</strong> <strong>the</strong> sector and identify <strong>the</strong> pressures to which it is respond<strong>in</strong>g.<br />
i. Economic drivers<br />
2.9 Table 2.1 demonstrates that for much of <strong>the</strong> past fifteen years, <strong>the</strong> <strong>UK</strong> economy’s<br />
development has been underp<strong>in</strong>ned by extensive growth <strong>in</strong> domestic consumption. The<br />
broad consequence of this has been <strong>the</strong> relatively untrammelled growth of retail<br />
bus<strong>in</strong>esses and an optimistic and entrepreneurial outlook towards experimentation and<br />
expansion <strong>in</strong> a variety of ways. Most recently, <strong>the</strong> Bank of England has sought to re<strong>in</strong> <strong>in</strong><br />
consumer spend<strong>in</strong>g through a series of <strong>in</strong>terest rate rises. This, <strong>in</strong> comb<strong>in</strong>ation with<br />
concern over ris<strong>in</strong>g levels of personal debt and more general economic uncerta<strong>in</strong>ty, has<br />
led to growth <strong>in</strong> retail spend<strong>in</strong>g falter<strong>in</strong>g.<br />
2.10 In practice dur<strong>in</strong>g this period, <strong>UK</strong> shoppers have experienced substantial price decreases<br />
<strong>in</strong> a number of categories of consumer products over <strong>the</strong> past fifteen years – <strong>in</strong> categories<br />
such as cloth<strong>in</strong>g by as much as 20% and <strong>in</strong> audio-visual goods by as much as 60% -<br />
(Office of National Statistics, 2007). However, <strong>the</strong> debt which is of concern to consumers<br />
has not necessarily been <strong>in</strong>curred <strong>in</strong> consum<strong>in</strong>g retail goods, but as a result of higher<br />
utility, transport and hous<strong>in</strong>g bills. The pressure has <strong>the</strong>refore been upon retailers to<br />
clearly communicate fair, if not low, prices to those consumers for whom it is important.<br />
Those retailers which can cont<strong>in</strong>ually demonstrate ‘value’ <strong>in</strong> <strong>the</strong>ir propositions will w<strong>in</strong><br />
out aga<strong>in</strong>st those retailers with muddled price po<strong>in</strong>ts or value propositions.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
2.11 At <strong>the</strong> same time, retailers <strong>the</strong>mselves have been exposed to cost <strong>in</strong>flation <strong>in</strong> much <strong>the</strong><br />
same way as consumers: not least <strong>in</strong> terms of utilities, property and transport. The 23%<br />
growth <strong>in</strong> retail sales value looks strong beside a fall <strong>in</strong> telecommunications costs, cater<strong>in</strong>g<br />
clean<strong>in</strong>g and market research over <strong>the</strong> same 6-year period; but does not appear to have<br />
kept pace with <strong>in</strong>creases <strong>in</strong> costs of waste disposal, transport & logistics, property rental<br />
and bank<strong>in</strong>g services. The <strong>in</strong>troduction of <strong>the</strong> NMW, wage <strong>in</strong>flation and <strong>in</strong>creased<br />
staff<strong>in</strong>g levels has meant that <strong>the</strong> proportion that employment costs comprise of <strong>UK</strong><br />
retail sales has <strong>in</strong>creased from 10.5% to 13% over <strong>the</strong> past ten years.<br />
“Despite a slow down <strong>in</strong> growth [<strong>in</strong> corporate costs], <strong>the</strong> largest upward effect came from freight transport<br />
by road, reflect<strong>in</strong>g <strong>in</strong>creases <strong>in</strong> fuel prices. O<strong>the</strong>r notable upward contributions came from: sewerage<br />
services, follow<strong>in</strong>g <strong>the</strong> sett<strong>in</strong>g of new price limits by Ofwat; property rental prices follow<strong>in</strong>g general <strong>in</strong>creases<br />
across <strong>the</strong> <strong>in</strong>dustry; and waste disposal prices follow<strong>in</strong>g general rises coupled with <strong>in</strong>creases to landfill<br />
charges be<strong>in</strong>g passed onto customers.”<br />
(National Statistics Office, Corporate Services Prices Index, 2006)<br />
2.12 It has been argued that <strong>the</strong> comb<strong>in</strong>ation of price deflation accompanied by cost <strong>in</strong>flation<br />
has led some retailers <strong>in</strong>to an <strong>in</strong>creas<strong>in</strong>gly difficult f<strong>in</strong>ancial position and focused<br />
attention upon some types of <strong>in</strong>novation (such as process-related <strong>in</strong>novation deliver<strong>in</strong>g<br />
productivity benefits) over o<strong>the</strong>rs. Firms can put pressure on suppliers to reduce <strong>the</strong> cost<br />
of goods or can also accept a fall <strong>in</strong> marg<strong>in</strong>; cut o<strong>the</strong>r costs, or persuade consumers to<br />
trade up to higher marg<strong>in</strong> products with<strong>in</strong> a category.<br />
ii. Demographic and consumer behavioural drivers<br />
2.13 We have already suggested that <strong>the</strong> paradox presented by consumers’ lack of appreciation<br />
of price falls <strong>in</strong> certa<strong>in</strong> categories of consumer goods can be largely expla<strong>in</strong>ed by <strong>the</strong> ‘halo<br />
effect’ of price <strong>in</strong>creases occurr<strong>in</strong>g <strong>in</strong> more obvious categories - such as household<br />
utilities and transport. Many consumers are already <strong>in</strong>cl<strong>in</strong>ed to believe that <strong>the</strong> sell<strong>in</strong>g<br />
price of a product is substantially higher than its ‘fair’ price would be.<br />
“Consumers also now play games with retailers – sitt<strong>in</strong>g tight and wait<strong>in</strong>g for <strong>the</strong> discounts to come.<br />
Because purchases are not necessities (except food), <strong>the</strong>y have more choice about when <strong>the</strong>y buy.”<br />
(<strong>Retail</strong>er)<br />
Greater sensitivity to price and greater war<strong>in</strong>ess of retailers’ promises on price, toge<strong>the</strong>r<br />
with <strong>the</strong> growth of greater price <strong>in</strong>formation availability as a result of <strong>the</strong> Internet, has led<br />
to a greater focus on value formats by retailers. An <strong>in</strong>creas<strong>in</strong>g number of sectors have<br />
‘gone to value’.<br />
“Value retailers have 18% of <strong>the</strong> market [<strong>in</strong> <strong>the</strong> <strong>UK</strong>], but <strong>in</strong> <strong>the</strong> US it is 35%; <strong>the</strong>re's plenty to go<br />
for.” (John K<strong>in</strong>g, Matalan)<br />
“This concern with value for money is actually embedded <strong>in</strong> much broader concerns that people have about,<br />
for example, what to put <strong>in</strong> <strong>the</strong>ir kids’ packed lunches, or about <strong>the</strong> health impacts of different sorts of<br />
foods on <strong>the</strong>mselves and <strong>the</strong>ir loved ones.” (Barnett et al, 2005)<br />
2.14 Consumers have also begun to exert greater control with<strong>in</strong> <strong>the</strong> buy<strong>in</strong>g process, not least<br />
<strong>in</strong> response to <strong>the</strong> non-price concerns expressed above, rang<strong>in</strong>g from word of mouth<br />
effects to product boycotts. The National Consumer Council’s ‘Active Consumer Index’,<br />
which tracks switch<strong>in</strong>g trends for six services markets, has risen 52% s<strong>in</strong>ce 2000.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
<strong>Retail</strong>ers have not been immune to this grow<strong>in</strong>g activism as it has extended <strong>in</strong>to broader<br />
areas of social and environmental responsibility. Solutions for retailers run from ‘choice<br />
edit<strong>in</strong>g’ <strong>in</strong> product range, to <strong>the</strong> use of environmental or social susta<strong>in</strong>ability as a<br />
differentiator <strong>in</strong> <strong>the</strong> creation and design of formats, to a complete ethical makeover.<br />
2.15 As a result, <strong>the</strong> largest retail firms are <strong>in</strong>creas<strong>in</strong>gly expected to take <strong>the</strong> lead over issues of<br />
social responsibility and accountability related to consumption. This br<strong>in</strong>gs new<br />
opportunities and challenges for <strong>in</strong>novative behaviour <strong>in</strong> <strong>the</strong> sector <strong>in</strong> terms, for example,<br />
of:<br />
• The environmental impact of commercial activities (for example, Wal-Mart’s<br />
Project Aurora will, amongst o<strong>the</strong>r th<strong>in</strong>gs, <strong>in</strong>vest $500 million <strong>in</strong> technologies that<br />
will reduce greenhouse gases from <strong>the</strong> companies’ stores and distribution centres<br />
by 20 percent over <strong>the</strong> next seven years);<br />
• Ethical sourc<strong>in</strong>g (for example, <strong>the</strong> values expressed by Lush, <strong>the</strong> cosmetics<br />
grocer, lead it to buy<strong>in</strong>g only those <strong>in</strong>gredients which are not tested on animals,<br />
us<strong>in</strong>g vegetarian <strong>in</strong>gredients, made by hand with <strong>the</strong> m<strong>in</strong>imum of packag<strong>in</strong>g -<br />
http://www.lush.co.uk/LushLife/WeBelieve.aspx); and<br />
• Responsible consumption (for example, <strong>in</strong> address<strong>in</strong>g concerns over childhood<br />
obesity and healthier lifestyles, Sa<strong>in</strong>sbury's has developed its ‘Active Kids’<br />
campaign, spend<strong>in</strong>g £34mn over two years <strong>in</strong> subsidis<strong>in</strong>g <strong>the</strong> purchase of sports<br />
equipment by schools, scouts and guide movements, and has commissioned a<br />
research programme to discover what parents of young children buy and how<br />
that varies across regions and socio-economic groups).<br />
2.16 There is a potential dilemma for some firms <strong>in</strong> that <strong>the</strong> pressure towards provid<strong>in</strong>g value<br />
for money formats pushes firms towards cheaper, and potentially less susta<strong>in</strong>able,<br />
procurement. Similarly a contrast<strong>in</strong>g growth <strong>in</strong> demand for service and experience<br />
amongst some consumers can be seen as both an attractive non-price differentiator when<br />
set aga<strong>in</strong>st onl<strong>in</strong>e competitors, but also a potentially costly consideration <strong>in</strong> design<strong>in</strong>g new<br />
formats <strong>in</strong> <strong>the</strong> light of what we have said already about <strong>the</strong> <strong>in</strong>creas<strong>in</strong>g cost of space and of<br />
retail labour. Gett<strong>in</strong>g <strong>the</strong> balance right <strong>in</strong> response to consumer pressure is difficult:<br />
“It’s also f<strong>in</strong>d<strong>in</strong>g <strong>the</strong> trade-off between what customers want (price, convenience, choice) and what retailers<br />
have to deliver to shareholders (profits, marg<strong>in</strong>s, sales growth). For example, unmanned kiosks may not<br />
be so pleasant for a customer as is <strong>the</strong> ‘live’ <strong>in</strong>teraction with someone on <strong>the</strong> floor, but <strong>the</strong>n <strong>the</strong> customer<br />
may trade off this <strong>in</strong>convenience for <strong>the</strong> better price and <strong>the</strong> time sav<strong>in</strong>g.” (F<strong>in</strong>ance Director, general<br />
merchandiser)<br />
iii. Competition and <strong>in</strong>novation drivers<br />
2.17 In general terms, levels of competition ultimately determ<strong>in</strong>e <strong>the</strong> mix and range of retail<strong>in</strong>g<br />
on offer to consumers and <strong>the</strong> extent to which cont<strong>in</strong>ual <strong>in</strong>novation is required to build a<br />
switch<strong>in</strong>g barrier between, say, one retail format and ano<strong>the</strong>r. With <strong>in</strong>creased levels of<br />
competition amongst larger scale retailers, achiev<strong>in</strong>g that differentiation on a susta<strong>in</strong>able<br />
basis is costly and requires retailers to make choices:<br />
“There’s a perception now that you can only pull some of <strong>the</strong> levers. You have to make a choice between<br />
price, choice and breadth because of <strong>in</strong>creased levels of competition. You can’t compete on all <strong>the</strong> choice<br />
criteria.” (Director, variety store retailer)<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
2.18 Technology has played a complex role <strong>in</strong> relation to retail change. <strong>Retail</strong>ers <strong>the</strong>mselves<br />
have been generally reluctant adopters of technology (CEC, 1991). The majority of firms<br />
have tended to be adapters ra<strong>the</strong>r than <strong>in</strong>novators, us<strong>in</strong>g <strong>in</strong>formation technology to<br />
support exist<strong>in</strong>g operations. As a result, <strong>in</strong>vestment <strong>in</strong> ICT conferred little last<strong>in</strong>g<br />
competitive advantage even if it managed to raise rudimentary barriers to entry. Indeed,<br />
‘successful’ retail ICT for many <strong>in</strong> <strong>the</strong> 1990s comprised projects that did not <strong>in</strong>volve long<br />
term research & development, provided a visible f<strong>in</strong>ancial benefit, came without<br />
extensive capital commitment and provided for low risk, staged implementation. Even<br />
today, ICT accounts for extremely low levels of capital spend <strong>in</strong> <strong>the</strong> sector. However, a<br />
number of lead<strong>in</strong>g firms have used technology to achieve significant ga<strong>in</strong>s <strong>in</strong> productivity<br />
(Johnson, 2002). In addition, disruptive <strong>in</strong>novations driven by technology, such as ecommerce,<br />
have resulted <strong>in</strong> significant challenges for <strong>the</strong> sector. 2 For example, <strong>the</strong><br />
anticipated compound annual growth rate between 2007 and 2012 for retail onl<strong>in</strong>e<br />
spend<strong>in</strong>g is 14%. The expectation is that onl<strong>in</strong>e sales <strong>in</strong> <strong>the</strong> EU will overtake those <strong>in</strong> <strong>the</strong><br />
USA by 2011.<br />
2.19 One driver of domestic format <strong>in</strong>novation comes of course from cont<strong>in</strong>ually grow<strong>in</strong>g<br />
<strong>in</strong>ternational activity with<strong>in</strong> <strong>the</strong> <strong>UK</strong>. Estimates made <strong>in</strong> 2005 suggested that over 500<br />
non-<strong>UK</strong> retailers currently trade <strong>in</strong> <strong>the</strong> <strong>UK</strong>, numbers which have been ris<strong>in</strong>g over <strong>the</strong><br />
past twenty years, with high proportions of operators <strong>in</strong> cloth<strong>in</strong>g, footwear and<br />
accessories, health & beauty, toys and games and department & variety store retail<strong>in</strong>g<br />
(<strong>Retail</strong> Knowledge Bank, 2005).<br />
iv. Regulatory drivers<br />
2.20 Regulation is often seen by retailers as an unnecessary cost to <strong>the</strong> bus<strong>in</strong>ess, but regulation<br />
can work to direct and focus <strong>in</strong>novation <strong>in</strong> unanticipated and o<strong>the</strong>rwise unexplored ways,<br />
<strong>in</strong> seek<strong>in</strong>g to atta<strong>in</strong> specific social, economic and environmental goals. There is no central<br />
f<strong>in</strong>ancial analysis of <strong>the</strong> adm<strong>in</strong>istrative burden of regulation on <strong>UK</strong> bus<strong>in</strong>ess, although <strong>the</strong><br />
estimate is of some £20-£40bn per annum across all firms (Better Regulation Task Force,<br />
2005). The Task Force also estimated that small retailers were disproportionately affected<br />
over large: with small shopkeepers spend<strong>in</strong>g 3-5 days a month deal<strong>in</strong>g with a range of<br />
government adm<strong>in</strong>istration (Better Regulation Task Force, 2001).<br />
2.21 There is some evidence that <strong>the</strong> burden of retail regulation on <strong>the</strong> sector has reduced<br />
(Figure 2.1). Recent work by OECD suggested that <strong>the</strong> <strong>UK</strong> fell from <strong>the</strong> 8 th to <strong>the</strong> 17 th<br />
most regulated market from 1998 to 2003, although <strong>the</strong> difference was not statistically<br />
significant (OECD, 2006). Regulation can affect retailers <strong>in</strong> two ways <strong>in</strong> relation to<br />
<strong>in</strong>novation. The overall economic viability of any retail bus<strong>in</strong>ess model might be adversely<br />
affected or constra<strong>in</strong>ed. Additionally, however, because of <strong>the</strong> nature of retail bus<strong>in</strong>ess,<br />
regulation also <strong>in</strong>fluences <strong>the</strong> possible locations available for a particular retail format and<br />
<strong>the</strong> costs of servic<strong>in</strong>g those locations.<br />
2 Christenson & Tedlow (1999) def<strong>in</strong>e disruptive technologies as <strong>in</strong>novations that change <strong>the</strong> economics of an <strong>in</strong>dustry (even if <strong>the</strong>y may not be<br />
<strong>in</strong>itially profitable <strong>in</strong>novations).<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Figure 2.1: Anti-competitive regulations <strong>in</strong> retail distribution, 1998-2003<br />
6.0<br />
5.0<br />
4.0<br />
3.0<br />
2.0<br />
1.0<br />
0.0<br />
Belgium<br />
Greece<br />
Spa<strong>in</strong><br />
Poland<br />
France<br />
Germany<br />
Norway<br />
Canada<br />
United States<br />
F<strong>in</strong>land<br />
Denmark<br />
Japan<br />
Source: OECD International Regulation Database, 2006. Note: Graph ranked by extent of regulation <strong>in</strong><br />
2003. Scale of regulation from 0.0 to 6.0, with 6.0 be<strong>in</strong>g <strong>the</strong> most restrictive.<br />
2.22 The OECD study did not <strong>in</strong>clude <strong>the</strong>se k<strong>in</strong>ds of regulatory constra<strong>in</strong>ts <strong>in</strong> its analysis. In<br />
addition to plann<strong>in</strong>g and competition policy, such regulations might <strong>in</strong>clude:<br />
Italy<br />
• Modally-constra<strong>in</strong>ed access to town and city centres by consumers (such as<br />
bus lanes, greenways and park & ride schemes);<br />
• Delivery curfews (<strong>the</strong> British <strong>Retail</strong> Consortium suggested that some 32% of all<br />
retailers were adversely affected by a delivery curfew of some sort <strong>in</strong> 2005, at a<br />
cost of some £3.3mn), and <strong>the</strong><br />
• Cost of park<strong>in</strong>g (Park<strong>in</strong>g revenues <strong>in</strong> London alone were an estimated £500mn<br />
<strong>in</strong> 2005.)<br />
Portugal<br />
United K<strong>in</strong>gdom<br />
Mexico<br />
Turkey<br />
Ne<strong>the</strong>rlands<br />
Korea<br />
Hungary<br />
Australia<br />
Ireland<br />
1998<br />
2003<br />
Switzerland<br />
Sweden<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
3. What are <strong>the</strong> dist<strong>in</strong>ctive characteristics of retail <strong>in</strong>novation?<br />
a. How different is retail <strong>in</strong>novation?<br />
3.1 What do conventional measures report as <strong>the</strong> extent of <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g? Data<br />
record<strong>in</strong>g factors such as R&D <strong>in</strong>tensity 3 and patent citation, suggests that retail<strong>in</strong>g on a<br />
global scale scores relatively lowly compared to sectors such as pharmaceuticals,<br />
biotechnology or technology hardware and equipment. The Community <strong>Innovation</strong><br />
Survey, a four-yearly pan-European exam<strong>in</strong>ation of <strong>in</strong>novation activity, was extended to<br />
<strong>in</strong>clude services – and retail<strong>in</strong>g – for <strong>the</strong> first time dur<strong>in</strong>g its most recent iteration <strong>in</strong><br />
2005. 4 Figure 3.1 below shows <strong>the</strong> extent and nature of retail <strong>in</strong>novation compared to<br />
o<strong>the</strong>r sectors. 40% of retail firms surveyed claimed to be ‘<strong>in</strong>novation active’ 5 .<br />
Figure 3.1. Extent of <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g<br />
per cent<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
57<br />
<strong>Innovation</strong> active<br />
Source: Community <strong>Innovation</strong> Survey (CIS4), 2005.<br />
3.2 The survey suggests that:<br />
40<br />
25<br />
Product <strong>in</strong>novator<br />
16<br />
59<br />
69<br />
of which, new to<br />
market<br />
16<br />
Process <strong>in</strong>novator<br />
7<br />
30<br />
29<br />
of which, new to<br />
<strong>in</strong>dustry<br />
54<br />
<strong>Innovation</strong>-related<br />
expenditure<br />
• <strong>UK</strong> retailers report lower levels of <strong>in</strong>novation than all sectors <strong>in</strong> <strong>the</strong> <strong>UK</strong> as a whole:<br />
40% of firms are ‘<strong>in</strong>novation active’, compared with 57% <strong>in</strong> <strong>the</strong> economy as a whole.<br />
The sector scores below <strong>the</strong> all sector average for every category of <strong>in</strong>novative activity<br />
but one; and is apparently significantly lower, for example, <strong>in</strong> terms of process<br />
<strong>in</strong>novation.<br />
• <strong>Retail</strong><strong>in</strong>g did score highly on ‘new to market’ product <strong>in</strong>novations (suggest<strong>in</strong>g high<br />
levels of competition <strong>in</strong> <strong>the</strong> <strong>in</strong>dustry and/or constant search for new bus<strong>in</strong>ess streams<br />
and markets).<br />
3 R&D as % of sales<br />
4 <strong>Retail</strong><strong>in</strong>g comprised 1,545 of <strong>the</strong> total of 16,445 <strong>UK</strong> firms surveyed (9.3% of responses). Of <strong>the</strong>se, 18% of respondent firms employed more<br />
than 250 people. The survey sought to capture activity between 2002 and 2004.<br />
5 <strong>Innovation</strong> <strong>in</strong> <strong>the</strong> survey is def<strong>in</strong>ed as “major changes aimed at enhanc<strong>in</strong>g competitive position, performance, know-how or capabilities for<br />
future enhancements. These can be new or significantly improved goods, services or processes for mak<strong>in</strong>g or provid<strong>in</strong>g <strong>the</strong>m. It <strong>in</strong>cludes spend<strong>in</strong>g<br />
on <strong>in</strong>novation activities, for example on mach<strong>in</strong>ery and equipment, R&D, tra<strong>in</strong><strong>in</strong>g, goods and service design or market<strong>in</strong>g.”<br />
36<br />
30<br />
Ei<strong>the</strong>r product or<br />
process <strong>in</strong>novators<br />
19<br />
11<br />
Both product and<br />
process <strong>in</strong>novators<br />
5<br />
13<br />
Cooperation<br />
agreements<br />
9<br />
33<br />
Wider Innovator<br />
21<br />
All sectors<br />
<strong>Retail</strong> trade (Div 10)<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
• <strong>Innovation</strong>-related expenditure of retailers is lower than <strong>the</strong> average; it looks as<br />
though this smaller number of <strong>in</strong>novations was both cheaper and had greater<br />
impact than on average.<br />
3.3 It is important to stress that <strong>the</strong>se results are not dissimilar to o<strong>the</strong>r ‘low <strong>in</strong>novation’<br />
eng<strong>in</strong>eer<strong>in</strong>g sectors and for o<strong>the</strong>r services (with <strong>the</strong> notable exception of knowledge<br />
<strong>in</strong>tensive bus<strong>in</strong>ess services (KIBS)) 6 . And o<strong>the</strong>r evidence tells us of <strong>the</strong> capability of<br />
retailers to <strong>in</strong>novate <strong>in</strong> ways which lead to efficient economic performance, which<br />
suggests that <strong>the</strong> CIS does not capture <strong>the</strong> full picture. For example, decompos<strong>in</strong>g<br />
productivity growth <strong>in</strong> <strong>the</strong> US from 1995 to 2000 suggests that <strong>the</strong> whole of its<br />
acceleration is driven by six sectors, <strong>the</strong> top three be<strong>in</strong>g wholesal<strong>in</strong>g, retail<strong>in</strong>g, and<br />
security and commodity brok<strong>in</strong>g. In fact <strong>the</strong> jo<strong>in</strong>t contribution of <strong>the</strong>se three key sectors<br />
was twice as great as <strong>the</strong> next three i.e., electronic and electric equipment<br />
(semiconductors), <strong>in</strong>dustrial mach<strong>in</strong>ery and equipment (computers) and telecoms (Solow,<br />
Bosworth et al., 2001). The data s<strong>in</strong>ce year 2000 suggests that retail<strong>in</strong>g cont<strong>in</strong>ues to be<br />
among seven sectors which altoge<strong>the</strong>r accounted for 85% of all <strong>the</strong> productivity growth<br />
of <strong>the</strong> US economy 7 . None of <strong>the</strong>se, with <strong>the</strong> exception of computers and electronics, are<br />
among <strong>the</strong> conventionally R&D <strong>in</strong>tensive sectors (Farrell, Bailey et al. 2005; Hughes<br />
2007). More recent figures from NAICS suggest that retail<strong>in</strong>g cont<strong>in</strong>ues to be among <strong>the</strong><br />
top contributors to <strong>the</strong> US productivity growth (McK<strong>in</strong>sey Quarterly, 2006). About 12%<br />
of labour productivity ga<strong>in</strong>s <strong>in</strong> <strong>the</strong> second half of <strong>the</strong> 1990s could be traced back to one<br />
retailer alone: Wal-Mart (Johnson, 2002).<br />
3.4 One o<strong>the</strong>r major <strong>in</strong>dicator of <strong>the</strong> level of <strong>in</strong>novation with<strong>in</strong> <strong>UK</strong> firms is <strong>the</strong> regularly<br />
conducted R&D Scoreboard (DIUS, 2007). The 17 th annual Edition was published <strong>in</strong><br />
2007 and shows that Tesco and Marks & Spencer are amongst <strong>the</strong> <strong>UK</strong>’s ‘R&D leaders’<br />
and ‘fastest grow<strong>in</strong>g R&D spenders’ respectively 8 . In relation to <strong>the</strong> sector as a whole,<br />
however, <strong>the</strong>re are significant deficiencies <strong>in</strong> <strong>the</strong> Scoreboard (<strong>in</strong>clud<strong>in</strong>g significant<br />
omissions, misallocation of firms – <strong>in</strong>clud<strong>in</strong>g pharmaceutical suppliers - to <strong>the</strong> retail<br />
sector and some evidence of double-count<strong>in</strong>g) 9 . Whe<strong>the</strong>r this is as a result of nonresponse<br />
by major firms, <strong>the</strong> growth of private equity <strong>in</strong> <strong>the</strong> sector, a lack of an R&D l<strong>in</strong>e<br />
<strong>in</strong> public company accounts (or o<strong>the</strong>r account<strong>in</strong>g complexities aris<strong>in</strong>g from a firm’s<br />
diversified activities), or <strong>the</strong>ir not fall<strong>in</strong>g <strong>in</strong>to <strong>the</strong> top 850 <strong>UK</strong> firms (or top 1,250 global<br />
firms), is unclear. For whatever reasons, however, <strong>the</strong> Scoreboard cannot <strong>the</strong>refore be<br />
regarded as a reliable <strong>in</strong>dicator of retail<strong>in</strong>g R&D.<br />
3.5 This evidence is alongside <strong>the</strong> <strong>in</strong>creas<strong>in</strong>g realisation is that <strong>the</strong> sole use of R&D <strong>in</strong>tensity,<br />
patent registrations and o<strong>the</strong>r ‘hard’ measures of <strong>in</strong>novation fail to reflect <strong>the</strong> variety of<br />
<strong>in</strong>novation activities <strong>in</strong> knowledge based service firms. OECD’s ‘Frascati’ Manual 10<br />
acknowledges that hard measures need to be exam<strong>in</strong>ed with<strong>in</strong> a broader conceptual<br />
framework,<br />
6 A classification of those services def<strong>in</strong>ed as KIBS can be found at: http://www2.cst.gov.uk/cst/reports/files/knowledge-<strong>in</strong>tensiveservices/services-study-annexes.pdf<br />
7 These were retail<strong>in</strong>g, f<strong>in</strong>ance and <strong>in</strong>surance, computer and electronic products, wholesal<strong>in</strong>g, adm<strong>in</strong>istrative and support services, real estate and<br />
miscellaneous professional and scientific services.<br />
8 Tesco ranked 21 st of <strong>the</strong> top 850 <strong>UK</strong> firms <strong>in</strong> terms of its R&D expenditure <strong>in</strong> 2006 (+12% on <strong>the</strong> previous year). Marks & Spencer ranked 14 th<br />
of <strong>the</strong> top 850 <strong>UK</strong> firms <strong>in</strong> its <strong>in</strong>crease of R&D expenditure <strong>in</strong> 2006.<br />
9 The limitations of <strong>the</strong> Scoreboard methodology are described at http://www.<strong>in</strong>novation.gov.uk/rd_scoreboard/?p=33. The firms allocated to<br />
food, drug and general retailers can be seen <strong>in</strong> <strong>the</strong> ma<strong>in</strong> tables, downloadable at<br />
http://www.<strong>in</strong>novation.gov.uk/rd_scoreboard/downloads/2007_<strong>UK</strong>_RD_Scoreboard_Web.csv<br />
10 The OECD Frascati Manual (2002) proposes standard practice for surveys of R&D<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“that relates <strong>the</strong>m both to o<strong>the</strong>r types of resources … <strong>in</strong>tangible <strong>in</strong>vestment which covers not only<br />
R&D and related S&T activities but also expenditures on software, tra<strong>in</strong><strong>in</strong>g, organisation,<br />
etc.” (OECD, 2002, p.14).<br />
In relation to services <strong>the</strong>se sentiments are echoed by <strong>the</strong> recent report commissioned by<br />
<strong>the</strong> US National Science Foundation (RTI International, 2005). Measur<strong>in</strong>g service sectors<br />
(such as retail<strong>in</strong>g) with direct R&D measures does not account for R&D flows between<br />
<strong>the</strong> manufactur<strong>in</strong>g and services sectors, nei<strong>the</strong>r does it account for <strong>the</strong> large volumes of<br />
R&D services outsourc<strong>in</strong>g. This results <strong>in</strong> potential under-representation of nonmanufactur<strong>in</strong>g<br />
sectors such as retail<strong>in</strong>g.<br />
“Us<strong>in</strong>g both direct R&D expenditures and <strong>in</strong>direct R&D (consumed), such as R&D <strong>in</strong>corporated <strong>in</strong><br />
equipment and <strong>in</strong>termediates, provides a different estimate of technology <strong>in</strong>tensity for <strong>the</strong> service <strong>in</strong>dustry<br />
(RTI International, 2005, p. 2-3).<br />
3.6 There is also evidence that <strong>in</strong> ‘low <strong>in</strong>novation’ sectors such as oil production,<br />
construction or retail bank<strong>in</strong>g, large proportion of <strong>in</strong>novation is to a lesser extent<br />
technological, <strong>in</strong>volv<strong>in</strong>g organisational and market change or meld<strong>in</strong>g technologies <strong>in</strong><br />
deliver<strong>in</strong>g <strong>in</strong>novative services. This type of <strong>in</strong>novation rema<strong>in</strong>s largely ‘hidden under <strong>the</strong><br />
radar’ of <strong>the</strong> traditional measures of <strong>in</strong>novation (NESTA, 2007). Similarly, Jorma Ollia,<br />
<strong>the</strong> Chairman of <strong>the</strong> Board of Directors of Nokia po<strong>in</strong>ts out that currently <strong>the</strong> most<br />
fertile area of <strong>in</strong>novation today <strong>in</strong> effect could be found <strong>in</strong> management (Economist,<br />
2007). In this ve<strong>in</strong> accord<strong>in</strong>g <strong>the</strong> most recent BCG <strong>in</strong>novation survey among a cross<br />
section of senior executives, <strong>the</strong> retail sector appears among <strong>the</strong> most <strong>in</strong>novative; five<br />
retailers feature <strong>in</strong> <strong>the</strong> top twenty ‘most <strong>in</strong>novative’ firms of 2007; i.e., Wal-Mart (11),<br />
Starbucks (14), Target (15) and Amazon.com (20), with ano<strong>the</strong>r four retailers <strong>in</strong> <strong>the</strong> top<br />
50 (i.e., Ikea, Costco, Best Buy, McDonalds) (Bus<strong>in</strong>ess Week, 2007).<br />
3.7 The Community <strong>Innovation</strong> Survey sought to uncover aspects of ‘hidden’ <strong>in</strong>novation for<br />
<strong>the</strong> first time <strong>in</strong> 2005. Wider <strong>in</strong>novation with<strong>in</strong> firms was exam<strong>in</strong>ed <strong>in</strong> <strong>the</strong> form of a<br />
question explor<strong>in</strong>g “new or significantly amended forms of organisation, bus<strong>in</strong>ess<br />
structures or practices, aimed at step changes <strong>in</strong> <strong>in</strong>ternal efficiency of effectiveness or <strong>in</strong><br />
approach<strong>in</strong>g markets and customers.” This <strong>in</strong>cluded <strong>the</strong> possible <strong>in</strong>troduction of a new or<br />
significantly changed corporate strategy; advanced techniques such as knowledge<br />
management systems or an Investors <strong>in</strong> People <strong>in</strong>itiative; organizational changes, such as<br />
out-sourc<strong>in</strong>g or cross-functional team build<strong>in</strong>g; or market<strong>in</strong>g concepts or strategies, such<br />
as packag<strong>in</strong>g or presentational changes to a product to target new markets, or new<br />
support services to open up new markets. Figure 3.2 shows a comparison between <strong>the</strong><br />
retail sector, eng<strong>in</strong>eer<strong>in</strong>g and <strong>the</strong> survey average.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Figure 3.2. The extent of reported ‘wider <strong>in</strong>novation’ with<strong>in</strong> retail<strong>in</strong>g<br />
Market<strong>in</strong>g<br />
Organisational structure<br />
Management<br />
Corporate strategy<br />
WIDER INNOVATOR<br />
0 5 10 15 20 25 30 35 40 45<br />
Source: Community <strong>Innovation</strong> Survey 2004 (CIS4), 2005.<br />
per cent<br />
<strong>Retail</strong> trade Eng<strong>in</strong>eer<strong>in</strong>g All sectors<br />
3.8 Just over a fifth of retail enterprises reported hav<strong>in</strong>g engaged <strong>in</strong> one or o<strong>the</strong>r form of<br />
wider <strong>in</strong>novation dur<strong>in</strong>g 2002-04. The most popular form was market<strong>in</strong>g-related; <strong>the</strong> least<br />
connected with <strong>the</strong> <strong>in</strong>troduction of advanced management techniques. However, levels of<br />
wider <strong>in</strong>novation were below <strong>the</strong> national average for all firms and well below that<br />
reported for eng<strong>in</strong>eer<strong>in</strong>g.<br />
3.9 So if <strong>the</strong>re is a widespread perception that <strong>the</strong> best of <strong>UK</strong> retail<strong>in</strong>g is creative and<br />
<strong>in</strong>novative, how might we expla<strong>in</strong> such a discrepancy <strong>in</strong> terms of <strong>in</strong>novation performance<br />
accord<strong>in</strong>g to <strong>the</strong> CIS4 <strong>in</strong>novation survey? There may be several explanations. Perhaps we<br />
are dazzled by <strong>the</strong> best practice of a few lead<strong>in</strong>g <strong>in</strong>novators <strong>in</strong> <strong>the</strong> sector, which serves to<br />
conceal a lack of <strong>in</strong>novative activity elsewhere <strong>in</strong> retail<strong>in</strong>g. Or, as we have suggested,<br />
perhaps <strong>the</strong> environment for <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g is different and dist<strong>in</strong>ctive <strong>in</strong> some<br />
way that masks or changes its nature. Or it may be that retailers th<strong>in</strong>k about <strong>in</strong>novation<br />
differently, or conduct <strong>in</strong>novation of a somewhat different k<strong>in</strong>d than that which is<br />
conventionally used as an <strong>in</strong>dicator by <strong>the</strong> statistics. We exam<strong>in</strong>e some of <strong>the</strong>se possible<br />
explanations below <strong>in</strong> identify<strong>in</strong>g five dist<strong>in</strong>guish<strong>in</strong>g features of retail <strong>in</strong>novation and <strong>the</strong><br />
environment <strong>in</strong> which it occurs.<br />
3.10 Discussions with retailers as part of this research suggested that a lot of retail <strong>in</strong>novation<br />
is more about changes <strong>in</strong> ‘how’, ‘where’ and ‘when’. Cont<strong>in</strong>uous and non-l<strong>in</strong>ear,<br />
<strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g appears much closer to <strong>the</strong> entrepreneurial notion of <strong>in</strong>novation<br />
accord<strong>in</strong>g to which it is immaterial whe<strong>the</strong>r <strong>in</strong>novations <strong>in</strong>volve an element of scientific<br />
novelty or not. In this respect <strong>in</strong>novation is seen as an economic process of cause and<br />
effect which essentially <strong>in</strong>volves putt<strong>in</strong>g available resources to new uses. Accord<strong>in</strong>g to<br />
Ogawa (1998), who explores supply cha<strong>in</strong> <strong>in</strong>novations, retailers tend to develop<br />
functionally novel supply cha<strong>in</strong> <strong>in</strong>novations <strong>in</strong> contrast to manufacturers who tend to<br />
develop <strong>in</strong>novations that improve on well-articulated needs. For <strong>in</strong>stance <strong>in</strong> terms<br />
<strong>in</strong>ventory-management systems retailers tend to focus on new approaches to <strong>in</strong>ventory<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
management while manufacturers tend to develop improvements to <strong>the</strong> equipment used<br />
to deliver <strong>the</strong>se new approaches.<br />
3.11 The ‘retail type’ of <strong>in</strong>novation appears more difficult to record than <strong>the</strong> manufacturer<br />
one, s<strong>in</strong>ce manufactur<strong>in</strong>g firms predom<strong>in</strong>antly <strong>in</strong>novate <strong>in</strong> a ‘staircase’ mode characterised<br />
by identifiable step-wise jumps <strong>in</strong> product development, while large part of retail<br />
<strong>in</strong>novations tends to occur <strong>in</strong> a ‘cont<strong>in</strong>uous mode’ of organic change. This highlights <strong>the</strong><br />
broader problem of under-record<strong>in</strong>g services <strong>in</strong>novations <strong>in</strong> cases where <strong>in</strong>novation<br />
activities cannot be clearly described as def<strong>in</strong>itive products or outcomes, for <strong>in</strong>stance<br />
perta<strong>in</strong><strong>in</strong>g to process or organisational <strong>in</strong>novations which are hard to identify, def<strong>in</strong>e and<br />
grade. Accord<strong>in</strong>g to Te<strong>the</strong>r (2005) <strong>the</strong> CIS, which was <strong>in</strong>itially designed around <strong>the</strong><br />
manufactur<strong>in</strong>g cont<strong>in</strong>ues to be more suited to record ‘staircase’ <strong>in</strong>novations and may be<br />
still significantly under-record<strong>in</strong>g ‘cont<strong>in</strong>uous’ <strong>in</strong>novations more common service sectors<br />
such as retail<strong>in</strong>g.<br />
b. Selected characteristics of retail <strong>in</strong>novation<br />
3.12 The classic function of a retailer is as an <strong>in</strong>termediary, which <strong>in</strong>volves <strong>the</strong> creation of<br />
assortment, break of bulk and <strong>the</strong> facilitation of value creation for consumers at<br />
convenient times and <strong>in</strong> convenient places, alongside <strong>the</strong> provision of product<br />
<strong>in</strong>formation and appropriate pric<strong>in</strong>g architectures. In this context, our research suggests<br />
that <strong>in</strong>novation <strong>in</strong> retail organizations has five dist<strong>in</strong>ctive features: (1) <strong>Retail</strong>ers’ role as<br />
<strong>in</strong>novation hubs, facilitat<strong>in</strong>g ‘two-way’ <strong>in</strong>novation diffusion, (2) <strong>in</strong>novation <strong>in</strong> a retail<br />
environment of low appropriability, (3) predom<strong>in</strong>ance of non-technological <strong>in</strong>novation,<br />
(4) hybrid characteristics of retail <strong>in</strong>novation, (5) reverse <strong>in</strong>novation cycle (Hristov 2007).<br />
i. <strong>Retail</strong>ers as <strong>in</strong>novation hubs<br />
3.13 First, retailers are <strong>in</strong>creas<strong>in</strong>gly <strong>in</strong>novat<strong>in</strong>g by act<strong>in</strong>g as <strong>in</strong>termediaries well beyond <strong>the</strong>ir<br />
core retail propositions. Firms such as Tesco, Wal-Mart, Carrefour, Best Buy, El Corte<br />
Inglés, Nordstrom, Sa<strong>in</strong>sbury’s & Metro are rapidly diversify<strong>in</strong>g through tie-ups with<br />
suppliers <strong>in</strong>to f<strong>in</strong>ancial services, telecoms, utilities, travel, amongst o<strong>the</strong>rs. In many of<br />
<strong>the</strong>se cases <strong>the</strong>y <strong>in</strong>novate by <strong>in</strong>termediat<strong>in</strong>g <strong>in</strong> <strong>the</strong> value cha<strong>in</strong> and thus <strong>in</strong>crease <strong>the</strong><br />
efficiency of market exchange. They do this through what we can call a two-way diffusion<br />
process (see Figure 3.3) compris<strong>in</strong>g supply diffusion - which conventionally aggregates,<br />
augments and defuses new products, services and technologies from suppliers<br />
downstream to consumers - and demand diffusion - a relatively new feature <strong>in</strong> which <strong>the</strong><br />
retailer deciphers exist<strong>in</strong>g or impend<strong>in</strong>g market/consumer needs and communicates <strong>the</strong>m<br />
upstream, thus <strong>in</strong>itiat<strong>in</strong>g and often co-creat<strong>in</strong>g <strong>in</strong>novations with suppliers. (See Vignette<br />
3.1 – Best Buy, 3.2 – The Local Epicurean/Budgens, 3.3 – Marks and Spencer)<br />
3.14 This ‘<strong>in</strong>novation broaden<strong>in</strong>g’ role of modern retailers suggests that many of <strong>the</strong>m are <strong>in</strong><br />
<strong>the</strong> position to act as <strong>in</strong>novation hubs with<strong>in</strong> <strong>the</strong>ir supply cha<strong>in</strong>s. For <strong>in</strong>stance Hughes<br />
(2007) highlights <strong>the</strong> importance of <strong>the</strong> diffusion and use of ICT as a general purpose<br />
technology beyond <strong>the</strong> ICT and o<strong>the</strong>r R&D <strong>in</strong>tensive high-tech produc<strong>in</strong>g sectors. This<br />
may help expla<strong>in</strong> why so-called ‘unexpected’ user sectors with negligible conventional<br />
R&D spend such as retail<strong>in</strong>g have been dom<strong>in</strong>at<strong>in</strong>g movements <strong>in</strong> US aggregate<br />
productivity growth for <strong>the</strong> past ten years. The DIUS/BERR 2007 Scorecard exercise<br />
po<strong>in</strong>ts towards similar examples of consumed R&D that is subsequently diffused by<br />
<strong>in</strong>dustries such as retail<strong>in</strong>g and f<strong>in</strong>ancial services (DIUS/BERR, 2007).<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“In <strong>the</strong> supply cha<strong>in</strong>, <strong>the</strong> retailer has <strong>the</strong> f<strong>in</strong>al responsibility towards <strong>the</strong> customers and thus for<br />
<strong>the</strong> whole cha<strong>in</strong>” (Chairman of <strong>the</strong> Board)<br />
Figure 3.3. Two-way <strong>in</strong>novation diffusion<br />
Source: Hristov, 2007<br />
<strong>Retail</strong>ers as<br />
<strong>in</strong>termediary<br />
<strong>in</strong>novators<br />
Supply ‐Generate<br />
‐Adopt<br />
Demand<br />
Diffusion<br />
‐Adapt<br />
‐Augment<br />
‐Diffuse<br />
Diffusion<br />
Efficiency Differentiation<br />
ii. The low appropriability of <strong>the</strong> retail environment.<br />
3.15 Secondly, <strong>the</strong> retail environment is one <strong>in</strong> which <strong>in</strong>novations can be easily copied. Teece<br />
(1986) def<strong>in</strong>es what he calls ‘regimes of appropriability’ - environmental factors external<br />
to <strong>in</strong>novat<strong>in</strong>g firms which affect an <strong>in</strong>novator’s ability to extract profits from <strong>the</strong>ir<br />
<strong>in</strong>novation. Such regimes can comprise <strong>the</strong> availability of legal <strong>in</strong>struments for protect<strong>in</strong>g<br />
<strong>in</strong>novations like patents or copyrights, alongside technological conditions <strong>in</strong>clud<strong>in</strong>g<br />
production cycles or codified and tacit knowledge.<br />
3.16 But operat<strong>in</strong>g <strong>in</strong> conditions of ‘low appropriability’ causes knowledge spillovers between<br />
firms result<strong>in</strong>g <strong>in</strong> <strong>the</strong> rapid erosion of any first mover advantage. Sir Terry Leahy, Tesco<br />
CEO, has observed that <strong>the</strong> average dwell-time of an <strong>in</strong>novation <strong>in</strong> grocery retail<strong>in</strong>g is<br />
“around six weeks”. In retail<strong>in</strong>g <strong>the</strong>re are low barriers to protect<strong>in</strong>g <strong>in</strong>tellectual property<br />
and thus high risk of not be<strong>in</strong>g able to extract profit from <strong>in</strong>novation.<br />
“It is very difficult for retailers to make cont<strong>in</strong>uous big changes because <strong>the</strong>y're constantly sort of<br />
measur<strong>in</strong>g and match<strong>in</strong>g each o<strong>the</strong>r” (Board Director).<br />
“In retail<strong>in</strong>g generally you have those who create someth<strong>in</strong>g new and those that copy. For example Home<br />
Depot has been copied everywhere by different retailers” (Market<strong>in</strong>g Director).<br />
3.17 If retail <strong>in</strong>novations can rapidly be copied, <strong>the</strong>n cont<strong>in</strong>uous <strong>in</strong>cremental change coupled with<br />
build<strong>in</strong>g ‘airtight’ market match<strong>in</strong>g capabilities through <strong>the</strong> rapid scal<strong>in</strong>g up of <strong>in</strong>novation to<br />
<strong>the</strong> po<strong>in</strong>t of profitability, or simply through sheer economies of scale are <strong>the</strong> k<strong>in</strong>ds of<br />
defence mechanisms used by retailers to protect <strong>the</strong>ir <strong>in</strong>novations. For <strong>in</strong>stance Tesco<br />
uses <strong>the</strong> strap l<strong>in</strong>e “start small, scale up, th<strong>in</strong>k big”.<br />
Page 21
iii. Predom<strong>in</strong>ance of non-technological <strong>in</strong>novation.<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
3.18 Thirdly, retail <strong>in</strong>novation for <strong>the</strong> most part appears to comprise non-technological,<br />
customer fac<strong>in</strong>g activities which are driven by social-economic ra<strong>the</strong>r than technological<br />
forces. Of course, technology is a high profile and important enabler <strong>in</strong> what retailers do,<br />
as well as provid<strong>in</strong>g <strong>the</strong> capability for reach<strong>in</strong>g out <strong>in</strong>to untapped markets. Never<strong>the</strong>less,<br />
<strong>in</strong> contrast to manufactur<strong>in</strong>g, technological trajectories are seen by retailers to have a<br />
relatively limited impact on <strong>the</strong> overall characteristics and focus of <strong>the</strong>ir <strong>in</strong>novation<br />
(Hristov & Reynolds, 2005).<br />
“I th<strong>in</strong>k technology is always important, however it’s not <strong>the</strong> be all and end all because, you<br />
know, at <strong>the</strong> end of <strong>the</strong> day customers don’t buy technology, not <strong>in</strong> our bus<strong>in</strong>ess, <strong>the</strong>y buy <strong>the</strong><br />
results of technology. So I th<strong>in</strong>k as long as it’s seen <strong>in</strong> terms of what <strong>the</strong> customer wants, does<br />
this provide th<strong>in</strong>gs faster or better or cheaper, <strong>the</strong>n you're <strong>in</strong> <strong>the</strong> right place.” (HR Director).<br />
iv. Hybrid characteristics of retail <strong>in</strong>novation.<br />
3.19 Fourthly, some vertically <strong>in</strong>tegrated retailers have <strong>the</strong>ir own production units or design<br />
facilities, such as Zara (Spa<strong>in</strong>) part of Inditex, Migros (Switzerland), Tchibo (Germany),<br />
<strong>the</strong> S-Group (F<strong>in</strong>land) For <strong>in</strong>stance Migros, <strong>the</strong> largest Swiss retailer is <strong>the</strong> second biggest<br />
chocolate producer <strong>in</strong> Switzerland (Hristov, 2004). O<strong>the</strong>rs consider <strong>the</strong>mselves<br />
‘manufacturers without factories’ <strong>in</strong> <strong>the</strong> sense that <strong>the</strong>y exert significant upstream<br />
<strong>in</strong>fluence over suppliers. These characteristics have specific consequences <strong>in</strong> terms of<br />
<strong>in</strong>novation. We might expect such retailers to exhibit many characteristics <strong>in</strong> common<br />
with manufacturers, such as a focus on step-wise ra<strong>the</strong>r than cont<strong>in</strong>uous <strong>in</strong>novation. On<br />
<strong>the</strong> o<strong>the</strong>r hand, all retailers provide services of various k<strong>in</strong>ds and we might expect<br />
<strong>in</strong>novation here to be different from <strong>the</strong> predom<strong>in</strong>antly l<strong>in</strong>ear <strong>in</strong>novation patterns of<br />
manufactur<strong>in</strong>g.<br />
3.20 Therefore retail <strong>in</strong>novation displays ‘hybrid characteristics’ which are consistent with <strong>the</strong><br />
complex nature of retail output. For <strong>in</strong>stance, <strong>in</strong> <strong>the</strong> <strong>in</strong>troduction of certa<strong>in</strong> new product<br />
l<strong>in</strong>es, <strong>the</strong>re may be obligations on retailers to undertake scientific and quasi-scientific tests<br />
and trials. In many cases <strong>the</strong> NPD processes of retailers can be analogous to that of<br />
manufacturers. Sa<strong>in</strong>sbury’s operate a five stage-gated system of NPD of (Stage 1) capture<br />
and develop ideas, (Stage 2) develop project, (Stage 3) develop concept samples to own<br />
brand strategy (Stage 4) production, trials and launch (Stage 5) product analysis and<br />
project performance. This is not an isolated example: similar l<strong>in</strong>ear <strong>in</strong>novation pipel<strong>in</strong>es<br />
are used by ASDA, Boots and Marks & Spencer <strong>in</strong> <strong>the</strong>ir NPD. However <strong>in</strong> areas such as<br />
trad<strong>in</strong>g, customer services or sourc<strong>in</strong>g, <strong>in</strong>novation appears non-l<strong>in</strong>ear and, at times, even<br />
ad-hoc. For <strong>in</strong>stance some w<strong>in</strong>n<strong>in</strong>g retail formats emerge from an opportunistic,<br />
experimental and <strong>in</strong>cremental process, sometimes based more on <strong>in</strong>tuition than rational<br />
analysis.<br />
“Inside <strong>the</strong> bus<strong>in</strong>ess development area, under <strong>the</strong> Bus<strong>in</strong>ess Development Director, <strong>the</strong>re's a very<br />
structured po<strong>in</strong>t to <strong>the</strong> way we do th<strong>in</strong>gs. But <strong>in</strong> some cases <strong>in</strong>novation is much less structured,<br />
<strong>in</strong> some cases it’s quite ad-hoc”<br />
(Manag<strong>in</strong>g Director)<br />
“But I would guess <strong>in</strong> retail<strong>in</strong>g <strong>the</strong>re isn't much organisation of <strong>in</strong>novation, I th<strong>in</strong>k it’s more<br />
experimental and haphazard and opportunistic because of <strong>the</strong> nature of <strong>the</strong> bus<strong>in</strong>ess”<br />
(CEO of Industry Association).<br />
Page 22
v. <strong>Retail</strong>ers’ reverse <strong>in</strong>novation cycle.<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
3.21 F<strong>in</strong>ally, retail<strong>in</strong>g can experience a reverse <strong>in</strong>novation cycle (where f<strong>in</strong>ancial and<br />
organizational costs are <strong>in</strong>curred at <strong>the</strong> end of <strong>the</strong> <strong>in</strong>novation process ra<strong>the</strong>r than at <strong>the</strong><br />
beg<strong>in</strong>n<strong>in</strong>g). This has also been observed <strong>in</strong> <strong>the</strong> f<strong>in</strong>ancial services sector (Barras, 1986). But<br />
among multiple retailers we can also see both reverse <strong>in</strong>novation development and<br />
<strong>in</strong>novation <strong>in</strong>vestment cycles similar to those of many manufactur<strong>in</strong>g firms. In<br />
manufactur<strong>in</strong>g, <strong>the</strong> biggest f<strong>in</strong>ancial outlays tend to be associated with R&D and <strong>the</strong><br />
follow<strong>in</strong>g NPD process. Once <strong>the</strong> product gets to market radical <strong>in</strong>novation gives way to<br />
<strong>in</strong>cremental improvements throughout <strong>the</strong> product life cycle (as <strong>in</strong> <strong>the</strong> software <strong>in</strong>dustry).<br />
In retail<strong>in</strong>g, <strong>the</strong> <strong>in</strong>itial idea - even at <strong>the</strong> stage of <strong>in</strong>itial prototyp<strong>in</strong>g - is relatively cheap<br />
and largely experimental. However, <strong>the</strong> process of scal<strong>in</strong>g up an idea across a large<br />
portfolio of stores often requires radical <strong>in</strong>novations (such as <strong>in</strong> organisation and process)<br />
and major <strong>in</strong>vestment and management resource. For example, it took Tesco nearly 12<br />
years from 1994 to 2006 to br<strong>in</strong>g to full scale <strong>the</strong>ir <strong>in</strong>itial idea of an Express store. That<br />
<strong>in</strong>cluded trials of <strong>the</strong> concept, limited rollout, location plann<strong>in</strong>g, ref<strong>in</strong>ement of <strong>the</strong><br />
concept and subsequent scal<strong>in</strong>g up through <strong>the</strong> acquisition and re-brand<strong>in</strong>g of T&S<br />
Stores as well as organic growth to what is now a portfolio of over 730 stores. Once at a<br />
critical mass this <strong>in</strong>novation had a transformational effect on <strong>the</strong> market and led to a<br />
range of radical <strong>in</strong>novations <strong>in</strong> logistics and market<strong>in</strong>g.<br />
“I th<strong>in</strong>k <strong>the</strong> actual development of a concept is not complex and as soon as you know it works, <strong>the</strong>n you<br />
do it. However let’s take PC World, it would have taken ten years from <strong>the</strong> po<strong>in</strong>t that it was clear that<br />
it was a success to hav<strong>in</strong>g rolled out through <strong>the</strong> <strong>UK</strong>, and I don’t know how much longer it will take to go<br />
out to Europe”<br />
(CEO).<br />
Vignette 3.1: Best Buy<br />
Context: <strong>Retail</strong>ers as <strong>in</strong>novation hubs<br />
Example: Best Buy, <strong>the</strong> biggest US electrical retailer has set up what it refers to as a Venture Capital Network (VCN) for<br />
identify<strong>in</strong>g promis<strong>in</strong>g technologies for new products or services. The role of this VCN is to speed up <strong>the</strong> transition of <strong>the</strong>se<br />
technologies from concept to market. This is achieved through <strong>the</strong> creation of external <strong>in</strong>novation networks l<strong>in</strong>k<strong>in</strong>g up venture<br />
capital firms with <strong>in</strong>novation start-ups work<strong>in</strong>g on particular retailer projects. Best Buy stores are <strong>the</strong>n used to hot-house and test<br />
<strong>the</strong> <strong>in</strong>novations <strong>in</strong> a retail environment.<br />
For a number of years <strong>the</strong> retailer has also been pursu<strong>in</strong>g a ‘customer centricity’ program of segment<strong>in</strong>g <strong>the</strong>ir market and<br />
develop<strong>in</strong>g bespoke retail formats for each of <strong>the</strong> target segments, for <strong>in</strong>stance affluent professionals seek<strong>in</strong>g <strong>the</strong> best technology<br />
experience, younger males want<strong>in</strong>g cutt<strong>in</strong>g-edge new technology, fa<strong>the</strong>rs look<strong>in</strong>g for technology to improve <strong>the</strong>ir lifestyle,<br />
mo<strong>the</strong>rs seek<strong>in</strong>g technology to enrich <strong>the</strong>ir children's lives or small-bus<strong>in</strong>ess people us<strong>in</strong>g technology to improve <strong>the</strong>ir bottom<br />
l<strong>in</strong>e. The range and <strong>the</strong> services offered for each segment are tested <strong>in</strong> what <strong>the</strong> company refers to as ‘lab stores’, 68 of which are<br />
located throughout California.<br />
Page 23
Vignette 3.2: The Local Epicurean/Budgens<br />
Context: <strong>Innovation</strong> <strong>in</strong> a small retailer<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Example: The Local Epicurean was founded <strong>in</strong> 2006 by Andrew Thornton, a retail consultant who acquired his first food store<br />
from Budgens and jo<strong>in</strong>ed <strong>the</strong> Musgrave-Budgens-Londis (MBL) franchise. Less than two years later his company The Local<br />
Epicurean operates two Budgens branded stores, <strong>the</strong> first one of 9,000 sq ft <strong>in</strong> London’s Crouch End and <strong>the</strong> second of 7,000 sq<br />
ft, located <strong>in</strong> Belsize Park. The company employs altoge<strong>the</strong>r 170 people and has an annual turnover of about £17 million.<br />
Budgens as a retail brand is owned by MBL - Ireland’s largest food and grocery distributor. The bus<strong>in</strong>ess model is based on<br />
<strong>in</strong>dependent retail operators who buy products from <strong>the</strong> company and to whom MBL provides sales, market<strong>in</strong>g, IT and logistical<br />
expertise. In <strong>the</strong> process <strong>the</strong> <strong>in</strong>dependent franchisees have a fair amount of freedom <strong>in</strong> terms of how <strong>the</strong>y construct <strong>the</strong>ir ranges<br />
<strong>in</strong> view of local needs. Accord<strong>in</strong>g to Thornton:<br />
“Consumer needs can be very different from one place to ano<strong>the</strong>r <strong>the</strong>refore <strong>the</strong> benefit of such entrepreneurial model is that <strong>in</strong>dividuals who own <strong>the</strong>ir stores<br />
will do what is absolutely right for <strong>the</strong> local community. There some guidel<strong>in</strong>es you have got to follow <strong>in</strong> terms of brand entity, but with<strong>in</strong> that, how you<br />
work with <strong>the</strong> local community is up to you.”<br />
Therefore while Thornton has to buy a substantial amount of his goods through <strong>the</strong> MBL system he does not have to buy all of<br />
<strong>the</strong>m from <strong>the</strong>re.<br />
“So you can buy from Musgrave your corn flakes at competitive prices but you can also buy your bread from <strong>the</strong> local baker who is just 50 yards across<br />
<strong>the</strong> street.”<br />
Thornton’s two stores serve over 22,000 local customers seven days a week. Competition <strong>in</strong> <strong>the</strong> area is <strong>in</strong>tense. Just with<strong>in</strong> a<br />
walk<strong>in</strong>g distance from of his Crouch End store <strong>the</strong>re are one Tesco Express and a Marks & Spencer Simply Food - both<br />
formidable competitors. Therefore as a retail entrepreneur, he sees his role <strong>in</strong> keep<strong>in</strong>g <strong>the</strong> bus<strong>in</strong>ess fresh and attractive to<br />
customers: <strong>in</strong>novation is not a matter of choice but a matter of survival.<br />
“We must <strong>in</strong>novate cont<strong>in</strong>uously and <strong>in</strong> a customer focused way to susta<strong>in</strong> and grow <strong>the</strong> bus<strong>in</strong>ess and my job is all about <strong>in</strong>novation really, bus<strong>in</strong>ess<br />
development, chang<strong>in</strong>g th<strong>in</strong>gs mak<strong>in</strong>g th<strong>in</strong>s better. That’s how I would def<strong>in</strong>e <strong>in</strong>novation – basically ‘change <strong>in</strong> a bus<strong>in</strong>ess’ <strong>in</strong> l<strong>in</strong>e with what customers<br />
want.”<br />
New ideas are implemented through a team of managers whose concern is <strong>the</strong> smooth day-to-day runn<strong>in</strong>g of <strong>the</strong> bus<strong>in</strong>ess. The<br />
<strong>in</strong>novation effort of <strong>the</strong> company is channelled <strong>in</strong> three broad directions: (1) local sourc<strong>in</strong>g, (2) environmental <strong>in</strong>itiatives and (3)<br />
retail<strong>in</strong>g tailored for <strong>the</strong> local community.<br />
1. A dist<strong>in</strong>ctive store, localised product range and friendly services are seen as absolutely essential <strong>in</strong> establish<strong>in</strong>g <strong>the</strong> two stores<br />
as local dest<strong>in</strong>ations. S<strong>in</strong>ce <strong>the</strong> acquisition, <strong>the</strong> Crouch End store has been refurbished to reflect Thornton’s vision of<br />
<strong>in</strong>novative food retailer. The revamp <strong>in</strong>cluded <strong>the</strong> <strong>in</strong>troduction of zones for delicatessen, beers, w<strong>in</strong>es and spirits and <strong>the</strong><br />
<strong>in</strong>troduction of new l<strong>in</strong>es with emphasis on local foods. Additionally a ‘food to go’ counter was <strong>in</strong>stalled replac<strong>in</strong>g a chiller<br />
cab<strong>in</strong>et for pre-packed sandwiches. The new unit features juice and coffee bars for freshly made fruit juices, smoothies and<br />
Lavazza coffee and also offers freshly baked bread and made to order sandwiches. The store has an Epicurean Deli with<br />
fresh salads and meats all sourced locally. “There are a many good food producers around London which we want to br<strong>in</strong>g <strong>in</strong> our stores. In<br />
fact we are organis<strong>in</strong>g a meet<strong>in</strong>g <strong>in</strong> January with about 15 of <strong>the</strong>m and will be work<strong>in</strong>g with <strong>the</strong>m to <strong>in</strong>troduce <strong>the</strong>ir products <strong>in</strong>to our stores.”<br />
Both stores already offer a sizable range of ‘direct from <strong>the</strong> producer’ SKUs, sourced with<strong>in</strong> 100 miles and free from artificial<br />
colours and preservatives. There is also <strong>the</strong> ‘product of <strong>the</strong> week’ <strong>in</strong>itiative with regular supplier tast<strong>in</strong>g <strong>in</strong>-store, shelf-edge<br />
labels clearly <strong>in</strong>dicat<strong>in</strong>g <strong>the</strong> food miles of each of <strong>the</strong> local products. The stores offer fresh bread from Dunn’s - a local<br />
bakery, a range of food products from Suffolk and cheeses from Whitfield.<br />
2. In terms of <strong>the</strong> environment, <strong>the</strong> company <strong>in</strong>novates through a range of <strong>in</strong>itiatives. ‘Pennies for plastic’ is one of <strong>the</strong>m. “We<br />
want to encourage people to re-use <strong>the</strong>ir bags, <strong>the</strong>refore for every bag not used <strong>in</strong> our stores we are donat<strong>in</strong>g 1 penny to a local charity.” The<br />
campaign has helped raise money for build<strong>in</strong>g a new stage at <strong>the</strong> local school - Weston Park Primary. The message has been<br />
clearly publicised both <strong>in</strong>-store and through <strong>the</strong> media. The <strong>in</strong>itiative has gradually ga<strong>in</strong>ed momentum, <strong>the</strong> end result be<strong>in</strong>g<br />
that Budgens Crouch End has managed cut <strong>in</strong> 5 months <strong>the</strong>ir carrier bag usage by 55%. Accord<strong>in</strong>g to Thornton this is <strong>the</strong><br />
first step towards altoge<strong>the</strong>r substitut<strong>in</strong>g <strong>the</strong> disposable plastic bags for <strong>the</strong> more environmental reusable and Jute bags. “In<br />
March next year we are plann<strong>in</strong>g to give away 15,000 reusable and Juke bags and <strong>the</strong>n we shall stop altoge<strong>the</strong>r offer<strong>in</strong>g disposable plastic bags <strong>in</strong><br />
our stores.” O<strong>the</strong>r environmental <strong>in</strong>itiatives <strong>in</strong>clude food compost<strong>in</strong>g, mak<strong>in</strong>g sure that food products refuse is composted<br />
ra<strong>the</strong>r than to put <strong>in</strong> landfills and hoist<strong>in</strong>g <strong>the</strong> heat emitted from <strong>the</strong> store chillers back <strong>in</strong>to heat<strong>in</strong>g up <strong>the</strong> stores, thus<br />
reduc<strong>in</strong>g energy consumption. These <strong>in</strong>itiatives are carried out <strong>in</strong> co-operation with environmental organisations, one of<br />
<strong>the</strong>m - The Carbon Trust.<br />
3. The third direction for <strong>in</strong>novation accord<strong>in</strong>g to Andrew Thornton is local community retail<strong>in</strong>g. This <strong>in</strong>cludes a range of<br />
<strong>in</strong>itiatives <strong>the</strong> aim of which is to make local <strong>in</strong>dependent retailers <strong>the</strong> preferred dest<strong>in</strong>ation for shoppers. “There are many good<br />
<strong>in</strong>dependent retailers locally, but we have to market ourselves more effectively. The idea is make <strong>in</strong>dependent retail<strong>in</strong>g <strong>in</strong> Crouch End more<br />
attractive and to encourage local shoppers to stop us<strong>in</strong>g <strong>the</strong>ir cars, travell<strong>in</strong>g all that way to out of town shopp<strong>in</strong>g centres and <strong>in</strong>stead just walk<strong>in</strong>g<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
down to <strong>the</strong>ir local high street to for <strong>the</strong>ir shopp<strong>in</strong>g.” Thornton refers to this set of <strong>in</strong>itiatives as ‘The Crouch End Project’. The idea<br />
was <strong>in</strong>itially developed with <strong>the</strong> head of <strong>the</strong> parents association at <strong>the</strong> local school where <strong>the</strong> Local Epicurean has built a new<br />
stage. 26 <strong>in</strong>dependent retailers have jo<strong>in</strong>ed forces <strong>the</strong> project sponsor<strong>in</strong>g <strong>the</strong> local fun run, school carol concerts, music, w<strong>in</strong>e<br />
and cheese even<strong>in</strong>gs. “We have even designed our very own Crouch End cotton shopp<strong>in</strong>g bag and we are experiment<strong>in</strong>g with a Crouch End<br />
wedd<strong>in</strong>g list, that sort of <strong>in</strong>novations we develop with shoppers and retailers toge<strong>the</strong>r. They are relatively <strong>in</strong>expensive and easy to reverse if <strong>the</strong>y don’t<br />
work. We keep <strong>in</strong>novat<strong>in</strong>g s<strong>in</strong>ce that’s important both for us and our customers” (Hristov, 2007 - Company <strong>in</strong>terview).<br />
Vignette 3.3: Marks & Spencer<br />
Context: <strong>Innovation</strong> <strong>in</strong> susta<strong>in</strong>able development, co-<strong>in</strong>novation; retailers’ reverse <strong>in</strong>novation cycle<br />
Example: In October 2007 Marks and Spencer unveiled its first eco-store <strong>in</strong> Bournemouth. The completely refurbished 51,000<br />
sq ft store <strong>in</strong>corporates a whole host of new eco-technologies. It is completely powered by renewable energy and is 25% more<br />
energy efficient. Its <strong>in</strong>novative footpr<strong>in</strong>t has been developed <strong>in</strong> l<strong>in</strong>e with <strong>the</strong> M&S’ Plan A <strong>in</strong> which <strong>the</strong> retailer has pledged £200<br />
m over 5 years on <strong>in</strong>novat<strong>in</strong>g on susta<strong>in</strong>able and ethical projects. For <strong>in</strong>stance by year 2012, M&S aims to:<br />
− become carbon neutral,<br />
− send no waste to landfill,<br />
− extend susta<strong>in</strong>able sourc<strong>in</strong>g,<br />
− set new standards <strong>in</strong> ethical trad<strong>in</strong>g, and<br />
− help customers and employees live a healthier lifestyle.<br />
The above is expected to be achieved <strong>in</strong> tandem with organisations such as WWF <strong>in</strong> <strong>the</strong> area of new susta<strong>in</strong>able store concepts,<br />
WRAP <strong>in</strong> area of eco-friendly packag<strong>in</strong>g, and with <strong>the</strong>ir commercial suppliers on issues of reduc<strong>in</strong>g carbon emissions, and <strong>the</strong><br />
development on new eco-products and healthier foods. The Bournemouth store which is <strong>the</strong> first of four planned <strong>in</strong> <strong>the</strong> next few<br />
years has its own green travel plan and bike racks to encourage customers and staff to cycle to <strong>the</strong> outlet.<br />
(www.marksandspencer.com, 23.10.2007)<br />
Page 25
4. How do retailers th<strong>in</strong>k about <strong>in</strong>novation?<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
4.1 The retailers to whom we spoke as part of this research (Hristov, 2007) acknowledged<br />
overwhelm<strong>in</strong>gly <strong>the</strong> crucial role of <strong>in</strong>novation for <strong>the</strong> performance of any retail bus<strong>in</strong>ess.<br />
Without <strong>in</strong>novation, <strong>the</strong>y suggested, like-for-like growth and profit marg<strong>in</strong>s decl<strong>in</strong>e and<br />
organisations run <strong>in</strong>to life-cycle issues:<br />
“You get about two years under <strong>the</strong> sun and <strong>the</strong>n suddenly <strong>the</strong>re is a new kid on <strong>the</strong> block … ever so<br />
often you have to take a long hard look at yourself”<br />
(CEO)<br />
But our f<strong>in</strong>d<strong>in</strong>gs also <strong>in</strong>dicated that <strong>the</strong>re is a real range of mean<strong>in</strong>gs and <strong>in</strong>terpretations<br />
among retail practitioners as to what constitutes <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g, and this may<br />
contribute to under-report<strong>in</strong>g <strong>in</strong> conventional surveys. It’s seen not just as:<br />
• A necessary means to cont<strong>in</strong>ued existence, but also as<br />
• Change with positive, long-last<strong>in</strong>g effects,<br />
• A cross-bus<strong>in</strong>ess process of generat<strong>in</strong>g and implement<strong>in</strong>g commercially viable ideas<br />
that deliver benefits to customers, and<br />
• A process of implementation of new ideas which creates differentiation <strong>in</strong> <strong>the</strong><br />
marketplace.<br />
4.2 Fur<strong>the</strong>r, retailers acknowledged that def<strong>in</strong><strong>in</strong>g and measur<strong>in</strong>g retail <strong>in</strong>novation was difficult<br />
s<strong>in</strong>ce <strong>in</strong>novations were largely dispersed across <strong>the</strong> bus<strong>in</strong>ess: requir<strong>in</strong>g <strong>the</strong> co-ord<strong>in</strong>ated<br />
effort of a wide constituency of people across functional areas and <strong>in</strong>clud<strong>in</strong>g suppliers<br />
and customers. As a term, <strong>the</strong>refore, ‘<strong>in</strong>novation’ often did not appear immediately self<br />
explanatory to retail practitioners. Or, as one senior consultant put it,<br />
“<strong>Innovation</strong>, its too big a term. To communicate it, one has to break it <strong>in</strong>to its component parts.”<br />
4.3 With some notable exceptions most of <strong>the</strong> retailers <strong>in</strong> <strong>the</strong> sample po<strong>in</strong>ted out that <strong>the</strong>y<br />
did not use <strong>the</strong> term <strong>in</strong> <strong>the</strong>ir everyday vocabulary. Yet <strong>the</strong>y felt that <strong>the</strong>ir organisations<br />
<strong>in</strong>novated all <strong>the</strong> time without hav<strong>in</strong>g <strong>in</strong>novation directors or departments. Some referred<br />
to ‘<strong>in</strong>novation’ as a composite term which <strong>in</strong> practice needed to be translated <strong>in</strong>to more<br />
concrete operational term<strong>in</strong>ology such as: ‘new product development (NPD)’, ‘new<br />
SKUs’, ‘new categories’, ‘refresh<strong>in</strong>g <strong>the</strong> range’, ‘new formats’, ‘new markets’, or ‘new<br />
applications of technology’.<br />
“It is very hard to def<strong>in</strong>e <strong>in</strong>novation. We are a fashion retailer; <strong>the</strong>refore every time you design a<br />
new product is that <strong>in</strong>novation? How different does it have to be, to be <strong>in</strong>novation? We <strong>in</strong>novate<br />
<strong>in</strong> <strong>the</strong> product, <strong>in</strong> our designs, <strong>in</strong> our store environment, we are creative <strong>in</strong> <strong>the</strong> way we brand<br />
ourselves and <strong>in</strong> <strong>the</strong> way we <strong>in</strong>teract with our customers but <strong>the</strong>re are many levers to pull, I th<strong>in</strong>k<br />
<strong>the</strong> trick is to pull <strong>the</strong>se at <strong>the</strong> right time and at <strong>the</strong> right level, ra<strong>the</strong>r than th<strong>in</strong>k<strong>in</strong>g next year<br />
I'm go<strong>in</strong>g for my store refit, or next year I’m go<strong>in</strong>g to launch an all-new product offer<strong>in</strong>g, one has<br />
to be entrepreneurial about that.”<br />
(CEO Fashion <strong>Retail</strong>er).<br />
4.4 Some retailers perceive <strong>the</strong> term ‘<strong>in</strong>novation’ as a much more radical departure from<br />
‘bus<strong>in</strong>ess as usual’ ra<strong>the</strong>r than <strong>in</strong>cremental change <strong>in</strong> operational practices and new<br />
product development.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“We prefer to use ‘newness’. <strong>Innovation</strong> somehow carries <strong>the</strong> mean<strong>in</strong>g of a radically new idea. I guess it is<br />
associated with blue sky th<strong>in</strong>k<strong>in</strong>g or someth<strong>in</strong>g that has never been done before. The majority of our<br />
<strong>in</strong>cremental growth comes from newness, which I would describe as a stage below <strong>in</strong>novation. We also use<br />
re<strong>in</strong>vention” (Commercial Director).<br />
4.5 So what <strong>the</strong>refore constitutes <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g? Summaris<strong>in</strong>g <strong>the</strong> views of over 50<br />
senior <strong>in</strong>dustry practitioners, we suggest that a broadly acceptable def<strong>in</strong>ition might be:<br />
Elements of <strong>the</strong> retail offer (i.e., products, range, services, retail format, etc.) <strong>in</strong> tandem with <strong>the</strong><br />
underp<strong>in</strong>n<strong>in</strong>g organisation and technologies needed to deliver <strong>the</strong>se to <strong>the</strong> market, which are new or<br />
significantly improved as a result of <strong>the</strong> retailer’s exist<strong>in</strong>g market or technological knowledge.<br />
4.6 Whilst <strong>in</strong>terviews with retailers <strong>in</strong>dicated a plethora of mean<strong>in</strong>gs and views as to what<br />
might constitute <strong>in</strong>novation, it also found a dist<strong>in</strong>ction between those <strong>in</strong>novations which<br />
were strategic and <strong>the</strong>se which were more operational <strong>in</strong> character.<br />
a. Strategic retail <strong>in</strong>novation<br />
4.7 Although retail <strong>in</strong>novation tends to follow a pattern of a ‘cont<strong>in</strong>uous change’ mode ra<strong>the</strong>r<br />
than <strong>the</strong> more pronounced manufactur<strong>in</strong>g pattern of ‘series of step changes’ between<br />
periods of stability, <strong>the</strong>re is evidence that more radical <strong>in</strong>novations are often qualified as<br />
strategic <strong>in</strong> <strong>the</strong> sense that <strong>the</strong>y are guided by corporate strategy. Examples of <strong>the</strong>se are<br />
‘sector hopp<strong>in</strong>g’ from food to non-food - for <strong>in</strong>stance <strong>in</strong> <strong>the</strong> case of Sa<strong>in</strong>sbury’s and<br />
ASDA - or pursu<strong>in</strong>g new channels to market <strong>in</strong> <strong>the</strong> case of <strong>the</strong> John Lewis Partnership<br />
(Waitrose) with Ocado.com. (See also Vignette 4.1 – Hotel Chocolat.) Strategic<br />
<strong>in</strong>novations might also <strong>in</strong>volve <strong>the</strong> development of new retail formats for <strong>in</strong>ternational<br />
markets, <strong>in</strong> <strong>the</strong> case of Tesco’s new ‘Fresh and Easy’ concept for <strong>the</strong> US market. Similarly<br />
<strong>the</strong>y <strong>in</strong>volve <strong>in</strong>novative bus<strong>in</strong>ess models which comb<strong>in</strong>e a range of retail applications<br />
such as cater<strong>in</strong>g, retail<strong>in</strong>g, enterta<strong>in</strong>ment and <strong>the</strong> <strong>in</strong>ternet often <strong>in</strong>troduced by smaller<br />
retailers <strong>in</strong> rural communities. There are also examples of radically new approaches to<br />
susta<strong>in</strong>able development or retailer-supplier collaboration. (See Vignette 4.2 – Migros, 4.5<br />
- Zara and 4.6 – TK Maxx, 4.7 - Somerset Local Direct).<br />
b. Operational retail <strong>in</strong>novation<br />
4.8 At an operational level <strong>the</strong>re seems to be a broad consensus that <strong>in</strong>novation is associated<br />
with new products, ideas or ways of operat<strong>in</strong>g. The predom<strong>in</strong>ant view suggests that<br />
operational retail <strong>in</strong>novations are ma<strong>in</strong>ly cont<strong>in</strong>uous, <strong>in</strong>cremental and with a cost or<br />
value-added focus. They often <strong>in</strong>volve plann<strong>in</strong>g, management sponsorship or resource<br />
allocation and have short <strong>in</strong>novation cycles of between 3 to 18 months. For example, one<br />
typical approach to <strong>in</strong>novation is experimentation through ‘test’ or ‘lab’ stores or through<br />
cont<strong>in</strong>uous store trials. The US electrical retailer Best Buy has opened over 60 ‘lab stores’<br />
<strong>in</strong> which <strong>the</strong>y test new ranges, technologies and services (discussed <strong>in</strong> Vignette 3.1, but<br />
see also 4.4). Similarly Metro set up its Future Store near Rhe<strong>in</strong>berg <strong>in</strong> Germany (now<br />
closed) where alongside test<strong>in</strong>g new technologies such self-checkouts, RFID and smart<br />
scales, <strong>the</strong>y also tested and ref<strong>in</strong>ed <strong>the</strong>ir new hypermarket footpr<strong>in</strong>t of Real Extra.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Sa<strong>in</strong>sbury also has its own a technology store <strong>in</strong> Hazel Grove where it tests <strong>the</strong> appeal of<br />
new concepts to its core customer base 11 .<br />
c. The retail <strong>in</strong>novation pyramid<br />
4.9 What traditional <strong>in</strong>novation literature does not explore or expla<strong>in</strong> at any length are <strong>the</strong><br />
typical application areas <strong>in</strong> which retail <strong>in</strong>novation occurs. Our research has identified<br />
three such areas: (1) offer-related <strong>in</strong>novations, (2) support-related <strong>in</strong>novations and (3)<br />
organisation-related <strong>in</strong>novations. These areas are summarised <strong>in</strong> ‘<strong>the</strong> retail <strong>in</strong>novation<br />
pyramid’ <strong>in</strong> Figure 4.1 at <strong>the</strong> apex of which is <strong>the</strong> retailer’s overall corporate strategy<br />
(Hristov, 2007).<br />
Figure 4.1. The retail <strong>in</strong>novation pyramid<br />
Source: Hristov, 2007<br />
4.10 Offer-related areas of <strong>in</strong>novation <strong>in</strong>clude <strong>in</strong>novations <strong>in</strong> product, service, category<br />
format, channel and market, etc. For example Tesco’s <strong>in</strong>novations <strong>in</strong> non-food categories<br />
<strong>in</strong>clud<strong>in</strong>g stationery, enterta<strong>in</strong>ment, house wares, cloth<strong>in</strong>g, electronics, f<strong>in</strong>ancial services,<br />
telecoms and convenience store. For example <strong>the</strong> US retailer Whole Foods Market has<br />
extended <strong>the</strong>ir organic concept beyond <strong>the</strong>ir supermarket format <strong>in</strong>to non-food by roll<strong>in</strong>g<br />
out <strong>in</strong> 2005 <strong>the</strong>ir “Lifestyle” store of environmentally conscious cloth<strong>in</strong>g, house ware and<br />
o<strong>the</strong>r non-food products. By locat<strong>in</strong>g what <strong>the</strong>y refer to as <strong>the</strong> ‘Lifestyle Annexe’ next to<br />
<strong>the</strong>ir full-range supermarkets <strong>the</strong> company is creat<strong>in</strong>g one-stop retail dest<strong>in</strong>ations for <strong>the</strong><br />
rapidly <strong>in</strong>creas<strong>in</strong>g number of environmentally conscious consumers. (See also <strong>the</strong><br />
example of retail service <strong>in</strong>novation <strong>in</strong> Vignette 4.3 – <strong>Retail</strong> Cl<strong>in</strong>ics). Such <strong>in</strong>novations are<br />
central for retailers s<strong>in</strong>ce <strong>the</strong>y <strong>in</strong>volve customer <strong>in</strong>teractions and have direct contribution<br />
to growth. They are often led by major functional areas like commercial (buy<strong>in</strong>g), retail<br />
operations, NPD or creative and market<strong>in</strong>g. In terms of deconstruct<strong>in</strong>g retail <strong>in</strong>novation<br />
11 http://www.igd.com, (26.03.2007)<br />
Strategy<br />
Offer‐related <strong>in</strong>novations<br />
Support‐related <strong>in</strong>novations Organisation‐related <strong>in</strong>novations<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
along <strong>the</strong> l<strong>in</strong>es of <strong>the</strong> more ‘traditional’ <strong>in</strong>novation typologies of product versus process,<br />
<strong>in</strong>cremental versus radical, we conclude that all <strong>the</strong>se are seen amongst retail practitioners.<br />
Never<strong>the</strong>less <strong>the</strong>ir prevalence appears dist<strong>in</strong>ctly retailer specific, for <strong>in</strong>stance <strong>in</strong> <strong>the</strong> case<br />
of <strong>the</strong> novelty mix of a retail range. (See also Vignettes 4.1 – Hotel Chocolat, 4.8 -<br />
Smiley’s Delicatessen, Farm Shop and Café).<br />
4.11 Support-related areas of <strong>in</strong>novation: On <strong>the</strong> o<strong>the</strong>r hand, support-related areas of<br />
<strong>in</strong>novation encompass <strong>in</strong>novations <strong>in</strong> technology, systems and <strong>the</strong> supply cha<strong>in</strong>, etc.<br />
Examples of <strong>the</strong>se are <strong>the</strong> development of extranet capabilities <strong>in</strong> terms of electronic<br />
stock control, payment, <strong>in</strong>voic<strong>in</strong>g and delivery systems, similarly sharpen<strong>in</strong>g customer<br />
focus through <strong>the</strong> <strong>in</strong>troduction of customer databases and loyalty schemes or <strong>in</strong>novat<strong>in</strong>g<br />
<strong>in</strong> <strong>in</strong>-store technologies <strong>in</strong> terms of susta<strong>in</strong>able energy consumption, shelf-management<br />
or payment systems. These are seen as key facilitators for <strong>the</strong> offer-related area and<br />
contributors to overall retailer efficiency and productivity (See Vignettes 4.9 - Boots and<br />
Tesco and 4.10 - The Mid Counties Co-op: payment systems <strong>in</strong>novation).<br />
4.12 Organization-related <strong>in</strong>novations comprise <strong>the</strong> third area, which <strong>in</strong>cludes <strong>in</strong>novations<br />
with strategic or operational significance that provide management and delivery<br />
frameworks for <strong>the</strong> previous two - such as <strong>in</strong>novations <strong>in</strong> <strong>the</strong> retail model, <strong>in</strong><br />
adm<strong>in</strong>istrative processes, cross-functional teams or <strong>in</strong> new activities which require<br />
coherent management mechanisms such as <strong>in</strong> <strong>the</strong> case of CSR, susta<strong>in</strong>ability and ecology.<br />
(See Vignettes 4.5 - Zara and 4.6 – TK Maxx, 4.7 - Somerset Local Direct, 4.11 - ASDA<br />
and 4.12 - <strong>the</strong> Co-op).<br />
4.13 The management levels and areas of retail <strong>in</strong>novation described above are summarised <strong>in</strong><br />
<strong>the</strong> organis<strong>in</strong>g framework shown <strong>in</strong> Figure 4.2.<br />
Figure 4.2. Organis<strong>in</strong>g framework of retail <strong>in</strong>novation<br />
Drivers of retail<br />
<strong>in</strong>novation:<br />
‐ external<br />
‐ <strong>in</strong>ternal<br />
Source: Hristov, 2007<br />
Strategy<br />
Management of<br />
retail <strong>in</strong>novation:<br />
‐ strategic<br />
‐ operational<br />
Areas of retail<br />
<strong>in</strong>novation<br />
Market<br />
Page 29
Vignette 4.1: Hotel Chocolat: multi-channel format<br />
Context: Offer-related <strong>in</strong>novation<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Example: “British chocolate has been a joke for quite a while. We are at <strong>the</strong> forefront of its resurgence.” (Angus Thirwell, cofounder).<br />
Hotel Chocolat has exploited a vacant niche with<strong>in</strong> <strong>UK</strong> retail<strong>in</strong>g for au<strong>the</strong>ntic, high quality, British-made chocolate.<br />
Hotel Chocolat was founded as a catalogue bus<strong>in</strong>ess <strong>in</strong> 1993. Its first store did not open until 2004. It now operates a corporate<br />
gifts service and a tast<strong>in</strong>g club with 100,000 members, <strong>in</strong> addition to its web site and 22 outlets <strong>in</strong> <strong>the</strong> <strong>UK</strong>., which generate £39mn<br />
<strong>in</strong> sales. It won Emerg<strong>in</strong>g <strong>Retail</strong>er of <strong>the</strong> Year Award at <strong>the</strong> <strong>Retail</strong> Week Awards <strong>in</strong> 2007 as well as be<strong>in</strong>g nom<strong>in</strong>ated as a<br />
CoolBrand and plans <strong>in</strong>ternational growth. It is already available onl<strong>in</strong>e <strong>in</strong> New York, Boston, Atlanta, San Francisco and<br />
Chicago.<br />
Vignette 4.2: Migros – susta<strong>in</strong>able brands<br />
Context: Brand <strong>in</strong>novation<br />
Example: Migros is <strong>the</strong> largest Swiss retailer with 2m co-operative members, 590 stores, and sales of CHF 21 billion. Over<br />
several years <strong>the</strong> retailer has agreed with its suppliers a set of ethical standards manifested through <strong>the</strong> launch of its range of own<br />
labels under <strong>the</strong> umbrella brand ‘Engagement’. Each <strong>in</strong>dividual label represents a kite mark for a particular <strong>in</strong>itiative of Migros, for<br />
example <strong>the</strong> elim<strong>in</strong>ation of child labour, better liv<strong>in</strong>g conditions and <strong>the</strong> conservation of tropical forests. These <strong>in</strong>itiatives predate<br />
much <strong>UK</strong> activity. Examples of such labels are:<br />
– BIO is for organic products manufactured without <strong>the</strong> use of chemical-syn<strong>the</strong>tic pesticides and fertilizers,<br />
– Max Havelaar (Maximal Fairness) is for products comply<strong>in</strong>g with our fair trade guidel<strong>in</strong>es,<br />
– 7-po<strong>in</strong>t meat guarantee label is for healthy meat from healthy animals,<br />
– IP-SUISSE guarantees that <strong>the</strong> bread, flour, potatoes and rapeseed oil are produced <strong>in</strong> Switzerland under environmentally<br />
friendly conditions,<br />
– Mar<strong>in</strong>e Stewardship Council guarantees that <strong>the</strong> fish is from susta<strong>in</strong>able fish<strong>in</strong>g grounds,<br />
– Forest Stewardship Council for timber from forests that are managed <strong>in</strong> an environmentally friendly and socially acceptable<br />
way<br />
– ECO is guarantee<strong>in</strong>g environmentally friendly production of clo<strong>the</strong>s, home textiles and shoes,<br />
– Bio Cotton for organically grown cotton<br />
Accord<strong>in</strong>g to Claude Hauser <strong>the</strong> Chairman of Migros alongside technology and product extensions <strong>in</strong>novation <strong>in</strong> Migros is about<br />
pr<strong>in</strong>ciples. Although <strong>the</strong> company acknowledges that generally grocery markets are quite price sensitive <strong>the</strong>re is also an <strong>in</strong>creas<strong>in</strong>g<br />
sensitivity among shoppers about ethical, environmental, and health issues underp<strong>in</strong>n<strong>in</strong>g <strong>the</strong> grow<strong>in</strong>g need for <strong>the</strong> Engagement<br />
brands (Hristov 2004; Migros 2006).<br />
Vignette 4.3: <strong>Retail</strong> Cl<strong>in</strong>ics<br />
Context: Co-<strong>in</strong>novation <strong>in</strong> new services<br />
Examples: Recent example of new service <strong>in</strong>troductions <strong>in</strong> US retail<strong>in</strong>g are <strong>the</strong> trials <strong>in</strong>-store retail cl<strong>in</strong>ics. In this case more than<br />
a dozen cl<strong>in</strong>ic operators <strong>in</strong> co-operation with retailers such as CVS, Wal-Mart, Target, Walgreens and Kerr Drug are pilot<strong>in</strong>g <strong>the</strong><br />
idea <strong>in</strong>-store cl<strong>in</strong>ics which will be provid<strong>in</strong>g convenient but limited service at a low cost offer<strong>in</strong>g basic procedures such as<br />
<strong>in</strong>oculations and treat<strong>in</strong>g common ailments such as strep throat, ear <strong>in</strong>fections and allergies.<br />
These walk-<strong>in</strong> cl<strong>in</strong>ics are seen as alternative to <strong>the</strong> more expensive doctors’ surgeries and emergency rooms, although this has<br />
provoked serious backlash from family doctors who call for tighter regulation of such practices. In <strong>the</strong> <strong>UK</strong> <strong>in</strong> 1999 Boots trialled<br />
dental cl<strong>in</strong>ics <strong>in</strong> some of <strong>the</strong>ir high street stores after <strong>the</strong> acquisition of Dental Body Corporate and Wilson's Dentistry Limited,<br />
<strong>the</strong> <strong>in</strong>itiative was later abandoned. The company however cont<strong>in</strong>ues to offer flu jabs and free prescription collection.<br />
(www.usatoday.com; www.ft.com; www. bbc.co.uk, 21.10.2007)<br />
Vignette 4.4: Wal-Mart – limits to format <strong>in</strong>novation<br />
Context: <strong>Retail</strong> format <strong>in</strong>novation<br />
Example: Hav<strong>in</strong>g created <strong>the</strong> Supercenter years ago, Wal-Mart has cont<strong>in</strong>ued to <strong>in</strong>crementally evolve <strong>the</strong> concept. Over time it<br />
has deliberately pushed <strong>the</strong> envelope creat<strong>in</strong>g new more productive versions of <strong>the</strong> format roughly 20 000 sq ft or more larger<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
than <strong>the</strong> <strong>in</strong>itial one, gradually tak<strong>in</strong>g it from 120,000 sq ft up to 200,000 sq ft. The new stores are test<strong>in</strong>g added features which are<br />
subsequently rolled out nationwide such as new l<strong>in</strong>es of cloth<strong>in</strong>g, extended electrical department sell<strong>in</strong>g computers, iPods and<br />
DVDs and a full-range grocery department. The stores are also test<strong>in</strong>g new media with TV screens navigat<strong>in</strong>g shoppers <strong>in</strong> store.<br />
However, <strong>the</strong> standard Supercenter format did not work as well <strong>in</strong> Japan or Germany.<br />
Accord<strong>in</strong>g to Wall Street Journal <strong>the</strong> company is also work<strong>in</strong>g on two new smaller store concepts <strong>in</strong> direct response to Tesco’s US<br />
grocery stores. The first is an urban C-store cater<strong>in</strong>g for more affluent tastes <strong>in</strong> city centres while <strong>the</strong> second is a standalone retail<br />
unit offer<strong>in</strong>g a wide range of health services and products.<br />
(Accenture 2005; www.walmartfacts.com; www.csnews.com, 23.10.2007 )<br />
Vignette 4.5: Zara: threats to ‘fast fashion’<br />
Context: Bus<strong>in</strong>ess model <strong>in</strong>novation<br />
Example: Zara, <strong>the</strong> retail subsidiary of Inditex was among <strong>the</strong> first proponents of <strong>the</strong> ‘fast fashion’ bus<strong>in</strong>ess model which was<br />
built on <strong>the</strong> basis of:<br />
− partial vertical <strong>in</strong>tegration,<br />
− <strong>in</strong>-house design,<br />
− buy<strong>in</strong>g of merchandise much closer to <strong>the</strong> season and<br />
− fast feedback from stores.<br />
The model allows for high stock turnover, 4 weeks at most lead times from concept to consumer. The result is a constantly<br />
refreshed product range of more than 12 000 SKUs (e.g., new styles every week <strong>in</strong> low production quantities) and on average 17<br />
customer visits per year. The ‘when-it’s-gone-it’s-gone’ approach also means far less price mark downs, i.e. higher profitability.<br />
However <strong>the</strong> ‘fast fashion’ model of Zara, Top Shop and H&M now appears to be under pressure from a new breed of cloth<strong>in</strong>g<br />
discounters such as Primark, Peakocks and fast grow<strong>in</strong>g grocery labels such as Cherokee (Tesco) and George (ASDA) which are<br />
manag<strong>in</strong>g to offer cloth<strong>in</strong>g with contemporary styl<strong>in</strong>g at discount prices.<br />
Vignette 4.6: TK Maxx: <strong>the</strong> ‘off price’ model<br />
Context: Bus<strong>in</strong>ess model <strong>in</strong>novation<br />
Example: The ‘off-price’ bus<strong>in</strong>ess model of TK Maxx (<strong>the</strong> British affiliate of <strong>the</strong> US company TJX), suggests ano<strong>the</strong>r type of<br />
<strong>in</strong>novation. The appeal of its offer comes from a wide range of well-known designer brands sold at 20 to 60% discount. TK Maxx<br />
is able to do this through its opportunistic buy<strong>in</strong>g strategy. Unlike more traditional department stores which commit to quarterly<br />
buy<strong>in</strong>g cycles, <strong>the</strong> merchandis<strong>in</strong>g teams at TK Maxx wait until both suppliers and retailers have committed to <strong>the</strong>ir orders and<br />
<strong>the</strong>n look for excess or unwanted stock at discount prices (Ritson, 2006).<br />
Vignette 4.7: Somerset Local Direct<br />
Context: Bus<strong>in</strong>ess model <strong>in</strong>novation<br />
Example: Somerset Local Food Direct is retailer offer<strong>in</strong>g <strong>the</strong>ir customers every day onl<strong>in</strong>e <strong>the</strong> same quality of local foods as <strong>the</strong>y<br />
can buy at farmers’ markets. The company was set up with <strong>the</strong> help of fund<strong>in</strong>g from DEFRA. The retailer’s philosophy is about<br />
support<strong>in</strong>g ‘local food culture’, provid<strong>in</strong>g value and convenience to customers and help<strong>in</strong>g local agriculture survive <strong>in</strong> <strong>the</strong> face of<br />
imported produce. Most of its suppliers are farmers and producers who also sell at local farmers’ markets.<br />
Somerset Local Food Direct’s bus<strong>in</strong>ess model is simple. The company has a catalogue of locally sourced foods, augmented by<br />
organic and ethically sourced produce from fur<strong>the</strong>r afield. It proudly emphasises <strong>the</strong> predom<strong>in</strong>antly local nature of its range<br />
po<strong>in</strong>t<strong>in</strong>g out that 80% of suppliers can see <strong>the</strong> local landmark, Glastonbury Tor. The catalogue can be accessed onl<strong>in</strong>e or as a<br />
paper copy. Customers can <strong>the</strong>n place an order (80% do so on <strong>the</strong> web site, 20% by phone) up until Tuesday morn<strong>in</strong>g. The<br />
company <strong>the</strong>n places orders with producers on Tuesday for exactly <strong>the</strong> amounts required to fulfil that week’s orders. Suppliers<br />
<strong>the</strong>n deliver <strong>the</strong>ir produce to <strong>the</strong> Glastonbury warehouse on Wednesday and it is put out onto <strong>the</strong> shelves. The orders are picked<br />
and a fleet of vans delivers <strong>the</strong> orders to customers’ homes on Thursday and Friday. Produce is packed <strong>in</strong> <strong>in</strong>sulated boxes to keep<br />
it fresh and this also means that customers do not need to be at home when it is delivered.<br />
Because of its orig<strong>in</strong>s, and numerous contacts <strong>in</strong> <strong>the</strong> farmers’ market movement, <strong>the</strong> company has been quickly able to develop a<br />
competitive product offer, achiev<strong>in</strong>g <strong>the</strong> necessary critical mass to be successful. Keys to profitability are strict control on costs,<br />
sufficient density of customers to make delivery viable and attractive range available <strong>in</strong> all seasons of <strong>the</strong> year. There is obviously<br />
a limit to <strong>the</strong> distance from <strong>the</strong> warehouse with<strong>in</strong> which delivery is economic. Crucial to <strong>the</strong> whole operation is a computer<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
software system, developed <strong>in</strong>-house. Given <strong>the</strong> determ<strong>in</strong>edly local scale of <strong>the</strong> operation, Somerset Local Food Direct offers a<br />
remarkable range of goods, amount<strong>in</strong>g to well over a 1,000 SKUs <strong>in</strong>clud<strong>in</strong>g fresh locally produced meats, vegetables, dairy<br />
produce, eggs, breads, preserves and snacks. Such a range caters for a large proportion of <strong>the</strong> weekly requirements of customers<br />
which <strong>in</strong> tunrn generates additional customer loyalty. As a result, <strong>the</strong> average order value is healthy, with some customers order<strong>in</strong>g<br />
up to £80 worth of food at a time. This is important to <strong>the</strong> economics of <strong>the</strong> operation, as, even with a delivery charge of £3,<br />
small orders are unlikely to be economic to fulfil. This coupled with recommendations from satisfied customers has helped <strong>the</strong><br />
delivery model of <strong>the</strong> retailer, which now operates on <strong>the</strong> basis of ‘delivery clusters’, where several drops are close toge<strong>the</strong>r and<br />
thus make <strong>the</strong> delivery operation more efficient (www.localfooddirect.co.uk).<br />
Vignette 4.8: Smiley’s Delicatessen, Farm Shop and Café<br />
Context: Offer-related <strong>in</strong>novation <strong>in</strong> a small rural retailer<br />
Example: Smiley’s is not a standard village shop but a hybrid retail concept balanc<strong>in</strong>g <strong>the</strong> range of l<strong>in</strong>es stocked and <strong>the</strong> different<br />
needs of teashop/café and <strong>the</strong> retail side. The shop’s range is tailored to <strong>the</strong> modern reality that most people buy <strong>the</strong>ir cans and<br />
packets at <strong>the</strong> large supermarkets and <strong>the</strong> role of local shops is to provide short life products bought between <strong>the</strong> weekly or<br />
fortnightly visits to large food stores. The shop has a large serve-over dairy and delicatessen section, with fresh produce, much of<br />
it local, a limited range of groceries (for <strong>the</strong> “I forgot to buy it at <strong>the</strong> supermarket” customer) toge<strong>the</strong>r with a wide range of<br />
confectionery <strong>in</strong>clud<strong>in</strong>g loose sweets <strong>in</strong> jars for <strong>the</strong> nostalgic. Fresh produce is displayed with some flair <strong>in</strong> wicker baskets and <strong>in</strong><br />
artistic piles. Friendly customer service is a key part of <strong>the</strong> offer toge<strong>the</strong>r with a will<strong>in</strong>gness to listen to customers’ requests for<br />
items not already stocked.<br />
However, <strong>the</strong> most <strong>in</strong>terest<strong>in</strong>g aspect of <strong>the</strong> shop is <strong>the</strong> mix of retail and café. The café section is totally <strong>in</strong>tegrated with <strong>the</strong> shop<br />
but del<strong>in</strong>eated by a pillar and a change <strong>in</strong> floor tile colour. This has a French <strong>the</strong>me and feel. With 26 covers, <strong>the</strong> café provides<br />
<strong>in</strong>formal eat<strong>in</strong>g with <strong>the</strong> possibility of even<strong>in</strong>g service as well at weekends or o<strong>the</strong>r times. Lunch has proved very popular, <strong>in</strong><br />
particular on Sundays. The challenge is to produce a menu that is <strong>in</strong>terest<strong>in</strong>g whilst be<strong>in</strong>g not too difficult to produce without a<br />
dedicated chef on <strong>the</strong> premises, that is “homemade” without elicit<strong>in</strong>g <strong>the</strong> response, “Well, I could do it just as well at home”.<br />
Cater<strong>in</strong>g provides much higher gross profit marg<strong>in</strong>s than retail but <strong>the</strong>re are higher costs as well, <strong>in</strong> terms of time required to<br />
prepare and serve <strong>the</strong> food, wastage, space, etc. Hence manag<strong>in</strong>g <strong>the</strong> balance between <strong>the</strong> two halves of a bus<strong>in</strong>ess like this is<br />
crucial - be<strong>in</strong>g able to cope with <strong>the</strong> <strong>in</strong>evitable peaks <strong>in</strong> customer demands.<br />
Theories of retail<strong>in</strong>g might suggest that <strong>the</strong> demand from <strong>the</strong> village itself is too small to susta<strong>in</strong> <strong>the</strong> shop or cafe on its own.<br />
However, <strong>the</strong>re is also significant pass<strong>in</strong>g trade on <strong>the</strong> A road that passes through Sandford, <strong>the</strong> shop hav<strong>in</strong>g a large forecourt for<br />
park<strong>in</strong>g (The Rural Shops Alliance 2007).<br />
Vignette 4.9: Boots and Tesco: customer-centric supply cha<strong>in</strong> <strong>in</strong>novation<br />
Context: Supply cha<strong>in</strong> <strong>in</strong>novation<br />
Examples: In 2005 Boots launched <strong>the</strong> first phase of its Store-Friendly Supply Cha<strong>in</strong> (SFSC) programme tak<strong>in</strong>g a more<br />
customer-centric perspective to <strong>the</strong> way it organise its supply cha<strong>in</strong>. The aim is to improve stock availability and free up staff time<br />
<strong>in</strong> store to serve customers <strong>in</strong>stead of unpack<strong>in</strong>g and sort<strong>in</strong>g merchandise. Boots claims that as a result of SFSC, over 80% of<br />
items are arriv<strong>in</strong>g at stores ready to go straight onto shelves, a huge sav<strong>in</strong>g <strong>in</strong> time and energy for busy store managers and <strong>the</strong>ir<br />
teams. (Boots Annual Report 2006)<br />
Tesco is improv<strong>in</strong>g <strong>the</strong> efficiency of its <strong>in</strong>-store operations and on-shelf availability by <strong>in</strong>novat<strong>in</strong>g <strong>in</strong> what <strong>the</strong> <strong>in</strong>dustry experts<br />
refer to <strong>the</strong> ‘last 50 yards’. In shelf-replenishment terms this means <strong>in</strong>creased use of new design merchandis<strong>in</strong>g units, easier to<br />
refill freezer units with drop down fronts, shelf-ready packag<strong>in</strong>g (SRP) and trials of <strong>in</strong>-store applications of RFID.<br />
Vignette 4.10: The Mid Counties Co-op: payment systems <strong>in</strong>novation<br />
Context: <strong>Retail</strong> applications of biometric technology<br />
Example: The Mid Counties Co-op has <strong>in</strong>troduced a f<strong>in</strong>ger-touch payment system, enabl<strong>in</strong>g customers to pay for <strong>the</strong>ir shopp<strong>in</strong>g<br />
by scann<strong>in</strong>g <strong>the</strong>ir f<strong>in</strong>gerpr<strong>in</strong>t at <strong>the</strong> checkout. The biometric payment system developed by a consortium of a technology firm <strong>in</strong><br />
San Francisco, Fujitsu and Pay By Touch has been tested by <strong>the</strong> Mid Counties Co-op <strong>in</strong> three of its stores <strong>in</strong> <strong>the</strong> Oxfordshire<br />
area. Customers us<strong>in</strong>g <strong>the</strong> ‘Pay By Touch’ can set up an account at <strong>the</strong> store or over <strong>the</strong> <strong>in</strong>ternet. Once <strong>the</strong>ir f<strong>in</strong>gerpr<strong>in</strong>t has been<br />
identified at <strong>the</strong> checkout <strong>the</strong> customer's bank account is automatically debited. The retailer’s own research suggests that ‘Pay by<br />
Touch’ has <strong>the</strong> capacity to be up to 20% than us<strong>in</strong>g ‘chip and PIN’.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Accord<strong>in</strong>g to <strong>the</strong> retailer <strong>the</strong> <strong>in</strong>itial customer response to this <strong>in</strong>novation has been very encourag<strong>in</strong>g. From a sample of 1000 Coop<br />
shoppers <strong>in</strong> <strong>the</strong> areas where <strong>the</strong> system is <strong>in</strong> operation half has already signed up to <strong>the</strong> scheme or plann<strong>in</strong>g to do so <strong>in</strong> <strong>the</strong><br />
near future. The Co-op is <strong>the</strong> first retailer <strong>in</strong> <strong>the</strong> <strong>UK</strong> to launch this new technology which offers a secure and convenient way of<br />
payment.<br />
(www.software.silicon.com; www.imrg.org, 23.10.2007)<br />
Vignette 4.11: ASDA<br />
Context: Innovat<strong>in</strong>g <strong>in</strong> susta<strong>in</strong>able development<br />
Examples:<br />
− Fair trade: ASDA claims to be <strong>the</strong> largest seller of Fairtrade fruit and vegetables <strong>in</strong> <strong>the</strong> <strong>UK</strong>, and is extend<strong>in</strong>g its Fairtrade l<strong>in</strong>es<br />
across <strong>the</strong> range.<br />
− Organics: ASDA has reported that it will <strong>in</strong>crease its organic ranges from <strong>the</strong> current 300 SKUs to 1,000 SKUs by <strong>the</strong> end of<br />
2007.<br />
− Transport/logistics: The retailer has entered plann<strong>in</strong>g applications to <strong>in</strong>stall w<strong>in</strong>d turb<strong>in</strong>es at six of its <strong>UK</strong> distribution centres<br />
(www.planetretail.net, 03.08.2007).<br />
− Eco stores footpr<strong>in</strong>t: The company is plann<strong>in</strong>g to open its first susta<strong>in</strong>able timber frame with view of lower<strong>in</strong>g its carbon<br />
footpr<strong>in</strong>t. This will eradicate <strong>the</strong> use 500 tonnes of steel and is expected to save 450 tonnes of carbon emissions while<br />
improv<strong>in</strong>g <strong>the</strong> energy efficiency of <strong>the</strong> stores by 20%.<br />
− The company aims to achieve zero waste go<strong>in</strong>g to landfill by 2010. (www.asda-press.co.uk, 18.10.2007)<br />
Vignette 4.12: The Co-op<br />
Context: Innovat<strong>in</strong>g <strong>in</strong> susta<strong>in</strong>able development<br />
Examples: The Co-operative Group strives to evolve its bus<strong>in</strong>ess model <strong>in</strong> a susta<strong>in</strong>able manner by undertak<strong>in</strong>g a number of<br />
commitments and environmental <strong>in</strong>itiatives such as:<br />
− 98% of outlets to be powered by green electricity<br />
− The <strong>in</strong>itiation of w<strong>in</strong>d farm projects<br />
− Solar power and micro-w<strong>in</strong>d <strong>in</strong>stallations on two Head Offices<br />
− Commitment to reduce energy consumption by 25% by 2012<br />
− The entire own-brand household paper range sourced from responsibly managed forests and recycl<strong>in</strong>g facilities certified by <strong>the</strong><br />
Forest Stewardship Council.<br />
(Presentation by Mart<strong>in</strong> Beaumont, CEO, at <strong>the</strong> BRC conference (2007) “The secrets of retail success”)<br />
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5. What drives retail <strong>in</strong>novation?<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
5.1 This section focuses on explor<strong>in</strong>g <strong>the</strong> specific drivers of <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g as seen by<br />
<strong>the</strong> <strong>in</strong>terview component of our research. Managers’ perceptions about <strong>the</strong> drivers of<br />
<strong>in</strong>novation help us to understand how organisational responses are shaped <strong>in</strong> terms of<br />
strategies, structures, directions and <strong>the</strong> ways <strong>in</strong> which <strong>in</strong>novation is measured. In most<br />
cases, <strong>the</strong>re is broad agreement on what <strong>the</strong>se drivers are and that <strong>the</strong>y fall <strong>in</strong>to two broad<br />
categories: those external to <strong>the</strong> firm and those <strong>in</strong>ternal:<br />
• Drivers external to <strong>the</strong> retailer drivers comprise (1) customer/consumer trends, (2)<br />
<strong>the</strong> competitive environment, (3) <strong>in</strong>dustry cycles and organisational growth, (4) <strong>the</strong><br />
regulatory environment, (5) technology, and (6) retailer-supplier relations;<br />
• Drivers <strong>in</strong>ternal to <strong>the</strong> retailer comprise (1) strategy and bus<strong>in</strong>ess plann<strong>in</strong>g, (2) top<br />
management vision and leadership, (3) operational efficiency, (4) organizational<br />
culture and structure, (5) <strong>in</strong>novation reward mechanisms, and (6) availability of<br />
resources (f<strong>in</strong>ancial and human) (Hristov 2007).<br />
Figures 5.1 and 5.2 summarise <strong>the</strong> relative importance of <strong>the</strong> six ma<strong>in</strong> drivers as seen by a<br />
sample of 34 <strong>in</strong>terviewees.<br />
a. External to <strong>the</strong> retailer<br />
Figure 5.1. External drivers of <strong>in</strong>novation<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
65%<br />
Customer/consumer<br />
trends<br />
53%<br />
The competitive<br />
environment<br />
Source: Company <strong>in</strong>terviews content analysis, (Hristov, 2007).<br />
47%<br />
Industry cycles and<br />
organisational growth<br />
18% 18%<br />
Technology The regulatory<br />
environment<br />
5.2 Customer/consumer trends: By a long way <strong>in</strong> terms of share of responses (65%) of<br />
managers consider chang<strong>in</strong>g consumer trends to be <strong>the</strong> major external driver of retail<br />
<strong>in</strong>novation. This is unsurpris<strong>in</strong>g because of <strong>the</strong> very nature of retail<strong>in</strong>g as a consumer<br />
fac<strong>in</strong>g activity. Consumer trends are multidimensional and <strong>in</strong>clude socio-economic,<br />
technological, demographic components, like changes <strong>in</strong> terms of mobility, susta<strong>in</strong>able<br />
12%<br />
<strong>Retail</strong>er-supplier relations<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
consumption, consumer welfare, use of technology, fragmentation of demand, or <strong>the</strong><br />
emergence of a global consumer. Interviewees acknowledged that commercial survival<br />
and success are <strong>in</strong>tr<strong>in</strong>sically l<strong>in</strong>ked to <strong>the</strong>ir ability to <strong>in</strong>novate simultaneously across all<br />
<strong>the</strong>se areas of change. This results <strong>in</strong> plethora of retail <strong>in</strong>itiatives around <strong>the</strong> retail offer,<br />
delivery channels and <strong>the</strong> underp<strong>in</strong>n<strong>in</strong>g operations. One-stop shopp<strong>in</strong>g, <strong>the</strong> dollar store<br />
concept, <strong>in</strong>-store <strong>the</strong>atre, multi-channel retail<strong>in</strong>g, fast fashion, EDLP or more holistic<br />
customer centricity <strong>in</strong>itiatives are all <strong>in</strong>novative responses to chang<strong>in</strong>g consumer trends.<br />
Here <strong>the</strong> dilemma for senior managers seems to be to what extent retailers need to be<br />
customer-driven (focused on expressed consumer needs) and to what extent <strong>the</strong>y could<br />
actually drive consumer demand by focus<strong>in</strong>g on latent needs.<br />
“Ultimately of course all adds up to <strong>in</strong>novation <strong>in</strong> <strong>the</strong> proposition to <strong>the</strong> customer because <strong>the</strong> customer’s<br />
buy<strong>in</strong>g <strong>the</strong> product and <strong>the</strong> service and it’s happen<strong>in</strong>g through <strong>the</strong> supply cha<strong>in</strong> and <strong>the</strong>y're buy<strong>in</strong>g it through<br />
different channels”<br />
(Market<strong>in</strong>g Director)<br />
“I th<strong>in</strong>k <strong>the</strong> need to have competitive advantage over o<strong>the</strong>r people on <strong>the</strong> High Street, <strong>the</strong>y want to be able<br />
to have that product that nobody else has got ahead of everyone else. I th<strong>in</strong>k <strong>the</strong>y are very keen to improve<br />
<strong>the</strong> customer environment… I th<strong>in</strong>k <strong>the</strong>y [retailers] are quite focused on <strong>the</strong> customer areas <strong>in</strong> terms of<br />
deliver<strong>in</strong>g <strong>in</strong>novation”<br />
(Senior Manager, Industry Association).<br />
5.3 The competitive environment: (a 53% share of responses.) Grow<strong>in</strong>g <strong>in</strong>ternational<br />
competition coupled, with cont<strong>in</strong>ued <strong>in</strong>dustry concentration and <strong>the</strong> effects of <strong>the</strong><br />
Internet on consumer demand and shopp<strong>in</strong>g habits <strong>in</strong>variably affects <strong>the</strong> pace with which<br />
retailers <strong>in</strong>novate. Interviewees dist<strong>in</strong>guished between two types of competition: <strong>the</strong> first<br />
are ‘competitive pressures’ from direct competition <strong>in</strong> <strong>the</strong> marketplace from <strong>in</strong>cumbents<br />
<strong>in</strong> pursuit of market share and customer patronage. The second is what many retailers<br />
referred to as ‘fear from <strong>in</strong>dustry disruptions’ com<strong>in</strong>g with<strong>in</strong> or from outside <strong>the</strong> sector.<br />
These might <strong>in</strong>clude radically new retail bus<strong>in</strong>ess models, enabl<strong>in</strong>g technologies or even<br />
new product propositions which compete with retail<strong>in</strong>g for share of consumer wallet. By<br />
def<strong>in</strong>ition, <strong>the</strong>se often <strong>in</strong>direct competitive challenges are much more unpredictable.<br />
While ‘susta<strong>in</strong><strong>in</strong>g’ <strong>in</strong>novation is about <strong>in</strong>cremental improvement along established<br />
<strong>in</strong>dustry trajectories, <strong>in</strong>novations that result from ‘disruptive’ competition are often<br />
simpler and cheaper, but require very different set of commercial capabilities which<br />
<strong>in</strong>cumbents may f<strong>in</strong>d difficult to develop.<br />
“I th<strong>in</strong>k a lot of it is down to competition, it’s always try<strong>in</strong>g to be one step ahead o<strong>the</strong>r people or watch<strong>in</strong>g<br />
<strong>the</strong> competition lead and <strong>the</strong>n try<strong>in</strong>g to follow very quickly”<br />
(<strong>Innovation</strong> Director).<br />
“A disruption to your normal bus<strong>in</strong>ess model from competitive activity, rapid market change - I th<strong>in</strong>k<br />
<strong>the</strong>se are ma<strong>in</strong> drivers on a macro level.”<br />
(Market<strong>in</strong>g Director).<br />
5.4 Industry cycles and organisational growth has a 47% share of responses. Here<br />
managers associate <strong>in</strong>dustry cycles with <strong>the</strong>ir own organisational lifecycle. In this respect<br />
<strong>in</strong>novation is seen as <strong>the</strong> means for cont<strong>in</strong>ued existence. <strong>Retail</strong><strong>in</strong>g experiences dist<strong>in</strong>ct<br />
phases of development, and change through <strong>in</strong>novation is seen by <strong>in</strong>cumbents as critical<br />
for develop<strong>in</strong>g new differential advantages and revenue streams. This is nowhere more<br />
relevant than to retailers <strong>in</strong> mature and saturated markets. Accord<strong>in</strong>g to one Commercial<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Director about fifty to sixty percent of like-for-like food retail growth <strong>in</strong> one of <strong>the</strong>ir<br />
markets comes from <strong>in</strong>novation ra<strong>the</strong>r than ‘bus<strong>in</strong>ess as usual’. This drives companies to<br />
change <strong>the</strong>ir strategies, structures and propositions. As <strong>the</strong> CEO of a lead<strong>in</strong>g discounter<br />
po<strong>in</strong>ted out,<br />
“<strong>Innovation</strong> on a strategic level is about positive change and improvement, I don’t want to <strong>in</strong>novate and<br />
make th<strong>in</strong>gs worse.”<br />
Sometime change entails radical <strong>in</strong>novation or re<strong>in</strong>vention of <strong>the</strong> bus<strong>in</strong>ess model which<br />
requires leadership from <strong>the</strong> very top of <strong>the</strong> organisation (Hristov and Reynolds, 2005).<br />
“Our department store model was <strong>in</strong> decl<strong>in</strong>e, we had to do someth<strong>in</strong>g and go back to our routes of be<strong>in</strong>g<br />
more radically <strong>in</strong>novative. We had to redef<strong>in</strong>e ourselves, and that’s what we did”<br />
(CEO).<br />
5.5 The regulatory environment was <strong>in</strong>cluded <strong>in</strong> 18% of responses. However consider<strong>in</strong>g<br />
that <strong>the</strong> driver it becomes apparent it has a wide rang<strong>in</strong>g area of impact associated with all<br />
o<strong>the</strong>r drives. A wide-rang<strong>in</strong>g regulatory environment (address<strong>in</strong>g relates to competition<br />
and consumer protection legislation, plann<strong>in</strong>g, transportation and <strong>the</strong> environment) is<br />
seen as important <strong>in</strong> shap<strong>in</strong>g <strong>the</strong> direction of many retail <strong>in</strong>novations. In <strong>the</strong>ir pursuit for<br />
growth retailers constantly see <strong>the</strong> need to adapt <strong>the</strong>ir strategies to <strong>the</strong> environments <strong>in</strong><br />
which <strong>the</strong>y operate. In <strong>the</strong> spatial plann<strong>in</strong>g regime has given rise to new types of<br />
shopp<strong>in</strong>g outlets at new locations (see Vignettes 5.1 – IKEA, 5.2 – responses to<br />
regulation and 5.3 – Currys customer recycl<strong>in</strong>g proposition).<br />
We grow organically through buy<strong>in</strong>g land and build<strong>in</strong>g <strong>the</strong> stores ourselves. This however is not always<br />
possible. In some markets such as <strong>the</strong> <strong>UK</strong>, <strong>the</strong>re are hardly any locations left, and <strong>the</strong>re we comb<strong>in</strong>e<br />
organic growth with possible acquisitions.<br />
(Executive Chairman)<br />
“In many service <strong>in</strong>dustries de- and re-regulation can trigger <strong>the</strong> scope for <strong>in</strong>novation. In retail<strong>in</strong>g <strong>the</strong><br />
liberalisation of open<strong>in</strong>g hours of shops <strong>in</strong> comb<strong>in</strong>ation with changes <strong>in</strong> <strong>the</strong> spatial plann<strong>in</strong>g regime has<br />
given rise to new types of shopp<strong>in</strong>g outlets at new locations”<br />
(van Ark, Broersma and den Hertog, 2003).<br />
5.6 Technology: (18% of respondents). The role of technology is seen <strong>in</strong>creas<strong>in</strong>gly as<br />
supportive to <strong>the</strong> customer fac<strong>in</strong>g functions <strong>in</strong> retail organisations. Without ignor<strong>in</strong>g <strong>the</strong><br />
technological dimension, <strong>in</strong>terviewees appear, to re<strong>in</strong>force <strong>the</strong> generally nontechnological<br />
focus of retail <strong>in</strong>novation. Indeed, some commentators po<strong>in</strong>t toward lack of<br />
enthusiasm among some retailers to <strong>in</strong>novate <strong>in</strong> <strong>the</strong> ICT area. There are however many<br />
notable examples of retailers who behave as early adopters or generators of retail<br />
technologies (Hristov and Reynolds, 2005). (See Vignettes 5.4 – Marks & Spencer and 5.5<br />
– Tesco <strong>in</strong> a Box)<br />
“<strong>Retail</strong><strong>in</strong>g is not like some aspects of manufactur<strong>in</strong>g which is primarily about technological lead. In<br />
retail<strong>in</strong>g <strong>the</strong>se [factors] are go<strong>in</strong>g to be fur<strong>the</strong>r down <strong>the</strong> <strong>in</strong>terest list, retailers th<strong>in</strong>k <strong>in</strong> terms of ‘how can<br />
we better understand our customers, listen to customers, deliver what <strong>the</strong>y need <strong>in</strong> <strong>the</strong> right format and so<br />
on’… ‘oh, and by <strong>the</strong> way, how can we usefully deploy technology <strong>in</strong> order to achieve that?’”<br />
(Strategy Director).<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“Big, big, big, which is why I do development and IT, because <strong>the</strong> two are <strong>in</strong>terl<strong>in</strong>ked, whe<strong>the</strong>r it be new<br />
software that allows us to do th<strong>in</strong>gs we haven't done before like l<strong>in</strong>k toge<strong>the</strong>r databases, whe<strong>the</strong>r it be new<br />
technology like handsets, what mobile phones are go<strong>in</strong>g to do with Bluetooth, 3G, I mean all of that is a<br />
driver of <strong>in</strong>novation… So it’s how you tie <strong>the</strong> technology <strong>in</strong>to practical usage at some po<strong>in</strong>t <strong>in</strong> <strong>the</strong> future,”<br />
(Bus<strong>in</strong>ess development and IT Director).<br />
5.7 <strong>Retail</strong>er-supplier relations: (12%) This f<strong>in</strong>al driver of <strong>in</strong>novation highlights <strong>the</strong><br />
importance of <strong>the</strong> relationship between retailers and <strong>the</strong>ir suppliers as an <strong>in</strong>tr<strong>in</strong>sic part of<br />
<strong>the</strong> two way <strong>in</strong>novation diffusion <strong>in</strong>novation. The l<strong>in</strong>k appears particularly strong <strong>in</strong> retail<br />
areas such as NPD, buy<strong>in</strong>g, logistics and ICT. The cont<strong>in</strong>uous growth of retailer brands,<br />
diversification, geographical expansion, and multi-channel retail<strong>in</strong>g, coupled with <strong>the</strong><br />
constant quest for greater efficiency streng<strong>the</strong>n this complex but essential relationship.<br />
(See Vignette 5.6 – Waitrose.)<br />
We don’t manufacture anyth<strong>in</strong>g, so although we have product development technologists and buyers here,<br />
obviously with our suppliers <strong>the</strong>re's an equivalent team, so <strong>the</strong>re would be product developers, technologists<br />
and commercial people <strong>the</strong>re. And we talk about a partnership and <strong>the</strong>re's this constant well who does<br />
<strong>the</strong> <strong>in</strong>novation, where do <strong>the</strong> ideas come from”<br />
(NPD Director).<br />
b. Internal to <strong>the</strong> retailer<br />
Figure 5.2. Internal drivers of <strong>in</strong>novation<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
71%<br />
Strategy and bus<strong>in</strong>ess<br />
plann<strong>in</strong>g<br />
Source: Hristov, 2007<br />
36%<br />
Organisational culture and<br />
structure<br />
32%<br />
Top management vision<br />
and leadership<br />
5.8 Strategy and bus<strong>in</strong>ess plann<strong>in</strong>g account for 71% of all responses. Senior managers<br />
characterise strategic plann<strong>in</strong>g as a decision mak<strong>in</strong>g process which translates <strong>the</strong> retailer’s<br />
<strong>in</strong>tent <strong>in</strong>to a realized strategy. This <strong>in</strong>volves <strong>the</strong> development of sales, profit or<br />
competitive objectives <strong>in</strong> l<strong>in</strong>e with <strong>the</strong> retailer’s bus<strong>in</strong>ess model and <strong>in</strong> pursuit of<br />
opportunities <strong>in</strong> <strong>the</strong> market place. ‘Strategiz<strong>in</strong>g’ <strong>in</strong>volves <strong>the</strong> allocation of f<strong>in</strong>ancial,<br />
human resources <strong>in</strong>to new competences. The <strong>in</strong>terviewees drew clear connections<br />
between strategy and <strong>in</strong>novation. The predom<strong>in</strong>ant view is that strategy drives <strong>in</strong>novation<br />
21%<br />
12%<br />
Operational efficiency <strong>Innovation</strong> reward<br />
mechanisms<br />
9%<br />
Availability of resources<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
<strong>in</strong> terms of direction, resources availability and timel<strong>in</strong>es. Evidence of that is <strong>the</strong> existence<br />
of ‘organizational rout<strong>in</strong>es’ such as annual plann<strong>in</strong>g cycles, regular board meet<strong>in</strong>gs with<br />
<strong>in</strong>novation on <strong>the</strong> agenda, strategic and range reviews <strong>in</strong> <strong>the</strong> course of which <strong>in</strong>novation<br />
is discussed and planned.<br />
“<strong>Innovation</strong> is not always about ideas, many people have ideas, it is not even about skills - many have<br />
<strong>the</strong>se as well - it is about <strong>the</strong> will of implement<strong>in</strong>g new ides, <strong>the</strong> dogged determ<strong>in</strong>ation to br<strong>in</strong>g <strong>the</strong>m <strong>the</strong><br />
market through a well thought-out strategy”<br />
(Market<strong>in</strong>g Director).<br />
5.9 Top management vision and leadership: 32% of respondents highlighted <strong>the</strong> role of<br />
<strong>the</strong> top management team <strong>in</strong> <strong>in</strong>novation. Practitioners see <strong>the</strong> role of retail directors as<br />
<strong>the</strong> ‘lead<strong>in</strong>g entrepreneurs’ of <strong>the</strong> bus<strong>in</strong>ess who provide strategic and operational support<br />
for <strong>in</strong>novation, sponsor<strong>in</strong>g as well as produc<strong>in</strong>g new ideas (Hristov and Reynolds, 2005).<br />
Beyond <strong>the</strong>ir strategic role, senior executives see <strong>the</strong> need to get <strong>in</strong>volved <strong>in</strong> front-end<br />
decisions, which keeps <strong>the</strong>m <strong>in</strong> touch with <strong>the</strong> operational side of <strong>the</strong> bus<strong>in</strong>ess and<br />
ensures a feedback loop for bottom-up creative ideas.<br />
“As a manager I deal with both strategic and operational issues. At present we have more than 750<br />
stores across five markets … I have approved every s<strong>in</strong>gle location and have personally opened most of our<br />
major stores. I travel a lot between <strong>the</strong> markets, meet<strong>in</strong>g managers and people important to our bus<strong>in</strong>ess.<br />
With our store managers I discuss <strong>the</strong> local ranges, what sells and what doesn’t and how we can improve<br />
our position. There is always room for improvement”<br />
(Executive Chairman).<br />
Senior management also see <strong>the</strong>ir role <strong>in</strong> achiev<strong>in</strong>g <strong>the</strong> right balance between <strong>the</strong><br />
‘bus<strong>in</strong>ess as usual’ which generates revenues ‘here and now’ and <strong>the</strong> need for new<br />
revenue streams which will deliver future growth. Many of <strong>the</strong>m acknowledge <strong>the</strong><br />
potential tensions between <strong>the</strong>se two seem<strong>in</strong>gly disparate bus<strong>in</strong>ess areas.<br />
“<strong>Innovation</strong> is a balanc<strong>in</strong>g act. I feel conscious that even if an organisation is do<strong>in</strong>g well I still have to<br />
provoke its <strong>in</strong>novation <strong>in</strong>st<strong>in</strong>cts”<br />
(CEO).<br />
5.10 Operational efficiency: 21% of practitioners emphasised that much <strong>in</strong>novation <strong>in</strong><br />
retail<strong>in</strong>g is driven by <strong>the</strong> need to improve operational efficiency. There are fundamentally<br />
two ways of <strong>in</strong>creas<strong>in</strong>g output: (1) to <strong>in</strong>crease <strong>the</strong> number of <strong>in</strong>puts <strong>in</strong>to <strong>the</strong> value<br />
creation process, or (2) to f<strong>in</strong>d new ways of <strong>in</strong>creas<strong>in</strong>g <strong>the</strong> output from <strong>the</strong> same number<br />
of <strong>in</strong>puts. The second one gives rise to cost driven <strong>in</strong>novation. Evaluation of key<br />
performance <strong>in</strong>dicators such as space productivity, asset productivity, f<strong>in</strong>ancial<br />
productivity or employee productivity provides scope for <strong>in</strong>novative solutions to reduce<br />
operat<strong>in</strong>g costs. Therefore considerable <strong>in</strong>novation occurs <strong>in</strong> <strong>the</strong> ‘support areas’ of a retail<br />
bus<strong>in</strong>ess – its systems, logistics or store operations.<br />
“The efficiency side, yes, seek<strong>in</strong>g to do more for less, if you like, to drive profit growth. I guess that’s<br />
because we feel that that’s more under our control”<br />
(Market<strong>in</strong>g Director).<br />
“…we've had to really k<strong>in</strong>d of ref<strong>in</strong>e and ref<strong>in</strong>e our processes and our systems to make ourselves a much<br />
more productive beast”<br />
(Bus<strong>in</strong>ess Development Director).<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
5.11 Organizational culture and structure: This driver accounts for 36% of responses.<br />
Senior managers see culture and structure as closely related. A retail culture is manifested<br />
through patterns of shared beliefs, values, attitudes and behaviour (“<strong>the</strong> way we do th<strong>in</strong>gs<br />
around here”) <strong>in</strong> relation to organisational goals and strategies. A particular organizational<br />
structure (<strong>in</strong>clud<strong>in</strong>g <strong>in</strong>novation delivery mechanisms) has <strong>the</strong> capacity to re<strong>in</strong>force a<br />
culture of <strong>in</strong>novation by channel<strong>in</strong>g and streaml<strong>in</strong><strong>in</strong>g <strong>the</strong> decision mak<strong>in</strong>g process. This<br />
must be carefully handled, however. Some <strong>in</strong>terviewees po<strong>in</strong>ted out that ‘over structur<strong>in</strong>g’<br />
<strong>the</strong> culture could actually work to stifle a more entrepreneurial culture.<br />
“For us <strong>in</strong>novation is a strategic priority, we made this conscious decision a few years ago. It is part of our<br />
<strong>in</strong>tention to cont<strong>in</strong>ue as <strong>the</strong> market leader. This meant that we had to <strong>in</strong>stil a culture of <strong>in</strong>novation<br />
consistent with our heritage and <strong>the</strong> structure to support it. It seems simple but not that easy, it takes<br />
time”.<br />
(Market<strong>in</strong>g Director)<br />
“In a turnaround situation it is somewhat easier to be <strong>in</strong>novative <strong>in</strong> a radical way. I had to change <strong>the</strong><br />
bus<strong>in</strong>ess and to take away a whole management layer to make sure that <strong>in</strong>novation ideas do not loose<br />
<strong>the</strong>ir edge by <strong>the</strong> time <strong>the</strong>y get to me”<br />
(CEO).<br />
5.12 <strong>Innovation</strong> reward mechanisms: This factor featured <strong>in</strong> 12% of <strong>the</strong> responses from<br />
senior executives. This relatively low score could be expla<strong>in</strong>ed <strong>in</strong> that some retailers do<br />
not have specific mechanisms for reward<strong>in</strong>g <strong>in</strong>novation, most appear to ma<strong>in</strong>ta<strong>in</strong> broader<br />
staff development or appraisal systems which reward job performance but may not<br />
necessarily encourage <strong>in</strong>novation orientated behaviour. Never<strong>the</strong>less, <strong>the</strong>re are some<br />
examples of <strong>in</strong>novation specific schemes among some retailers.<br />
“We have clear performance appraisals and people have growth targets which hopefully encourages<br />
<strong>in</strong>novation, we don’t give a specific reward for <strong>in</strong>novation, so <strong>the</strong>re's noth<strong>in</strong>g direct but <strong>the</strong>re is someth<strong>in</strong>g<br />
<strong>in</strong>direct”<br />
(Head of Format Development).<br />
“No, I don’t th<strong>in</strong>k we do specific mechanisms for reward<strong>in</strong>g <strong>in</strong>novative behaviour, perhaps with <strong>the</strong><br />
exception of a suggestion scheme which is primarily targeted at staff <strong>in</strong>-store, and <strong>the</strong>y do receive a small<br />
share of any sav<strong>in</strong>g or benefit that comes from <strong>the</strong> suggestion up to a capped amount”<br />
(IT Director).<br />
5.13 Availability of resources (human and f<strong>in</strong>ancial) as a driver featured <strong>in</strong> only <strong>in</strong> 9% of<br />
<strong>the</strong> responses but never<strong>the</strong>less it po<strong>in</strong>ted towards <strong>the</strong> fact that any lack of such resources<br />
can be a significant barrier to <strong>in</strong>novation. Resource availability determ<strong>in</strong>es <strong>the</strong> scope, scale<br />
and tim<strong>in</strong>g of <strong>the</strong> <strong>in</strong>novation <strong>in</strong>itiatives undertaken dur<strong>in</strong>g <strong>the</strong> plann<strong>in</strong>g cycle. Accord<strong>in</strong>g<br />
to some retailers, ‘good’ resource allocation means funnell<strong>in</strong>g <strong>the</strong> right resources at <strong>the</strong><br />
right time, o<strong>the</strong>rs suggest a ‘fixed capacity approach’ to <strong>in</strong>novation, recognis<strong>in</strong>g <strong>the</strong> limits<br />
of how much <strong>in</strong>novation a bus<strong>in</strong>ess can cope with at any one po<strong>in</strong>t: once one <strong>in</strong>itiative is<br />
through <strong>the</strong> <strong>in</strong>novation funnel <strong>the</strong>n ano<strong>the</strong>r can replace it.<br />
“Sometimes people have too much on, too many priorities <strong>in</strong> <strong>the</strong> bus<strong>in</strong>ess. We don't have <strong>the</strong> spare<br />
capacity or time to <strong>in</strong>novate. <strong>Innovation</strong> needs a separate delivery framework and r<strong>in</strong>g fenced resources.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
New ideas can easily get suppressed and elim<strong>in</strong>ated simply <strong>in</strong> <strong>the</strong> quest for earn<strong>in</strong>gs, growth and<br />
performance” (CEO).<br />
“There are some markets that you may want to go <strong>in</strong>to, because of <strong>the</strong> opportunities <strong>the</strong>y provide, but this<br />
may <strong>in</strong>volve a period of susta<strong>in</strong>ed <strong>in</strong>vestment, which could mean that you have to go down before you go<br />
up. It is a balanc<strong>in</strong>g equation of how much you can loose before you ga<strong>in</strong>. This could be a challenge to<br />
<strong>in</strong>novation. You have to make a commercial decision which ideas you are go<strong>in</strong>g to exploit and which not.<br />
Some ideas have to get parked for a while” (HR Director).<br />
Vignette 5.1: IKEA, Coventry<br />
Context: The regulatory environment as a driver for <strong>in</strong>novation<br />
Example: IKEA’s need to develop its bus<strong>in</strong>ess <strong>in</strong> <strong>the</strong> <strong>UK</strong> co<strong>in</strong>cided with <strong>the</strong> opportunity to experiment with its first multi-level<br />
(more than 2 storey) store <strong>in</strong> <strong>the</strong> context of <strong>the</strong> Town Centres First policy. The 23,850 m2 gross development (on four levels,<br />
with three levels of car park<strong>in</strong>g), proposed for <strong>the</strong> city centre of Coventry, follows a five-year site search <strong>in</strong> and around <strong>the</strong> city.<br />
The company’s trad<strong>in</strong>g concept - its retail format - is well-established and has hi<strong>the</strong>rto varied little <strong>in</strong> <strong>the</strong> 34 countries <strong>in</strong> which <strong>the</strong><br />
firm trades. The concept is based on self service (with <strong>the</strong> requirement for a self-serve warehouse), a Market Hall for home<br />
furnish<strong>in</strong>g accessories, and a Showroom.<br />
IKEA has made several significant compromises <strong>in</strong> <strong>the</strong> development of <strong>the</strong> Coventry concept. In <strong>the</strong> Coventry design, customers<br />
will park on one of <strong>the</strong> three lowest levels, or will arrive by bus or on foot, and will start <strong>the</strong>ir shopp<strong>in</strong>g <strong>in</strong> <strong>the</strong> showroom on <strong>the</strong><br />
topmost, sixth level. The market hall is on <strong>the</strong> floor below, and <strong>the</strong> self serve warehouse split between levels four and three.<br />
Home delivery and bistro facilities are on <strong>the</strong> ground floor. Up to 15 HGVs a day will provide a regular supply of goods <strong>in</strong>ward.<br />
Car park<strong>in</strong>g provision is well below <strong>the</strong> current Government maximum. Fur<strong>the</strong>r adaptation had been resisted, however.<br />
Disaggregation of <strong>the</strong> IKEA concept <strong>in</strong>to separate units had been acknowledged by <strong>the</strong> Secretary of State to be <strong>in</strong>appropriate.<br />
IKEA stresses that do<strong>in</strong>g this would have led to higher prices.<br />
Vignette 5.2: Drivers of <strong>in</strong>novation<br />
Context: The regulatory environment<br />
Examples: <strong>Retail</strong>ers’ strategies and <strong>the</strong> attractiveness of particular technologies are <strong>in</strong>fluenced and directed by <strong>the</strong> regulatory<br />
environment with<strong>in</strong> which retailers operate. For <strong>in</strong>stance:<br />
− An unanticipated consequence of a more restrictive plann<strong>in</strong>g policy towards out- and edge-of-town retail development,<br />
comb<strong>in</strong>ed with adoption of congestion charg<strong>in</strong>g or road pric<strong>in</strong>g may be to re<strong>in</strong>force <strong>the</strong> attractiveness of e-commerce<br />
technologies amongst consumers and retailers. Already, e-commerce market shares <strong>in</strong> <strong>the</strong> <strong>UK</strong> are runn<strong>in</strong>g broadly twice as<br />
high as <strong>in</strong> <strong>the</strong> US. <strong>UK</strong> total onl<strong>in</strong>e sales for 2006 reached £30.2bn, exceed<strong>in</strong>g <strong>the</strong> forecasted £30bn.<br />
− Ano<strong>the</strong>r significant emerg<strong>in</strong>g driver is that around future environmental regulation. Firms with extensive property portfolios,<br />
such as retailers, are substantial energy users. Fur<strong>the</strong>r, <strong>in</strong>creased responsibilities for recycl<strong>in</strong>g will add complexity to <strong>the</strong><br />
logistics function. Technologies – such as design simulation and modell<strong>in</strong>g applications – are likely to be important <strong>in</strong><br />
produc<strong>in</strong>g more energy efficient stores. Similarly, improved materials handl<strong>in</strong>g and vehicle utilisation systems will materially<br />
assist retailers seek<strong>in</strong>g to meet <strong>the</strong>ir recycl<strong>in</strong>g responsibilities cost effectively. For <strong>in</strong>stance Boots are aim<strong>in</strong>g to reduce reliance<br />
on landfill by reus<strong>in</strong>g and recycl<strong>in</strong>g over 17 different types of material which o<strong>the</strong>rwise would be disposed of to landfill.<br />
Many grocery retailers use backhaul<strong>in</strong>g of waste to <strong>in</strong>crease fleet utilisation through m<strong>in</strong>imis<strong>in</strong>g empty runn<strong>in</strong>g or trailers back<br />
from stores.<br />
(Reynolds 2005; www.imrg.org; www.bitc.org.uk, 18.10.2007)<br />
Page 40
Vignette 5.3: Currys customer recycl<strong>in</strong>g proposition<br />
Context: Us<strong>in</strong>g regulation to improve customer service<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Example: In July 2007 <strong>the</strong> <strong>UK</strong> Government <strong>in</strong>troduced <strong>the</strong> Waste Electrical and Electronic Equipment (WEEE) Directive.<br />
Many retailers elected to jo<strong>in</strong> <strong>the</strong> Government’s own take-back scheme, where consumers take goods to designated recycl<strong>in</strong>g<br />
facilities. O<strong>the</strong>rs retailers charged for collection.<br />
Currys, whose parent company DSGi had <strong>the</strong> experience of implement<strong>in</strong>g <strong>the</strong> Directive <strong>in</strong> 12 countries, <strong>in</strong>stead offered a<br />
different customer alternative to <strong>the</strong> Directive: <strong>the</strong> <strong>UK</strong>’s first and only free <strong>in</strong>-store and home collection recycl<strong>in</strong>g service.<br />
Customers are able to return <strong>the</strong>ir old products to any store, even if <strong>the</strong> orig<strong>in</strong>al item was not bought at Currys. Home delivery<br />
customers can have appliances collected at <strong>the</strong> same time.<br />
In addition to <strong>in</strong>vest<strong>in</strong>g <strong>in</strong> <strong>the</strong> scheme <strong>in</strong>frastructure, Currys has <strong>in</strong>vested <strong>in</strong> promot<strong>in</strong>g free <strong>in</strong>-store and home collection of<br />
recyclable goods through its latest TV advertis<strong>in</strong>g campaign. This has <strong>the</strong> dual benefit of rais<strong>in</strong>g awareness <strong>in</strong> recycl<strong>in</strong>g and shows<br />
Currys as will<strong>in</strong>g to go <strong>the</strong> extra mile for customers.<br />
The scheme is provid<strong>in</strong>g Currys with <strong>the</strong> opportunity to deliver (and communicate) better customer service, and customer<br />
feedback has been overwhelm<strong>in</strong>g. Customers are delighted to have <strong>the</strong> opportunity to recycle without <strong>the</strong> <strong>in</strong>convenience of<br />
transport<strong>in</strong>g old equipment <strong>the</strong>mselves.<br />
S<strong>in</strong>ce <strong>the</strong> scheme was launched <strong>in</strong> store on 1 July, <strong>the</strong> number of products collected has been almost double Currys’ expectations.<br />
Approximately 85% of all appliances are recycled and many products are reused some for charity. Currys is delighted that its<br />
<strong>in</strong>novative solution to a piece of legislation has been so successful.<br />
In addition, <strong>the</strong> transportation of <strong>the</strong> equipment has not added any additional miles to <strong>the</strong> supply cha<strong>in</strong> as Currys’ exist<strong>in</strong>g delivery<br />
lorries – that would o<strong>the</strong>rwise return to <strong>the</strong> Newark national delivery centre empty are be<strong>in</strong>g used for collections (DSGi, 2007)<br />
Vignette 5.4: Marks & Spencer and RFID<br />
Context: Applications of new technologies<br />
Example: Follow<strong>in</strong>g a successful trial <strong>in</strong> 42 stores <strong>in</strong> May 2007 Marks & Spencer has completed <strong>in</strong>stallation of RFID<br />
<strong>in</strong>frastructure <strong>in</strong> its 120 largest stores which allows for better supply cha<strong>in</strong> visibility, more accurate and efficient stock tak<strong>in</strong>g and<br />
improved availability of products <strong>in</strong> <strong>the</strong>ir stores. The company is also f<strong>in</strong>alis<strong>in</strong>g tra<strong>in</strong><strong>in</strong>g some of its staff on <strong>the</strong> BT RFID<br />
technology (Friedlos 2007).<br />
Vignette 5.5: Tesco <strong>in</strong> a Box<br />
Context: Applications of new technologies<br />
Example: ‘Tesco <strong>in</strong> a Box’ is Tesco’s solution to <strong>the</strong> need for consistency of execution when enter<strong>in</strong>g a new market. It comprises<br />
a centralised web-based management <strong>in</strong>formation system which measures stores aga<strong>in</strong>st key bus<strong>in</strong>ess performance <strong>in</strong>dicators.<br />
Tesco <strong>in</strong> a Box went live <strong>in</strong> <strong>the</strong> first store <strong>in</strong> Turkey <strong>in</strong> March 2005 and has been rolled out to <strong>the</strong> company's Japanese and<br />
Ch<strong>in</strong>ese bus<strong>in</strong>esses. A later version <strong>in</strong>corporates supply cha<strong>in</strong> and merchandise management software. “Bus<strong>in</strong>ess <strong>in</strong>telligence can<br />
be reproduced <strong>in</strong> o<strong>the</strong>r countries at m<strong>in</strong>imal cost” (Company).<br />
Page 41
Vignette 5.6: Waitrose<br />
Context: Innovat<strong>in</strong>g <strong>in</strong> susta<strong>in</strong>able development, retailer-supplier relations<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Example: Waitrose is look<strong>in</strong>g for <strong>in</strong>novative ways <strong>in</strong> deliver<strong>in</strong>g <strong>the</strong> ‘triple bottom l<strong>in</strong>e’, <strong>in</strong> terms of economic, social and<br />
environmental performance. The supermarket is champion<strong>in</strong>g seasonal British produce from local producers. This is part of its<br />
‘transport optimisation’ <strong>in</strong>itiative to reduce food miles by ensur<strong>in</strong>g more effective utilisation of its lorry fleet. The company is also<br />
allow<strong>in</strong>g local producers to deliver directly to stores. While this has positive effect on local farm<strong>in</strong>g communities and satisfies <strong>the</strong><br />
grow<strong>in</strong>g consumer need for local produce this also needs to be balanced <strong>in</strong> environmental terms. The retailer’s own research<br />
suggests that <strong>in</strong> logistical terms grow<strong>in</strong>g flowers, for <strong>in</strong>stance, <strong>in</strong> Kenya and fly<strong>in</strong>g <strong>the</strong>m <strong>in</strong> to <strong>the</strong> <strong>UK</strong> could be more energy<br />
efficient than grow<strong>in</strong>g <strong>the</strong>se flowers <strong>in</strong> glasshouses <strong>in</strong> <strong>the</strong> Europe and transport<strong>in</strong>g <strong>the</strong>m by road to <strong>the</strong> <strong>UK</strong>.<br />
The supermarket’s relationship with farmers is <strong>in</strong>creas<strong>in</strong>gly built on its own farm<strong>in</strong>g experience. In Leckford north Hampshire,<br />
Waitrose operates 4000 acre farm. The farm has more than 1,000 cattle, 12,000 hens, an apple orchard and mushroom produc<strong>in</strong>g<br />
facilities which are <strong>the</strong> sole supplier of white mushrooms to <strong>the</strong> supermarket. The farm has been <strong>in</strong> ownership of John Lewis<br />
s<strong>in</strong>ce 1946 and although it is far from be<strong>in</strong>g <strong>the</strong> major provider of agricultural produce for <strong>the</strong> Group it never<strong>the</strong>less is a source of<br />
practical experience about understand<strong>in</strong>g <strong>the</strong> challenges of modern farm<strong>in</strong>g. “Such <strong>in</strong>sights are <strong>in</strong>valuable at a time when<br />
supermarket-supplier relationships have come under scrut<strong>in</strong>y from regulators at <strong>the</strong> Competition Commission” (Davey, 2007;<br />
John Lewis, 2007).<br />
Page 42
6. What are <strong>the</strong> barriers to retail <strong>in</strong>novation?<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
6.1 Conventional analyses of barriers to <strong>in</strong>novation with<strong>in</strong> <strong>the</strong> Community <strong>Innovation</strong> Survey<br />
and elsewhere tend break down <strong>the</strong> likely obstacles <strong>in</strong>to four broad sets of factors: costs<br />
and knowledge (l<strong>in</strong>ked to difficulties <strong>in</strong>ternal to <strong>the</strong> firm) and market-related and o<strong>the</strong>r,<br />
largely regulatory, factors (l<strong>in</strong>ked to difficulties external to <strong>the</strong> firm). The CIS responses<br />
are based on a specific question ask<strong>in</strong>g ‘what factors constra<strong>in</strong>ed your <strong>in</strong>novation or<br />
<strong>in</strong>fluenced you not to <strong>in</strong>novate?’ In some senses, <strong>the</strong> barriers represent <strong>the</strong> obverse of <strong>the</strong><br />
drivers discussed <strong>in</strong> <strong>the</strong> previous section, and will not bear duplication, but this section<br />
draws attention to a small number of dist<strong>in</strong>ctive features of barriers to retail <strong>in</strong>novation.<br />
Figure 6.1. <strong>Retail</strong> Trade Barriers to <strong>Innovation</strong><br />
O<strong>the</strong>r<br />
factors<br />
Cost factors Knowledge factors Market factors<br />
Need to meet EU regulations<br />
Need to meet <strong>UK</strong> Government regulations<br />
Uncerta<strong>in</strong> demand for <strong>in</strong>novative goods or services<br />
Market dom<strong>in</strong>ated by established enterprises<br />
Lack of <strong>in</strong>formation on markets<br />
Lack of <strong>in</strong>formation on technology<br />
Lack of qualified personnel<br />
Avaibility of f<strong>in</strong>ance<br />
Cost of f<strong>in</strong>ance<br />
Direct <strong>in</strong>novation costs too high<br />
Excessive perceived economic risks<br />
Source: Community <strong>Innovation</strong> Survey 2004 (CIS4), 2005.<br />
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%<br />
Not experienced Low Medium High<br />
6.2 At <strong>the</strong> aggregate level, (shown <strong>in</strong> Figure 6.1), we might conclude that <strong>the</strong> majority of<br />
retailers do not perceive <strong>the</strong>re to be any barriers to <strong>in</strong>novation with<strong>in</strong> <strong>the</strong>ir firms.<br />
Amongst those that do, <strong>the</strong> biggest barriers are reportedly <strong>in</strong> relation to costs, <strong>in</strong><br />
particular <strong>the</strong> cost of f<strong>in</strong>ance and <strong>the</strong> perceived economic risks of <strong>in</strong>novation. These<br />
results were re<strong>in</strong>forced by comments we received <strong>in</strong> consult<strong>in</strong>g over this research, as<br />
illustrated <strong>in</strong> <strong>the</strong> quotations below:<br />
“There is difficulty <strong>in</strong> encourag<strong>in</strong>g risk and <strong>in</strong>novation <strong>in</strong> challeng<strong>in</strong>g bus<strong>in</strong>ess conditions.”<br />
“F<strong>in</strong>ancial uncerta<strong>in</strong>ty. <strong>Innovation</strong> never occurs when people are worried about job security.”<br />
“People resources and bus<strong>in</strong>ess pressures to achieve f<strong>in</strong>ancial targets stifle <strong>in</strong>novation.”<br />
6.3 The smallest range of barriers is reportedly <strong>in</strong> relation to level of knowledge. The majority<br />
of retailers would seem to know <strong>the</strong>ir markets well and to have little concern that lack of<br />
knowledge about technological possibilities works to prevent <strong>in</strong>novation. The greatest<br />
concerns <strong>in</strong> this area are over <strong>the</strong> availability of skilled personnel:<br />
Page 43
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“On occasion <strong>the</strong>re is a lack of technical skills, but more often <strong>the</strong>re is a lack of leadership skills to<br />
drive/demand <strong>in</strong>novation and tie everyth<strong>in</strong>g toge<strong>the</strong>r” (<strong>Retail</strong>er).<br />
“Research <strong>in</strong>stitutes were also a source of talent so <strong>the</strong>ir decl<strong>in</strong>e has aggravated <strong>the</strong> skills shortage”<br />
(<strong>Retail</strong>er).<br />
6.4 In relation to regulation, EU regulations are perceived to be less of a barrier than are<br />
domestic regulations. However, <strong>the</strong>re is relatively little difference between <strong>the</strong> retail sector<br />
and <strong>the</strong> responses to <strong>the</strong> survey from all sectors <strong>in</strong> relation to barriers: <strong>the</strong> majority of all<br />
firms report no experience of barriers prevent<strong>in</strong>g <strong>in</strong>novation, although concerns about<br />
erosion of components of <strong>the</strong> science and research base, supported by Government, do<br />
prompt comment:<br />
“There has been an erosion of government fund<strong>in</strong>g <strong>in</strong>to research <strong>in</strong>stitutes. E.g. Silsoe Institute no longer<br />
exists. They developed <strong>the</strong> concept of Precision Agriculture <strong>in</strong> response to concerns about labour shortages<br />
and pesticides” (<strong>Retail</strong>er).<br />
As do concerns over <strong>the</strong> availability of allowances for mitigat<strong>in</strong>g some of <strong>the</strong> risks of<br />
<strong>in</strong>novation:<br />
“Risk allowance for bus<strong>in</strong>ess, allow<strong>in</strong>g shared risk <strong>in</strong> terms of f<strong>in</strong>ancial <strong>in</strong>vestments” (<strong>Retail</strong>er).<br />
There are some specific concerns expressed <strong>in</strong> relation to <strong>the</strong> regulation of susta<strong>in</strong>able<br />
technology:<br />
“Plann<strong>in</strong>g regulations: w<strong>in</strong>d turb<strong>in</strong>es, solar panels, mezzan<strong>in</strong>es and expansion of stores.”<br />
6.5 But perhaps <strong>the</strong> biggest concern (which relates to susta<strong>in</strong>ability but to o<strong>the</strong>r areas of<br />
Government’s attitude and policies towards <strong>in</strong>novation) is:<br />
“Lack of <strong>in</strong>ter-departmental co-operation with<strong>in</strong> government and lack of common agendas.”<br />
6.6 One of <strong>the</strong> most significant market factors <strong>in</strong>hibit<strong>in</strong>g or shap<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g is<br />
derived, as we have suggested, from <strong>the</strong> ease with which many <strong>in</strong>novations can be copied.<br />
Ano<strong>the</strong>r way of illustrat<strong>in</strong>g this is to exam<strong>in</strong>e <strong>the</strong> extent of protection of <strong>in</strong>novation<br />
employed by <strong>in</strong>novation active firms. Figure 6.2 shows this for <strong>the</strong> retail sector.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Figure 6.2. Nature of protection of <strong>in</strong>novation employed: retail trade<br />
Formal Strategic<br />
Lead-time advantage on<br />
competitors<br />
Complexity of design<br />
Secrecy<br />
Copyright<br />
Confidentiality agreements<br />
Patents<br />
Trademarks<br />
Registration of design<br />
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%<br />
Not used Low Medium High<br />
Source: Community <strong>Innovation</strong> Survey 2004 (CIS4), 2005.<br />
6.7 Relatively low levels of <strong>in</strong>novation protection are employed by retail firms and <strong>the</strong>re is a<br />
tendency to use <strong>in</strong>formal (such as secrecy) over formal methods (such as patents). In part,<br />
this relates to <strong>the</strong> nature and <strong>in</strong>cidence of retail <strong>in</strong>novation – often not patentable or<br />
capable of be<strong>in</strong>g trademarked, and where designs may be much less complex than <strong>in</strong>, say,<br />
manufactur<strong>in</strong>g. <strong>Retail</strong>ers appear to rely more on secrecy and lead times <strong>in</strong> protect<strong>in</strong>g <strong>the</strong><br />
new th<strong>in</strong>gs <strong>the</strong>y do from competitors. But <strong>the</strong> majority <strong>in</strong> every case who do not employ<br />
ei<strong>the</strong>r formal or <strong>in</strong>formal protection mechanisms re<strong>in</strong>forces <strong>the</strong> visibility and – <strong>in</strong> many<br />
cases – transparency of retail <strong>in</strong>novations, particularly customer-fac<strong>in</strong>g ones.<br />
6.8 When compared to <strong>the</strong> protection employed by, say, eng<strong>in</strong>eer<strong>in</strong>g firms, (Figure 6.3) <strong>the</strong><br />
irrelevance of all k<strong>in</strong>ds of protection for retail<strong>in</strong>g becomes clear. The nature of often<br />
complex proprietary eng<strong>in</strong>eer<strong>in</strong>g projects leads to very low levels of appropriability and<br />
<strong>the</strong> likely greater success of <strong>in</strong>formal mechanisms, whilst <strong>the</strong> tangible nature of much<br />
<strong>in</strong>novation <strong>in</strong> eng<strong>in</strong>eer<strong>in</strong>g lends itself also to formal protection mechanisms. Eng<strong>in</strong>eer<strong>in</strong>g<br />
projects are habitually front-loaded <strong>in</strong> terms of cost and often require more complex<br />
f<strong>in</strong>anc<strong>in</strong>g; retail<strong>in</strong>g <strong>in</strong>novation is more <strong>in</strong>cremental, cheaper, and can be turned off<br />
relatively quickly if it fails or becomes more expensive than orig<strong>in</strong>ally budgeted. <strong>Retail</strong><br />
projects are more often back-loaded from <strong>the</strong> po<strong>in</strong>t of view of f<strong>in</strong>ance, as we have<br />
suggested. <strong>Retail</strong>ers appear to be more confident of <strong>the</strong>ir markets and relevant technology<br />
better, but <strong>the</strong> relative difference <strong>in</strong> relation to technology not as high. F<strong>in</strong>ally, <strong>the</strong> two<br />
sectors are closer on regulatory barriers, but eng<strong>in</strong>eer<strong>in</strong>g appears more affected by EU<br />
regulation than <strong>UK</strong>. We might speculate that this reflects actual or perceived lack of<br />
services legislation at EU level.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Figure 6.3. Comparisons of perceived barriers to <strong>in</strong>novation: retail trade vs.<br />
eng<strong>in</strong>eer<strong>in</strong>g<br />
O<strong>the</strong>r<br />
factors<br />
Cost factors Knowledge factors Market factors<br />
Need to meet EU regulations<br />
Need to meet <strong>UK</strong> Government regulations<br />
Uncerta<strong>in</strong> demand for <strong>in</strong>novative goods or services<br />
Market dom<strong>in</strong>ated by established enterprises<br />
Lack of <strong>in</strong>formation on markets<br />
Lack of <strong>in</strong>formation on technology<br />
Lack of qualified personnel<br />
Avaibility of f<strong>in</strong>ance<br />
Cost of f<strong>in</strong>ance<br />
Direct <strong>in</strong>novation costs too high<br />
Excessive perceived economic risks<br />
0 50 100 150 200 250 300 350 400<br />
<strong>Retail</strong> trade Eng<strong>in</strong>eer<strong>in</strong>g<br />
Extent of barrier (weighted score, max= 1,000)<br />
Source: Community <strong>Innovation</strong> Survey 2004 (CIS4), 2005.<br />
Page 46
7. What are <strong>the</strong> measures of retail <strong>in</strong>novation?<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
7.1 <strong>Innovation</strong> needs to be measured <strong>in</strong> order to be successfully managed. The focus of this<br />
section is to explore <strong>the</strong> ways <strong>in</strong> which <strong>the</strong> senior managers <strong>in</strong>terviewed as part of this<br />
research seek to measure <strong>in</strong>novation. Wider mean<strong>in</strong>gs of <strong>in</strong>novation as ‘new ideas to<br />
market’ are typically cascaded across <strong>the</strong> bus<strong>in</strong>ess and translated <strong>in</strong>to bus<strong>in</strong>ess specific<br />
operational term<strong>in</strong>ology and targets such as, new SKUs, new product categories, new<br />
retail formats, number of new products <strong>in</strong> <strong>the</strong> range or share of customers, etc. In this<br />
case retailers strive to put measurement systems <strong>in</strong>to place <strong>in</strong> order to be able to monitor<br />
and review levels of bus<strong>in</strong>ess performance and <strong>the</strong> extent to which <strong>the</strong>ir <strong>in</strong>itial strategies<br />
are be<strong>in</strong>g realised. Measurement of <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g can be categorised <strong>in</strong> terms of<br />
its ‘type’ (1) f<strong>in</strong>ancial and (2) non-f<strong>in</strong>ancial and its ‘level of application’: (1) project<br />
specific, (2) functional and (3) corporate level (Hristov, 2007). The Community<br />
<strong>Innovation</strong> Survey does not ask questions about <strong>in</strong>novation measurement.<br />
a. The extent of measurement<br />
7.2 With some notable exceptions, most senior managers po<strong>in</strong>ted out that retail firms tend<br />
not to use <strong>in</strong>novation-specific metrics or KPIs 12 , ra<strong>the</strong>r <strong>the</strong>y measure <strong>the</strong>ir <strong>in</strong>novation<br />
activities by adapt<strong>in</strong>g exist<strong>in</strong>g performance measures. In part, this is because retail<br />
<strong>in</strong>novation is largely <strong>in</strong>cremental, iterative and often dispersed across different divisional<br />
budgets, considerable perceptual differences exist as to what exactly is recorded as<br />
<strong>in</strong>novation as opposed to simply good bus<strong>in</strong>ess practice with<strong>in</strong> different functional areas<br />
such as product design, buy<strong>in</strong>g or retail operations. Measur<strong>in</strong>g retail <strong>in</strong>novation tends to<br />
be focused most on short term tangible performance outputs, based on cost benefit<br />
analysis and captured through traditional measures of performance and much less on <strong>the</strong><br />
longer term commercial impact of <strong>in</strong>novation as a value added activity.<br />
“It's very difficult, I mean it is very, very difficult, to def<strong>in</strong>e and measure <strong>in</strong>novation <strong>in</strong> some parts of <strong>the</strong><br />
bus<strong>in</strong>ess. For <strong>in</strong>stance funnily enough, our design team don’t get f<strong>in</strong>ancially bonused for be<strong>in</strong>g <strong>in</strong>novative,<br />
that’s part and parcel of what <strong>the</strong>y do … our buy<strong>in</strong>g teams on <strong>the</strong> o<strong>the</strong>r hand do get heavily <strong>in</strong>centivised<br />
on bonuses and operations”<br />
(CEO, Fashion <strong>Retail</strong>er).<br />
“People traditionally tend to overestimate <strong>the</strong> short term impact of <strong>in</strong>novation and technology and<br />
underestimate <strong>the</strong>ir long term benefits, and I th<strong>in</strong>k that's probably happen<strong>in</strong>g here” (Strategy Director).<br />
7.3 From <strong>the</strong> 37 senior managers who were asked to th<strong>in</strong>k about how <strong>in</strong>novation was<br />
measured <strong>in</strong> retail<strong>in</strong>g, all gave examples where aspects of <strong>in</strong>novation are measured by<br />
non-specific performance measures, nearly a fifth were of <strong>the</strong> op<strong>in</strong>ion that retailers<br />
generally do not use specific measures related to <strong>in</strong>novation while 16% of practitioners<br />
po<strong>in</strong>ted out that although <strong>the</strong>y use general performance measures <strong>the</strong>y adapt <strong>the</strong>se and<br />
attach to <strong>the</strong>n predeterm<strong>in</strong>ed or completely adapted success criteria designed to give<br />
<strong>in</strong>novations <strong>the</strong> chance to succeed.<br />
“So each product you launch has predeterm<strong>in</strong>ed success criteria, and <strong>the</strong> sales of new l<strong>in</strong>es are monitored<br />
aga<strong>in</strong>st such criteria on a weekly basis. But only a third of what we launch hits its success criteria”<br />
(Director NPID).<br />
12 Key Performance Indicators (KPI) are metrics that management managers have identified key important variables reflect<strong>in</strong>g <strong>the</strong> organisational<br />
or operational performance.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“We have completely different criteria for new products, yes, completely different criteria because it depends<br />
on <strong>the</strong> stage <strong>the</strong> project or <strong>the</strong> range or <strong>the</strong> brand [has reached]. … we do have completely different<br />
criteria for <strong>the</strong> mature brands” (Bus<strong>in</strong>ess Development Director).<br />
7.4 Therefore measur<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g often boils down to measur<strong>in</strong>g bus<strong>in</strong>ess<br />
organisational and operational performance with more traditional although<br />
organisationally adapted measures of performance. Practitioners appear not to be short of<br />
such measures:<br />
“We are very measurement-driven, so on <strong>the</strong> non-food side we’ll know performance by category, by<br />
product, evolution by product, percentage, <strong>in</strong>novation, all of those th<strong>in</strong>gs we have”<br />
(CEO).<br />
7.5 But retail practitioners also realise that <strong>the</strong> soft benefits of <strong>in</strong>novation - <strong>in</strong> terms of brand<br />
value, or total impact on <strong>the</strong> bus<strong>in</strong>ess - are less well measured, due to limitations <strong>in</strong> <strong>the</strong><br />
management account<strong>in</strong>g systems, and <strong>the</strong> lack of <strong>in</strong>tegration between pre-exist<strong>in</strong>g<br />
budget<strong>in</strong>g silos. As a result, <strong>the</strong>y are not sufficiently understood. Fur<strong>the</strong>r, most retail<br />
measures track<strong>in</strong>g <strong>in</strong>novation are designed for products, and are fewer available to<br />
measure process <strong>in</strong>novation – and precious little focus on organisational <strong>in</strong>novations or<br />
longer term drivers of growth.<br />
“I th<strong>in</strong>k that <strong>the</strong> difficulty comes more when you try and set strategic targets for <strong>in</strong>novation where a<br />
measure like, say; <strong>in</strong> five years time X percent of our sales will come from new products”<br />
(Senior Manager, Strategy Department).<br />
“I don’t th<strong>in</strong>k retailers are very good at assess<strong>in</strong>g <strong>the</strong> soft benefits of <strong>in</strong>novation. The language that talks<br />
to <strong>the</strong>m best is money, bottom l<strong>in</strong>e, and how much extra is <strong>in</strong> <strong>the</strong> till, that's how <strong>the</strong>y tend to th<strong>in</strong>k of it”<br />
(<strong>Retail</strong> Consultant).<br />
Figure 7.1. Usage of f<strong>in</strong>ancial and non-f<strong>in</strong>ancial measures of <strong>in</strong>novation<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
84%<br />
Source: Hristov, 2007<br />
65%<br />
Overal f<strong>in</strong>ancial measures Overall non-f<strong>in</strong>ancial F<strong>in</strong>ancial and non-f<strong>in</strong>ancial<br />
measures<br />
59%<br />
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. Types of Measures<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
7.6 Although <strong>the</strong> precise nature of <strong>the</strong> retail measures of <strong>in</strong>novation varies among companies,<br />
depend<strong>in</strong>g on sub-sector or upon managerial choices, <strong>the</strong>re are broadly two ma<strong>in</strong> types:<br />
(1) f<strong>in</strong>ancial and (2) non-f<strong>in</strong>ancial measures (Figure 7.1).<br />
i. F<strong>in</strong>ancial measures<br />
7.7 F<strong>in</strong>ancial measures provide visibility about <strong>the</strong> concrete contribution of <strong>in</strong>novation to <strong>the</strong><br />
top and bottom l<strong>in</strong>es of <strong>the</strong> bus<strong>in</strong>ess. The role of <strong>the</strong>se measures is to ensure cont<strong>in</strong>uous<br />
performance improvement based on <strong>the</strong> evaluation of <strong>the</strong> data about rates of return,<br />
profit marg<strong>in</strong>s, costs-benefit ratios etc. They are seen as essential for deliver<strong>in</strong>g <strong>the</strong><br />
necessary data for sett<strong>in</strong>g <strong>the</strong> strategic objectives (where do we want to go?), for decid<strong>in</strong>g<br />
upon resource allocation (how might we get <strong>the</strong>re?) and for cont<strong>in</strong>uous track<strong>in</strong>g, review<br />
and corrective actions along <strong>the</strong> way (how do we check progress?).<br />
7.8 84% of our respondents essentially use at least one or more f<strong>in</strong>ancial measures, <strong>the</strong> top 3<br />
measures be<strong>in</strong>g sales and market share measures, rate of return measures and measures of<br />
profitability:<br />
“I look at all <strong>the</strong> th<strong>in</strong>gs that are go<strong>in</strong>g to affect change, n<strong>in</strong>ety-n<strong>in</strong>e of <strong>the</strong>m are f<strong>in</strong>ancial-related- <strong>the</strong>y have<br />
a f<strong>in</strong>ancial benefit. There are some that have a f<strong>in</strong>ancial cost, [such as] ‘we were <strong>in</strong>novative <strong>in</strong> <strong>the</strong> way<br />
that we pay our store managers’, that’s go<strong>in</strong>g to <strong>in</strong>crease our costs - but we th<strong>in</strong>k long-term it will reduce<br />
tra<strong>in</strong><strong>in</strong>g, so it’s an economic deal”<br />
(CEO).<br />
“Well fundamentally we measure sales, marg<strong>in</strong>, and return on <strong>in</strong>vested capital”<br />
(Market<strong>in</strong>g Director).<br />
• Sales and market share measures have a 78% share of responses. These <strong>in</strong>clude<br />
measures of sales <strong>in</strong> volume and value, <strong>in</strong>cremental sales from new products and<br />
services, like-for-like sales s<strong>in</strong>ce launch, sales densities (per sq ft/sq m) of new<br />
products, categories, or retail formats. Some retailers have sales targets for new<br />
products or share of new products <strong>in</strong> <strong>the</strong> range, whilst o<strong>the</strong>rs use broader measures<br />
such as overall share of market, share of customers or share of wallet.<br />
“For a first year we actually set a target for a number of fresh products. That will be one of <strong>the</strong><br />
KPIs, where historically it has not been a KPI”<br />
(Market<strong>in</strong>g Director).<br />
“Like for like sales volumes, and sales per sq ft of <strong>the</strong> different brands and how <strong>the</strong>y compare<br />
with <strong>the</strong> overall performance of <strong>the</strong> cha<strong>in</strong> as well two-year payback for new <strong>in</strong>itiatives. Very, very<br />
simple, it’s part of <strong>the</strong> mechanics of <strong>the</strong> bus<strong>in</strong>ess”<br />
(CEO).<br />
• Rate of return measures i.e., ROI, ROIC, ROS 13 . (64%). The sector uses rates of<br />
return of new products, services or o<strong>the</strong>r <strong>in</strong>novation <strong>in</strong>itiatives as f<strong>in</strong>ancial measures<br />
of <strong>in</strong>novation. These <strong>in</strong>clude ROI from 6 to 12 months for new products (depend<strong>in</strong>g<br />
13 ROI – return on <strong>in</strong>vestment, ROIC – return on <strong>in</strong>vestment capital, ROS – return on sales<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
on product), ROI from new retail formats, ROI from new projects, ROS targets after<br />
product launch, discounted cash flow, etc. (See Figure 7.2).<br />
“It’s always return on <strong>in</strong>vestment (ROI) - at <strong>the</strong> end of <strong>the</strong> day we are here to make a profit. But<br />
because of new brand considerations, we are also now start<strong>in</strong>g from <strong>the</strong>ir perspective to look at th<strong>in</strong>gs like<br />
web page impressions…”<br />
(E-commerce Manager).<br />
“We have a realistic F<strong>in</strong>ance Director who is aware of <strong>the</strong> value of market<strong>in</strong>g but is encourag<strong>in</strong>g us to<br />
qualify everyth<strong>in</strong>g on an ROI basis”<br />
(Market<strong>in</strong>g Director, Grocery <strong>Retail</strong>er).<br />
• Profit marg<strong>in</strong>s: 37% of practitioners considered profit marg<strong>in</strong>s as an essential<br />
measure for track<strong>in</strong>g <strong>the</strong> success or failure of new products and as a contribut<strong>in</strong>g<br />
factor (among o<strong>the</strong>rs) <strong>in</strong> cont<strong>in</strong>u<strong>in</strong>g or discont<strong>in</strong>u<strong>in</strong>g a new product or a category.<br />
“I th<strong>in</strong>k we measure its performance us<strong>in</strong>g all <strong>the</strong> standard f<strong>in</strong>ancial matrixes that we use for <strong>the</strong><br />
ma<strong>in</strong>stream bus<strong>in</strong>ess, but you have to have a more of a relaxed <strong>in</strong>vestment targets for it. I th<strong>in</strong>k if<br />
you expect <strong>the</strong> same rate of payback or <strong>the</strong> same rate of return you get from <strong>in</strong>vestment <strong>in</strong> your core<br />
bus<strong>in</strong>ess, you’ll never support a new start-up bus<strong>in</strong>ess”<br />
(CEO).<br />
Figure 7.2. Key f<strong>in</strong>ancial measures of <strong>in</strong>novation<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
84%<br />
0%<br />
Overal f<strong>in</strong>ancial<br />
measures<br />
Source: Hristov, 2007<br />
78%<br />
ii. Non-f<strong>in</strong>ancial measures of <strong>in</strong>novation<br />
7.9 Non-f<strong>in</strong>ancial measures of <strong>in</strong>novation have been relatively recently applied <strong>in</strong> retail<strong>in</strong>g.<br />
They are designed to track <strong>the</strong> share of new activities <strong>in</strong> <strong>the</strong> broader context of <strong>the</strong><br />
bus<strong>in</strong>ess, over a longer period of time, or to measure on a regular basis some of <strong>the</strong> soft<br />
benefits of <strong>in</strong>novation such as customer perceptions about <strong>the</strong> retailer and its brand (i.e.,<br />
levels of satisfaction, awareness, loyalty, perceived quality, image or position<strong>in</strong>g vis-à-vis<br />
competition, etc.). These are of three types: (1) number of (or % of) new products, (2)<br />
consumer <strong>in</strong>sights and (3) time-related measures (see Figure 7.3).<br />
65%<br />
Sales and market share Rate of return measures<br />
(ROI, ROIC, ROS, etc.)<br />
37%<br />
Profit marg<strong>in</strong>s<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
• Number of (or %) new products: 59% of <strong>the</strong> senior managers <strong>in</strong>terviewed gave<br />
example of at least one of <strong>the</strong>se: for <strong>in</strong>stance overall number of new products, SKU,<br />
categories, or <strong>in</strong>troductions of modified products versus entirely new products. Some<br />
referred to <strong>the</strong>se as ‘semi-<strong>in</strong>novation’ versus ‘true <strong>in</strong>novation’, o<strong>the</strong>rs as ‘straight<br />
swaps <strong>in</strong> <strong>the</strong> range’ substitut<strong>in</strong>g old products with new ones, or <strong>the</strong> percentage of<br />
sales com<strong>in</strong>g from new products. One large DIY retailer, for example, tracks <strong>the</strong><br />
percentage of product purchas<strong>in</strong>g versus <strong>the</strong> percentage of project purchas<strong>in</strong>g (i.e., a<br />
kitchen unit versus a whole new kitchen).<br />
Some NPD departments track <strong>the</strong>ir performance as percentage of sales of all own<br />
brand products <strong>in</strong>troduced <strong>in</strong> <strong>the</strong> range for one year period. Some managers see <strong>the</strong>se<br />
measures as a fairly crude <strong>in</strong>dication of <strong>in</strong>novativeness, emphasis<strong>in</strong>g <strong>the</strong> importance<br />
of quality over quantity of launches. O<strong>the</strong>r practitioners believed that <strong>the</strong>se measures,<br />
when tracked longitud<strong>in</strong>ally, served to highlight <strong>the</strong> overall rate of <strong>in</strong>novation.<br />
“Percentage of sales of new products is someth<strong>in</strong>g I measure but we don’t th<strong>in</strong>k that big is always<br />
good any more. It’s a measure but it’s not a measure that is <strong>in</strong> proportion to how [successful we are].<br />
We don’t want to see more necessarily <strong>in</strong> fact we want to see fewer but more successful new products<br />
launched … ra<strong>the</strong>r than more”<br />
(NPID Director).<br />
• Consumer <strong>in</strong>sights: 34% of managers believed that customer <strong>in</strong>sights were essential<br />
non-f<strong>in</strong>ancial <strong>in</strong>dicator for levels of successful <strong>in</strong>novation <strong>in</strong> <strong>the</strong> bus<strong>in</strong>ess. Markets<br />
change, consumer needs change and retailers need to cont<strong>in</strong>uously <strong>in</strong>novate <strong>in</strong><br />
anticipation of <strong>the</strong>se changes.<br />
“Our customers are chang<strong>in</strong>g and so are <strong>the</strong>ir needs, <strong>in</strong>novation keeps us relevant…without <strong>in</strong>novation<br />
our like-for-like growth will not succeed, you get <strong>in</strong>to product life cycle issues, you’ll degrade your marg<strong>in</strong>s<br />
and profitability, and will end up commoditis<strong>in</strong>g your offer”<br />
(Commercial Director).<br />
Here retailer KPIs <strong>in</strong>clude chang<strong>in</strong>g levels of consumer acquisition and retention, lifetime<br />
value, measures of loyalty such as ‘net promoter scores’, satisfaction, usage rates,<br />
conversion rates, frequency of purchase and repeat purchase.<br />
• Time-related measures: Time span (pre- or post-launch) will depend on <strong>the</strong> overall<br />
strategic value of <strong>the</strong> opportunity. These are often referred to as milestones for<br />
track<strong>in</strong>g market penetration levels (for example, <strong>the</strong> first milestone might be 6<br />
months, <strong>the</strong>n 8 months or 6 weeks from launch). O<strong>the</strong>r measures might <strong>in</strong>clude time<br />
to market or speed to market.<br />
7.10 59% of respondents gave examples of comb<strong>in</strong><strong>in</strong>g f<strong>in</strong>ancial with non-f<strong>in</strong>ancial measures<br />
of <strong>in</strong>novation (see Figure 7.1).<br />
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Figure 7.3. Key non-f<strong>in</strong>ancial measures of <strong>in</strong>novation<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
65%<br />
Source: Hristov, 2007<br />
c. Levels of application<br />
59%<br />
Overall non-f<strong>in</strong>ancial Number (or %) of new<br />
products<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
7.11 F<strong>in</strong>ally, retailers measure <strong>the</strong> benefits of <strong>in</strong>novation at different levels. The <strong>in</strong>terview<br />
responses we analysed po<strong>in</strong>ted towards three ma<strong>in</strong> levels of measures: (1) project specific<br />
measures (KPIs), (2) functional level measures (function-specific KPIs), and (3) corporate<br />
level measures (corporate performance measures).<br />
7.12 Project metrics are most bespoke and detailed. They are designed with specific project<br />
outcomes <strong>in</strong> m<strong>in</strong>d and measure <strong>the</strong> extent to which <strong>the</strong> project objectives are met <strong>in</strong><br />
terms of <strong>in</strong>puts, outputs, timescales for product development, budget limits, perceived<br />
risks and <strong>the</strong> amount of management time <strong>in</strong>volved. Senior managers saw <strong>the</strong> projects at<br />
functional level as <strong>the</strong> responsibility of <strong>the</strong> functional budget holders: i.e., heads of<br />
functional areas or departments. The metrics are drawn from with<strong>in</strong> those departments<br />
with <strong>in</strong>put from management account<strong>in</strong>g. For projects at a corporate level <strong>in</strong> some<br />
retailers, <strong>the</strong> practice is that project specific measures will emerge through a consultation<br />
process or will be produced by cross-discipl<strong>in</strong>ary teams from <strong>the</strong> departments <strong>in</strong>volved <strong>in</strong><br />
<strong>the</strong> project. In o<strong>the</strong>r retailers, <strong>the</strong> CFOs and <strong>the</strong>ir teams will be responsible for sett<strong>in</strong>g <strong>the</strong><br />
KPIs alone or toge<strong>the</strong>r with bus<strong>in</strong>ess development departments who are often<br />
responsible for <strong>the</strong> plann<strong>in</strong>g and delivery of <strong>the</strong> project.<br />
7.13 Functional measures are designed to reflect levels of <strong>in</strong>novation <strong>in</strong>put and output with<strong>in</strong><br />
<strong>in</strong>dividual functional areas. For <strong>in</strong>stance NPD departments will have a clear set of<br />
measures <strong>in</strong> terms of profitability, cost benefit, time management and a range of<br />
reflect<strong>in</strong>g technology and operational processes. These metrics are designed to measure<br />
newness “with functional flavour” as well as <strong>the</strong> functional contribution to <strong>in</strong>novation<br />
and present a mix of f<strong>in</strong>ancial and non-f<strong>in</strong>ancial measures of performance. <strong>Innovation</strong> <strong>in</strong><br />
functional areas may be managed as part of <strong>the</strong> core bus<strong>in</strong>ess activities or as separate<br />
projects as described above.<br />
7.14 Corporate measures track <strong>the</strong> <strong>in</strong>cremental contribution of <strong>in</strong>novation to <strong>the</strong> bus<strong>in</strong>ess as a<br />
whole and may comprise <strong>in</strong>put and output measures, as well as f<strong>in</strong>ancial and non-<br />
35%<br />
24%<br />
Customer <strong>in</strong>sights Time Measures<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
f<strong>in</strong>ancial measures. Corporate level measures may assess, for <strong>in</strong>stance, <strong>the</strong> overall <strong>in</strong>put of<br />
f<strong>in</strong>ancial of non-f<strong>in</strong>ancial resources <strong>in</strong> new <strong>in</strong>itiatives such as <strong>the</strong> development of new<br />
ranges of product, new retail formats or <strong>the</strong> impact of mov<strong>in</strong>g <strong>in</strong>to new markets.<br />
7.15 Overall product-related <strong>in</strong>novation measures appear most developed and most commonly<br />
used. In general most retail measures are non-specific, adapted to measure <strong>in</strong>novation or<br />
mostly its ‘hard’ benefits - for <strong>in</strong>stance <strong>in</strong> areas like NPD, where <strong>the</strong> <strong>in</strong>novation process<br />
resembles <strong>the</strong> l<strong>in</strong>earity characteristic to <strong>the</strong> patterns of <strong>in</strong>novation found <strong>in</strong><br />
manufactur<strong>in</strong>g. Much less susceptible to measurement are <strong>the</strong> process, wider service<br />
<strong>in</strong>novations and organisational <strong>in</strong>novations undertaken by retailers - those associated with<br />
change, process design, market<strong>in</strong>g or tra<strong>in</strong><strong>in</strong>g and development. Accord<strong>in</strong>g to some of<br />
our <strong>in</strong>terviewees, <strong>the</strong>se <strong>in</strong>novations are not sufficiently understood, nor are <strong>the</strong>y<br />
sufficiently measured. In terms of timescale most of <strong>the</strong> discussed measures of <strong>in</strong>novation<br />
are relatively short-term, often follow<strong>in</strong>g <strong>the</strong> retailers’ plann<strong>in</strong>g cycles and frequently do<br />
not account for <strong>the</strong> longer term effects or commercial benefits of <strong>in</strong>novation like learn<strong>in</strong>g<br />
or new competence build<strong>in</strong>g (Hristov, 2007).<br />
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8. Recommendations to stimulate and support <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g<br />
8.1 Understand<strong>in</strong>g <strong>the</strong> sources of <strong>in</strong>formation and methods of co-operation conventionally<br />
employed by <strong>the</strong> retail sector <strong>in</strong> relation to <strong>in</strong>novation provides a useful backdrop to <strong>the</strong><br />
development of recommendations of ways <strong>in</strong> which Government might stimulate and<br />
support <strong>in</strong>novation <strong>in</strong> <strong>the</strong> sector. The Community <strong>Innovation</strong> Survey identifies four<br />
broad sources of support and co-operation:<br />
• Internal to <strong>the</strong> firm,<br />
• Market-related (<strong>in</strong>clud<strong>in</strong>g customers, competitors and suppliers),<br />
• Institutional (<strong>in</strong>clud<strong>in</strong>g government and university sources) and<br />
• O<strong>the</strong>r (which <strong>in</strong>clude conferences, <strong>in</strong>dustry associations and scientific journals)<br />
Figure 8.1. Sources of <strong>in</strong>formation & co-operation for <strong>in</strong>novation<br />
Institutional<br />
sources O<strong>the</strong>r sources<br />
Internal Market sources<br />
Technical, <strong>in</strong>dustry or service standards<br />
Professional and <strong>in</strong>dustry associations<br />
Scientific journals<br />
Conferences, trade fairs, exhibitions<br />
Government or public research <strong>in</strong>stitutes<br />
Universities or o<strong>the</strong>r HEIs<br />
Consultants, commercial labs, private R&D <strong>in</strong>stitutes<br />
Competitors<br />
Clients or customers<br />
Suppliers<br />
With<strong>in</strong> your enterprise or enterprise group<br />
Source: Community <strong>Innovation</strong> Survey (CIS4), 2005. Base: all <strong>in</strong>novation active<br />
0% 10% 20% 30% 40% 50%<br />
per cent<br />
60% 70% 80% 90% 100%<br />
Not used Low Medium High<br />
8.2 Predictably, retail <strong>in</strong>novators appeared most reliant on market sources for <strong>the</strong>ir<br />
<strong>in</strong>formation with over 50% of both customers and suppliers identified as relevant to<br />
<strong>in</strong>novation (and 19% of <strong>in</strong>novation active firms suggest<strong>in</strong>g that customers were ‘very<br />
important’ to <strong>the</strong>ir <strong>in</strong>novation activities). These sources were well ahead of consultants or<br />
private R&D resources. Competitors comprised useful <strong>in</strong>formation resources, partly<br />
because much customer-fac<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g is <strong>in</strong>herently visible (even if not<br />
easily capable of emulation). All <strong>the</strong>se sources comprise excellent examples of retailers<br />
exploit<strong>in</strong>g so-called ‘open <strong>in</strong>novation’, as well as provid<strong>in</strong>g evidence to support our<br />
notion of retailers act<strong>in</strong>g as ‘<strong>in</strong>novation hubs’. 14 A smaller proportion of firms (42%)<br />
claimed to make use of <strong>in</strong>ternal sources, whilst of ‘o<strong>the</strong>r sources’, attendance at<br />
conferences and trade fairs appeared to be most highly regarded. F<strong>in</strong>ally, only a small<br />
m<strong>in</strong>ority (between 10-11% of firms) considered any <strong>in</strong>stitutional sources of <strong>in</strong>formation<br />
14 Open <strong>in</strong>novation is def<strong>in</strong>ed as ‘<strong>the</strong> exploitation of ideas generated from outside <strong>the</strong> traditional enterprise unit’.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
or stimulation to have been at all important; and – notably - no s<strong>in</strong>gle respondent felt that<br />
government played a ‘highly important’ role <strong>in</strong> this regard.<br />
8.3 It is important to put <strong>the</strong>se f<strong>in</strong>d<strong>in</strong>gs <strong>in</strong>to context <strong>in</strong> a number of ways. First, <strong>in</strong> l<strong>in</strong>e with<br />
earlier analysis, retailers appeared to rely less on any s<strong>in</strong>gle source of <strong>in</strong>formation than<br />
<strong>UK</strong> firms on average, apart from <strong>the</strong>ir particular <strong>in</strong>terest <strong>in</strong> conferences, trade fairs &<br />
exhibitions. Whilst low levels of importance are also attributed both to universities and to<br />
government by firms <strong>in</strong> general, such <strong>in</strong>stitutional sources appeared less than half as<br />
important for <strong>the</strong> retail sector (Figure 8.2). Secondly, it has been suggested by <strong>the</strong> sector<br />
that more recently, <strong>the</strong> largest retail firms have engaged more extensively with universities<br />
and o<strong>the</strong>r research <strong>in</strong>stitutions, although such evidence is necessarily anecdotal. For<br />
example, <strong>in</strong> 2006 five lead<strong>in</strong>g fashion retailers came toge<strong>the</strong>r <strong>in</strong> a jo<strong>in</strong>t <strong>in</strong>itiative with<br />
Government to fund <strong>the</strong> Fashion <strong>Retail</strong> Academy 15 under <strong>the</strong> auspices of <strong>the</strong> University<br />
of <strong>the</strong> Arts London, and <strong>in</strong> 2007 Tesco announced a £25mn Susta<strong>in</strong>able Consumption<br />
Institute (SCI) at <strong>the</strong> University of Manchester 16 . F<strong>in</strong>ally, <strong>the</strong> position <strong>in</strong> <strong>the</strong> <strong>UK</strong> is not<br />
universally reflected elsewhere <strong>in</strong> Europe. The European level data from <strong>the</strong> Community<br />
<strong>Innovation</strong> Study suggests, for example, that service firms <strong>in</strong> Nordic countries have more<br />
extensive l<strong>in</strong>ks with Government and HEI sources than is <strong>the</strong> case <strong>in</strong> o<strong>the</strong>r markets.<br />
Figure 8.2. Sources of <strong>in</strong>formation & co-operation for <strong>in</strong>novation: retail sector<br />
and all sector comparison (weighted data)<br />
Institutional<br />
sources O<strong>the</strong>r sources<br />
Internal Market sources<br />
Technical, <strong>in</strong>dustry or service standards<br />
Professional and <strong>in</strong>dustry associations<br />
Scientific journals<br />
Conferences, trade fairs, exhibitions<br />
Government or public research <strong>in</strong>stitutes<br />
Universities or o<strong>the</strong>r HEIs<br />
Consultants, commercial labs, private R&D <strong>in</strong>stitutes<br />
Competitors<br />
Clients or customers<br />
Suppliers<br />
With<strong>in</strong> your enterprise or enterprise group<br />
0 50 100 150 200 250 300 350 400 450<br />
Importance of source of <strong>in</strong>novation (weighted, max = 1,000)<br />
Source: Community <strong>Innovation</strong> Survey (CIS4), 2005. Base: all <strong>in</strong>novation active. Note: weighted data. High<br />
importance=*10, medium importance=*5, low importance=*1; not important=0<br />
8.4 Governments around <strong>the</strong> world have recognised <strong>the</strong>ir responsibility for support<strong>in</strong>g and<br />
stimulat<strong>in</strong>g <strong>in</strong>novative activity by firms. Similarly, however, many governments have also<br />
historically shared a preoccupation with <strong>the</strong> manufactur<strong>in</strong>g sector over services, and<br />
support for technological over non-technological forms of <strong>in</strong>novation. In <strong>the</strong><br />
Ne<strong>the</strong>rlands, for example:<br />
15 See http://www.fashionretailacademy.ac.uk<br />
16 See http://www.manchester.ac.uk/aboutus/news/archive/list/item/<strong>in</strong>dex.htm?year=2007&month=september&id=123544<br />
<strong>Retail</strong> trade<br />
All sectors<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
“a bias rema<strong>in</strong>s towards support<strong>in</strong>g technological <strong>in</strong>novation <strong>in</strong> ma<strong>in</strong>ly manufactur<strong>in</strong>g firms.”<br />
(den Hertog, Segers and van Ark, 2003).<br />
This has led to a number of <strong>in</strong>itiatives at both <strong>in</strong>ternational and national levels to remedy<br />
<strong>the</strong> perceived imbalance (CEC, 2007, Forfás Ireland, 2007). The Council of <strong>the</strong> European<br />
Union reached broad-rang<strong>in</strong>g conclusions <strong>in</strong> its deliberations on competitiveness <strong>in</strong><br />
November 2007, highlight<strong>in</strong>g <strong>the</strong> <strong>in</strong>creased role of services and:<br />
“<strong>the</strong> importance of support<strong>in</strong>g all forms of <strong>in</strong>novation <strong>in</strong>clud<strong>in</strong>g non-technological <strong>in</strong>novation” (Council<br />
of <strong>the</strong> European Union, 2007)<br />
The present <strong>UK</strong> Government <strong>in</strong>itiative <strong>in</strong>to <strong>Innovation</strong> <strong>in</strong> Services forms part of this<br />
broader response.<br />
8.5 It has been suggested that exist<strong>in</strong>g Government policies towards <strong>in</strong>novation can be<br />
adapted to <strong>the</strong> needs of service sector firms <strong>in</strong> three particular ways:<br />
• Deepen<strong>in</strong>g of exist<strong>in</strong>g policy<br />
(by mak<strong>in</strong>g <strong>in</strong>novation policies more ‘service-friendly’);<br />
• Broaden<strong>in</strong>g of exist<strong>in</strong>g policy<br />
(by recognis<strong>in</strong>g that <strong>in</strong>novation with<strong>in</strong> <strong>the</strong> service sector are more likely to span firms<br />
as well as whole value cha<strong>in</strong>s); and<br />
• Horizontalisation of exist<strong>in</strong>g policy<br />
(by recognis<strong>in</strong>g that o<strong>the</strong>r policies not explicitly designed to stimulate <strong>in</strong>novation may<br />
– <strong>in</strong>directly – improve <strong>the</strong> climate for service sector <strong>in</strong>novation. Such <strong>in</strong>itiatives<br />
<strong>in</strong>clude those <strong>in</strong> relation to human capital (tra<strong>in</strong><strong>in</strong>g and development) and<br />
deregulation (den Hertog et al, 2003)).<br />
8.6 If <strong>the</strong> <strong>UK</strong> Government is perceived to do less <strong>in</strong> stimulat<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> services, or<br />
exist<strong>in</strong>g policies fail to recognise <strong>the</strong> dist<strong>in</strong>ctive characteristics of <strong>the</strong> sector, <strong>the</strong>n this<br />
might serve to expla<strong>in</strong> why <strong>the</strong> retail sector extensively discounts Government’s <strong>in</strong>fluence<br />
on firms’ th<strong>in</strong>k<strong>in</strong>g <strong>in</strong> this area. In practice, Oxford’s research reveals that <strong>the</strong> Government<br />
is engaged <strong>in</strong> a significant number of activities with vary<strong>in</strong>g degrees of relevance to retail<br />
<strong>in</strong>novation. This section reviews <strong>in</strong> summary what Government already does that is<br />
relevant to stimulat<strong>in</strong>g and support<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g. The review is not designed<br />
as an exhaustive catalogue of Government services, but a prioritised appreciation of<br />
current activity, which can be seen <strong>in</strong> three dist<strong>in</strong>ct areas:<br />
• Provision of support mechanisms for retail <strong>in</strong>novation;<br />
• Promot<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability by <strong>the</strong> retail sector; and<br />
• Foster<strong>in</strong>g skills and organizational <strong>in</strong>novation <strong>in</strong> <strong>the</strong> retail sector.<br />
8.7 Alongside this review, it makes recommendations for those areas <strong>in</strong> which <strong>the</strong><br />
Government might better focus and communicate exist<strong>in</strong>g activity, <strong>in</strong> addition to<br />
potentially provid<strong>in</strong>g new stimuli which might matter particularly to retailers. For each<br />
recommendation, <strong>the</strong> report follows a standard structure:<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
• Desired outcome<br />
• Background<br />
• Evidence<br />
• Analysis (<strong>in</strong>clud<strong>in</strong>g <strong>the</strong> impact of <strong>the</strong> recommendation, <strong>the</strong> potential benefits aris<strong>in</strong>g<br />
from action or risks aris<strong>in</strong>g from <strong>in</strong>action)<br />
• Conclusions/next steps<br />
Early drafts of <strong>the</strong>se recommendations have benefitted from feedback by <strong>the</strong> practitioner<br />
member’s of BERR’s <strong>Retail</strong> <strong>Innovation</strong> Group and <strong>the</strong> authors of this report are grateful<br />
for <strong>the</strong>ir commentary.<br />
a. Provision of support mechanisms for retail <strong>in</strong>novation<br />
8.8 The role of Government <strong>in</strong> provid<strong>in</strong>g support mechanisms for retail <strong>in</strong>novation as <strong>in</strong><br />
o<strong>the</strong>r sectors should be to encourage risk-tak<strong>in</strong>g and <strong>in</strong>novation, particularly <strong>in</strong><br />
challeng<strong>in</strong>g bus<strong>in</strong>ess conditions. Such mechanisms can be of several different k<strong>in</strong>ds:<br />
offer<strong>in</strong>g <strong>in</strong>formation brok<strong>in</strong>g, educational and horizon scann<strong>in</strong>g services; advis<strong>in</strong>g on<br />
protection of <strong>in</strong>tellectual property l<strong>in</strong>ked to <strong>in</strong>novation; f<strong>in</strong>anc<strong>in</strong>g or subsidis<strong>in</strong>g R&D<br />
through grants or tax credits, or even target<strong>in</strong>g public procurement to favour <strong>in</strong>novative<br />
activities. Much of Government’s current activity directly <strong>in</strong> relation to retail <strong>in</strong>novation<br />
falls with<strong>in</strong> <strong>the</strong> first category.<br />
i. Information, education and horizon scann<strong>in</strong>g<br />
8.9 There is widespread <strong>in</strong>formational brok<strong>in</strong>g activity provided by different levels of <strong>UK</strong><br />
Government potentially to support <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g. This comes from BERR,<br />
DEFRA, DIUS, <strong>the</strong> Department for Transport, DCLG, <strong>the</strong> Regional Development<br />
Agencies and numerous o<strong>the</strong>r governmental and non-departmental public bodies<br />
(NDPBs), as well as Local Authorities. Th<strong>in</strong>k<strong>in</strong>g about <strong>the</strong> future is an area where<br />
Government has already played a part <strong>in</strong> br<strong>in</strong>g<strong>in</strong>g toge<strong>the</strong>r <strong>in</strong>terested parties and act<strong>in</strong>g as<br />
a catalyst, or retail ‘knowledge hub’. The retail futures work undertaken by Forum for <strong>the</strong><br />
Future and sponsored by Tesco and Unilever might usefully be made available to a wider<br />
audience. Similarly, <strong>in</strong> relation to specific areas of <strong>in</strong>terest expressed by <strong>the</strong> sector – such<br />
as retail crime – activities by Government have led to tangible outcomes. For example,<br />
discussions with <strong>the</strong> Home Office and <strong>the</strong> Design Council may lead to <strong>the</strong> roll<strong>in</strong>g out of<br />
<strong>the</strong> Home Office ‘Design Aga<strong>in</strong>st Crime’ <strong>in</strong>itiative across service sectors. This may be a<br />
good example of a new way of government work<strong>in</strong>g with retailers - as a catalyst for<br />
<strong>in</strong>novation.<br />
8.10 However, retailers feel that <strong>the</strong> lack of <strong>in</strong>ter-departmental co-operation with<strong>in</strong><br />
government (a ‘s<strong>in</strong>gle voice’) and lack of an <strong>in</strong>tegrated agenda can make communication<br />
of <strong>the</strong>se activities confus<strong>in</strong>g and sometime conflict<strong>in</strong>g. <strong>Retail</strong>ers <strong>the</strong>mselves – apart from<br />
perhaps <strong>the</strong> very largest firms – have limited resources that <strong>the</strong>y can devote to such<br />
conversations. Lead<strong>in</strong>g retailers and <strong>the</strong>ir trad<strong>in</strong>g associations have been active <strong>in</strong><br />
support<strong>in</strong>g many of <strong>the</strong> Government’s recent <strong>in</strong>itiatives 17 . But even for <strong>the</strong> largest firms<br />
such requests must be prioritised on <strong>the</strong> basis of <strong>the</strong>ir commercial, or broader social or<br />
environmental, potential. Of course, from <strong>the</strong> Government’s po<strong>in</strong>t of view, evidence that<br />
17 See for example recent Government consultations <strong>in</strong>volv<strong>in</strong>g <strong>the</strong> retail sector:<br />
http://www.brc.org.uk/ConsResp04.asp?iMode=3.<br />
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<strong>the</strong> sector was respond<strong>in</strong>g with purpose and conviction to any <strong>in</strong>tegrat<strong>in</strong>g efforts would<br />
be an important demonstration of commitment.<br />
8.11 Some of <strong>the</strong> most significant <strong>in</strong>formational <strong>in</strong>itiatives <strong>in</strong> relation to <strong>in</strong>novation are <strong>the</strong><br />
Knowledge Transfer Networks (KTNs)). The 22 <strong>UK</strong> Knowledge Transfer Networks<br />
currently <strong>in</strong> existence are <strong>the</strong> ma<strong>in</strong> plank of <strong>the</strong> Government’s <strong>in</strong>vestment <strong>in</strong> technology<br />
transfer and knowledge exchange between <strong>in</strong>dustry and <strong>the</strong> science base. The first KTNs,<br />
funded by <strong>the</strong> Government, Regional Development Agencies and <strong>the</strong> Research Councils,<br />
were established <strong>in</strong> 2005 and <strong>the</strong> number cont<strong>in</strong>ues to grow. The opportunity of creat<strong>in</strong>g<br />
a <strong>Retail</strong> KTN has been explored on a number of occasions, but has not been taken up by<br />
<strong>the</strong> sector. However, Quotec identified 14 exist<strong>in</strong>g KTNs with “skills and expertise of<br />
relevance to <strong>the</strong> retail sector” with<strong>in</strong> five specific areas:<br />
• <strong>Innovation</strong> <strong>in</strong> retail products<br />
• Technology to improve <strong>the</strong> manufacture, market<strong>in</strong>g & sale of retail products<br />
• Susta<strong>in</strong>ability, efficient use of resources and <strong>the</strong> reduction of waste;<br />
• <strong>Retail</strong> logistics, transport and security and<br />
• Health & safety (Quotec, 2007).<br />
Table 8.1 summarises <strong>the</strong> 14 KTNs and <strong>the</strong>ir particular po<strong>in</strong>ts of relevance.<br />
Table 8.1. KTN relevance to retail sector<br />
KTN<br />
Product<br />
<strong>Innovation</strong><br />
Improved<br />
manufactur<br />
<strong>in</strong>g,<br />
market<strong>in</strong>g<br />
& sales<br />
Susta<strong>in</strong>able<br />
use of<br />
resources<br />
Resource Efficiency �<br />
Logistics,<br />
transport &<br />
security<br />
Health &<br />
safety<br />
Electronic-Enabled Products � � �<br />
Bioscience for Bus<strong>in</strong>ess � � �<br />
Food Process<strong>in</strong>g � � � �<br />
Industrial Ma<strong>the</strong>matics � �<br />
Sensors � � � �<br />
Industrial Pollution<br />
Management<br />
�<br />
Grid Comput<strong>in</strong>g Now! � �<br />
Materials � � � �<br />
Location & Tim<strong>in</strong>g � �<br />
<strong>UK</strong> Displays and Light<strong>in</strong>g � � � � �<br />
Low Carbon & Fuel Cell<br />
Technologies<br />
� �<br />
Modern Built Environment � �<br />
Health Technology �<br />
Source: Knee, 2007; www.ktnetworks.co.uk<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
8.12 It is important to recognise that KTNs are essentially technology-focused networks<br />
grounded <strong>in</strong> <strong>the</strong> <strong>UK</strong> science & R&D base and may be less appropriate vehicles for<br />
stimulat<strong>in</strong>g <strong>the</strong> k<strong>in</strong>d of wider <strong>in</strong>novation sought by retail firms. However, of <strong>the</strong> 14<br />
KTNs to have po<strong>in</strong>ted to <strong>the</strong> relevance of <strong>the</strong>ir activities to retail<strong>in</strong>g, few have been able<br />
to generate direct contacts with<strong>in</strong> <strong>the</strong> sector. For example, companies and academics<br />
with<strong>in</strong> <strong>the</strong> Displays and Light<strong>in</strong>g KTN are develop<strong>in</strong>g <strong>the</strong> new technology platform of<br />
Plastic Electronics which has widespread implications for retail processes. But <strong>the</strong>y have<br />
yet to engage with significant end-users from <strong>the</strong> sector. Some KTNs have reported<br />
difficulty reach<strong>in</strong>g <strong>the</strong> most appropriate <strong>in</strong>dividuals with<strong>in</strong> retail firms; retailer attendance<br />
at relevant events has been relatively poor and only a small number of <strong>in</strong>dividual retailers<br />
have fielded speakers at KTN conferences. However, retailers have worked on a limited<br />
number of specific issues with certa<strong>in</strong> KTNs <strong>in</strong> <strong>the</strong> past, some, but not all, of which have<br />
been technology-focused. For example:<br />
• Project E-Flex (Electronics-Enabled Products KTN) explored <strong>the</strong> efficiency of home<br />
delivery, <strong>in</strong>clud<strong>in</strong>g vehicle, software and refrigeration design, <strong>in</strong> which <strong>the</strong> John Lewis<br />
Partnership participated.<br />
• Project NAPSTER (Industrial Ma<strong>the</strong>matics KTN) exam<strong>in</strong>ed <strong>the</strong> effect of wea<strong>the</strong>r<br />
upon operations, us<strong>in</strong>g data from Marks & Spencer.<br />
• Smart Textiles (Materials KTN) work<strong>in</strong>g with an unspecified ‘range of lead<strong>in</strong>g<br />
retailers’ to support <strong>the</strong>ir <strong>in</strong>troduction of smart textiles and nanotechnology.<br />
• Electronic shelf edge labels (Displays & Light<strong>in</strong>g KTN) <strong>the</strong> former ‘<strong>in</strong> volume trial at<br />
a number of major store locations’.<br />
KTN activities <strong>in</strong> respect of <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability are dealt with separately below.<br />
8.13 Identify<strong>in</strong>g specific application areas (often technological) where <strong>the</strong>re are common<br />
concerns has led to effective action which generates real bus<strong>in</strong>ess benefits to retailers. For<br />
example, an event run by BERR with BRC - by retailers for retailers, followed by <strong>the</strong><br />
sett<strong>in</strong>g up of <strong>the</strong> RFID Bus<strong>in</strong>ess Benefits Action Group is an example of where<br />
government can work effectively with <strong>the</strong> retail sector on a technology issue.<br />
Page 59
Recommendation 1:<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Improve <strong>the</strong> effectiveness of <strong>in</strong>novation-related support activity with<strong>in</strong> Government.<br />
Desired outcomes: Better <strong>in</strong>tegration and clear and simple communication between <strong>the</strong> <strong>in</strong>novation-related<br />
<strong>in</strong>formation, education and horizon scann<strong>in</strong>g services and networks funded by<br />
Government, and <strong>the</strong> retail sector. An improvement <strong>in</strong> Government credibility with<br />
<strong>the</strong> sector. The provision of a ‘s<strong>in</strong>gle voice’ for retail<strong>in</strong>g with<strong>in</strong> Government.<br />
Background: The <strong>in</strong>formational activities undertaken by Government, funded agencies of<br />
Government and academics that are relevant to retailers are poorly <strong>in</strong>tegrated and<br />
often poorly aligned with <strong>the</strong> commercial priorities of <strong>the</strong> sector. For example, <strong>the</strong><br />
considerable numbers of <strong>in</strong>itiatives which arise from KTN activities are not<br />
communicated <strong>in</strong> a coherent or appropriate way to retail firms. Such firms (even <strong>the</strong><br />
largest) also lack <strong>the</strong> resources to become aware of or respond to ad hoc <strong>in</strong>itiatives.<br />
Evidence: Poor attendance at events, lack of access to key retail managers for advice on policy<br />
formulation, limited retailer awareness of and participation <strong>in</strong> projects, particularly<br />
amongst smaller firms – but also with<strong>in</strong> some large bus<strong>in</strong>esses.<br />
Analysis: Three specific actions flow from this desired outcome:<br />
Conclusion/Next<br />
Steps:<br />
1.1 A more systematic approach to co-ord<strong>in</strong>at<strong>in</strong>g <strong>in</strong>formation & expertise <strong>in</strong><br />
Government & NDPBs (e.g. KTNs, Envirowise, Chemistry Leadership<br />
Council) which mimimises bureaucracy and improves access. The provision of<br />
a ‘one stop shop’ host<strong>in</strong>g <strong>in</strong>formation on <strong>in</strong>itiatives, support and services<br />
available to <strong>the</strong> sector, especially to SMEs.<br />
1.2 A better mechanism for identification, prioritis<strong>in</strong>g and channell<strong>in</strong>g of<br />
commercial, <strong>in</strong>novation-related <strong>in</strong>itiatives and research to firms (a ‘s<strong>in</strong>gle<br />
voice’).<br />
1.3 Encouragement of longer term horizon scann<strong>in</strong>g that is more relevant to<br />
retail<strong>in</strong>g: facilitat<strong>in</strong>g <strong>the</strong> showcas<strong>in</strong>g of new ideas with commercial potential<br />
and support<strong>in</strong>g projects ‘on <strong>the</strong> marg<strong>in</strong>’.<br />
The benefits of action <strong>in</strong> this area <strong>in</strong>cludes <strong>the</strong> demonstration of better value for<br />
money from exist<strong>in</strong>g Government activity and <strong>the</strong> possibility of mutual agreement<br />
between <strong>the</strong> sector and Government on priorities <strong>in</strong> <strong>in</strong>novation-related support. The<br />
risks of <strong>in</strong>action are that <strong>the</strong> fragmented nature of knowledge-brok<strong>in</strong>g activity of<br />
relevance to retailers comb<strong>in</strong>ed with retailers’ limited human resources leads to a cycle<br />
of failure <strong>in</strong> support. The sector becomes de-emphasised <strong>in</strong> future work by agencies<br />
such as <strong>the</strong> KTNs and a m<strong>in</strong>dset develops amongst retailers that such Government<br />
activity is not helpful or relevant to <strong>the</strong>ir commercial activities.<br />
Identify an appropriate mechanism or <strong>in</strong>termediary to channel <strong>in</strong>novation-relevant<br />
<strong>in</strong>itiatives simply and efficiently to <strong>the</strong> correct <strong>in</strong>dividuals with<strong>in</strong> <strong>the</strong> sector and to<br />
prioritise those of most commercial relevance to <strong>the</strong> sector. Develop appropriate KPIs<br />
to measure success (e.g. impact on smaller, hard-to-reach SME sector; direct attribution<br />
of <strong>in</strong>novation to Government <strong>in</strong>itiatives). Evidence that <strong>the</strong> sector was respond<strong>in</strong>g<br />
with purpose and conviction to any <strong>in</strong>tegrat<strong>in</strong>g efforts by <strong>the</strong> Government would be an<br />
important demonstration of commitment.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
ii. Advis<strong>in</strong>g on protection of <strong>in</strong>tellectual property l<strong>in</strong>ked to <strong>in</strong>novation<br />
8.14 A second role played by government <strong>in</strong> relation to <strong>in</strong>novation more generally is <strong>in</strong><br />
provid<strong>in</strong>g advice on IP issues l<strong>in</strong>ked to <strong>the</strong> protection of <strong>in</strong>novation by firms. The<br />
Community <strong>Innovation</strong> Survey <strong>in</strong>dicated that retailers tend not to use formal mechanisms<br />
such as trademarks and patents to protect retail <strong>in</strong>novation, <strong>in</strong> preference to<br />
confidentiality agreements or simple secrecy. In part, this was related to <strong>the</strong> nature of<br />
wider <strong>in</strong>novation <strong>in</strong> <strong>the</strong> sector and <strong>the</strong> difficulty of patent<strong>in</strong>g <strong>in</strong>cremental, customerfac<strong>in</strong>g<br />
or service process-related service <strong>in</strong>novations. Broadly-based service <strong>in</strong>novations<br />
are <strong>the</strong>mselves often <strong>in</strong>herently complex, collaborative and <strong>the</strong>refore difficult to copy.<br />
Fur<strong>the</strong>r, software, or particular bus<strong>in</strong>ess methods, are not patentable <strong>in</strong> Europe at present<br />
(and <strong>the</strong> prevail<strong>in</strong>g view is that <strong>the</strong> latter may not be defensibly patentable <strong>in</strong> any case). As<br />
a result, we do not feel that a particular recommendation to Government is yet necessary<br />
<strong>in</strong> this area, s<strong>in</strong>ce retailers appear to be well able to employ <strong>in</strong>formal methods of<br />
protection.<br />
iii. F<strong>in</strong>anc<strong>in</strong>g or subsidis<strong>in</strong>g R&D by <strong>the</strong> retail sector<br />
8.15 As well as support<strong>in</strong>g <strong>in</strong>novation ‘<strong>in</strong> k<strong>in</strong>d’ through <strong>in</strong>formation provision and brok<strong>in</strong>g<br />
and through advice on <strong>the</strong> protection of <strong>in</strong>novation, Governments also have <strong>the</strong> option<br />
to directly subsidise or <strong>in</strong>directly support through such vehicles as tax credits or <strong>the</strong><br />
targeted fund<strong>in</strong>g of <strong>in</strong>stitutional research programmes, <strong>the</strong> <strong>in</strong>novative activities<br />
undertaken by firms. For example, <strong>the</strong> <strong>UK</strong> Government <strong>in</strong>troduced a tax credit scheme<br />
<strong>in</strong> April 2000 designed to reward those companies – both large and SME - engag<strong>in</strong>g <strong>in</strong><br />
R&D (Table 8.2). The <strong>in</strong>ternational evidence to date suggests that such tax <strong>in</strong>centives are<br />
effective <strong>in</strong> stimulat<strong>in</strong>g R&D <strong>in</strong>tensity (Harrison & Simpson, 2003). But such support has<br />
tended to be most attractive to those sectors most closely associated with <strong>the</strong> science<br />
base. Around 5,500 companies claim per year, (and <strong>the</strong>re had been up to 20,000 claims by<br />
2006) 18 but we understand that, <strong>in</strong> a typical year, less than 1% of applications for tax<br />
credits have tended to be directly attributable to retail firms. Why is this so?<br />
Table 8.2. Comparison of <strong>the</strong> two <strong>UK</strong> R&D tax credit schemes<br />
SME scheme Large company scheme<br />
150% rate of enhanced deduction 125% rate of enhanced deduction<br />
Payable credit of up to £24 for every £100 of<br />
qualify<strong>in</strong>g expenditure on R&D<br />
No payable credit<br />
Company can claim for expenditure on R&D it Company can only claim for expenditure on<br />
sub-contracts to o<strong>the</strong>rs<br />
R&D it carries out itself, unless it sub-contracts<br />
R&D to certa<strong>in</strong> qualify<strong>in</strong>g bodies, <strong>in</strong>dividuals or<br />
partnerships of <strong>in</strong>dividuals<br />
Company cannot claim for contributions to Company can claim for contributions to<br />
<strong>in</strong>dependent research<br />
<strong>in</strong>dependent research<br />
Claim can be reduced if <strong>the</strong> R&D project is<br />
subsidised or a grant is received <strong>in</strong> respect of it<br />
No reduction for grant or subsidy<br />
Company must own <strong>the</strong> <strong>in</strong>tellectual property Company need not own <strong>the</strong> <strong>in</strong>tellectual<br />
aris<strong>in</strong>g out of <strong>the</strong> R&D<br />
property aris<strong>in</strong>g out of <strong>the</strong> R&D<br />
Source: HMRC, 2007.<br />
18 http://www.hmrc.gov.uk/randd/, HM Treasury/BERR, (2007), Productivity <strong>in</strong> <strong>the</strong> <strong>UK</strong>: 7. Secur<strong>in</strong>g long-term prosperity, November, para. 2.18.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
8.16 In part, it arises from <strong>the</strong> scheme’s use of a technology-focused def<strong>in</strong>ition of R&D<br />
employed which is l<strong>in</strong>ked to <strong>the</strong> OECD’s Frascati manual. This <strong>in</strong> turn is l<strong>in</strong>ked to <strong>the</strong><br />
need to conform to related account<strong>in</strong>g def<strong>in</strong>itions of R&D expenditure 19 . As a result, it is<br />
unlikely that <strong>the</strong> def<strong>in</strong>ition will be diluted, but one consequence is that it has been more<br />
difficult to determ<strong>in</strong>e whe<strong>the</strong>r certa<strong>in</strong> types of <strong>in</strong>novation (for example hidden, nontechnological,<br />
process-based or even some <strong>in</strong>novation <strong>in</strong>volv<strong>in</strong>g software applications)<br />
with less tangible <strong>in</strong>puts and measureable outputs qualify for relief.<br />
8.17 R&D tax <strong>in</strong>centives are used widely <strong>in</strong>ternationally to encourage <strong>in</strong>novation, with<br />
schemes be<strong>in</strong>g ei<strong>the</strong>r volume-based or <strong>in</strong>cremental 20 . The US retail sector is often cited as<br />
be<strong>in</strong>g more <strong>in</strong>novative and productive than that <strong>in</strong> <strong>the</strong> <strong>UK</strong>. In <strong>the</strong> US, federal and state<br />
tax credits schemes are certa<strong>in</strong>ly much more readily utilised by <strong>the</strong> retail sector, although<br />
<strong>the</strong> same bias to certa<strong>in</strong> sectors exists with<strong>in</strong> both jurisdictions. Never<strong>the</strong>less, from 1998-<br />
2001, $186mn was directly claimed <strong>in</strong> R&E 21 tax credits by US retailers, represent<strong>in</strong>g 3%<br />
of claim volume and 7% of returns (National Science Foundation, 2005). Indeed, such<br />
has been <strong>the</strong> growth of <strong>in</strong>terest <strong>in</strong> federal R&E credits, mediated by third party tax<br />
advisers, that <strong>the</strong> IRS has designated research and experimentation credit claims as a ‘tier<br />
one’ compliance issue. Us<strong>in</strong>g a somewhat different def<strong>in</strong>ition of R&D/R&E <strong>in</strong> <strong>the</strong> US<br />
potentially allows <strong>the</strong> scheme to recognise many of <strong>the</strong> particular k<strong>in</strong>ds of <strong>in</strong>novation<br />
practiced by retail firms, <strong>in</strong>clud<strong>in</strong>g own brand development and service-oriented ICT<br />
systems <strong>in</strong> areas rang<strong>in</strong>g from merchandis<strong>in</strong>g, price optimization, po<strong>in</strong>t of sale, sales<br />
audit, labour schedul<strong>in</strong>g, transportation management, space utilization and warehouse<br />
management, to e-commerce 22 . For example, <strong>the</strong> wages paid to a retailer’s textile<br />
development specialists, designers, process eng<strong>in</strong>eers, and o<strong>the</strong>rs <strong>in</strong>volved <strong>in</strong> new product<br />
and process development may qualify for <strong>the</strong> research credit.<br />
8.18 The scheme as operated <strong>in</strong> <strong>the</strong> <strong>UK</strong> has also been viewed by commentators as <strong>in</strong>consistent<br />
and overcomplicated <strong>in</strong> relation to qualify<strong>in</strong>g costs, subcontract<strong>in</strong>g and <strong>the</strong> applications<br />
and <strong>in</strong>spection process itself 23 . For example, <strong>the</strong> nature of retail <strong>in</strong>novation amongst<br />
larger firms means that complex subcontract<strong>in</strong>g rules fail fully to accommodate <strong>the</strong><br />
notion that retailers can act as ‘<strong>in</strong>novation hubs’ for <strong>the</strong> value cha<strong>in</strong> – and <strong>in</strong>deed for <strong>the</strong><br />
<strong>in</strong>dustry as a whole. They do this by stimulat<strong>in</strong>g suppliers <strong>in</strong>to develop<strong>in</strong>g new and<br />
<strong>in</strong>novative products and services on <strong>the</strong>ir behalf which can be brought to market, creat<strong>in</strong>g<br />
attractive spillover effects. Or by accommodat<strong>in</strong>g open <strong>in</strong>novation, which would also<br />
benefit <strong>the</strong> sector as a whole. Fur<strong>the</strong>r, whilst HMRC make clear that “<strong>the</strong> Government wants<br />
companies undertak<strong>in</strong>g R&D to get <strong>the</strong> reliefs to which <strong>the</strong>y are entitled <strong>in</strong> a simple way” 24 this does<br />
not appear to have been <strong>the</strong> experience anecdotally from retailers to date. For example, <strong>in</strong><br />
terms of adm<strong>in</strong>istration, few even large firms will have <strong>the</strong> k<strong>in</strong>ds of project account<strong>in</strong>g<br />
systems which could make <strong>the</strong>se k<strong>in</strong>ds of applications more straightforward. Whilst<br />
Bus<strong>in</strong>ess L<strong>in</strong>k offers a useful onl<strong>in</strong>e eligibility assessment 25 , smaller firms f<strong>in</strong>d that <strong>the</strong>y<br />
19 R&D for tax purposes <strong>in</strong> <strong>the</strong> <strong>UK</strong> takes place when a project seeks to achieve an ‘advance <strong>in</strong> underly<strong>in</strong>g science or technology’. Those activities<br />
which directly contribute to this advance through <strong>the</strong> ‘resolution of scientific or technological uncerta<strong>in</strong>ty’ are def<strong>in</strong>ed as R&D. Certa<strong>in</strong> qualify<strong>in</strong>g<br />
<strong>in</strong>direct activities also count. (HMRC, 2004).<br />
20 A useful summary of <strong>in</strong>ternational R&D tax <strong>in</strong>centives can be found at:<br />
http://public.deloitte.com/media/0424/Global%20Incentive%20Matrix.pdf<br />
21 R&E: Research and Experimentation<br />
22 See <strong>the</strong> discussion <strong>in</strong> Deloitte, (2007), Research and Development Tax Incentives for <strong>the</strong> <strong>Retail</strong> and Textile Industries, Deloitte Development LLC,<br />
http://www.deloitte.com/dtt/cda/doc/content/US_Tax_r%26dretail_101607.pdf<br />
23 See, for example, Arnott, S., (2006), ‘Industry calls for R&D tax credit shake-up’, Comput<strong>in</strong>g, 15th March,<br />
http://www.comput<strong>in</strong>g.co.uk/comput<strong>in</strong>g/news/2151992/<strong>in</strong>dustry-calls-tax-credits<br />
24 http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD85100.htm<br />
25<br />
http://www.bus<strong>in</strong>essl<strong>in</strong>k.gov.uk/bdotg/action/logicToolStart?r.l1=1073858808&r.l3=1077465866&type=BLTTOOL&itemId=1077460433&r.l2<br />
=1073859200&r.s=sc<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
often require specialist tax advice <strong>in</strong> order to navigate <strong>the</strong> application process and this can<br />
be burdensome and disproportionately expensive:<br />
“…many companies rema<strong>in</strong> unaware of <strong>the</strong> potential relief available or are sceptical of <strong>the</strong>ir ability to<br />
make a valid claim” (Deloitte, 2007).<br />
8.19 Efforts have recently been made to <strong>in</strong>crease awareness of tax credits amongst smaller <strong>UK</strong><br />
firms and improve <strong>the</strong> regional adm<strong>in</strong>istration of applications. New specialist HMRC<br />
units have been established to counter <strong>the</strong> dom<strong>in</strong>ance of applications from London and<br />
<strong>the</strong> South East, as well as to create centres of expertise. Towards <strong>the</strong> end of 2006, tax<br />
<strong>in</strong>spectors undertook tra<strong>in</strong><strong>in</strong>g to improve <strong>the</strong>ir understand<strong>in</strong>g of software-related<br />
applications. However, it is too early to judge <strong>the</strong> effectiveness of <strong>the</strong>se measures <strong>in</strong><br />
stimulat<strong>in</strong>g uptake of <strong>in</strong>centives.<br />
8.20 Whilst <strong>the</strong>re might not be scope for dilution of R&D tax credits, <strong>the</strong>re might be potential<br />
for a degree of extension and simplification. For example, <strong>the</strong> i2010 work<strong>in</strong>g group<br />
recommended that R&D tax credits might be extended to <strong>in</strong>clude capital expenditure<br />
(allowed <strong>in</strong> o<strong>the</strong>r jurisdictions, <strong>in</strong>clud<strong>in</strong>g Canada) which would allow those companies<br />
capitalis<strong>in</strong>g manpower costs to be eligible to apply (Information Age Partnership, 2007).<br />
The work<strong>in</strong>g group also suggested that <strong>the</strong> scheme could be widened to allow <strong>the</strong> cost of<br />
overhead activities <strong>in</strong>directly support<strong>in</strong>g R&D work to be <strong>in</strong>cluded.<br />
Page 63
Recommendation 2:<br />
Increase <strong>the</strong> take-up of R&D tax credits by <strong>the</strong> retail sector.<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Desired outcome: Improved awareness and utilisation of R&D tax credits with<strong>in</strong> <strong>the</strong> <strong>UK</strong> retail sector.<br />
Background: R&D tax credits were orig<strong>in</strong>ally launched <strong>in</strong> April 2000 to reward <strong>in</strong>novation by firms,<br />
but favour a ‘manufactur<strong>in</strong>g m<strong>in</strong>dset’. They are less appropriate for some k<strong>in</strong>ds of<br />
<strong>in</strong>novation, particularly <strong>the</strong> wider <strong>in</strong>novation practised by retail firms, and by suppliers<br />
on <strong>the</strong>ir behalf. This m<strong>in</strong>dset is out of step with tax <strong>in</strong>centives <strong>in</strong> o<strong>the</strong>r jurisdictions.<br />
R&D tax credits are a potentially attractive way for stimulat<strong>in</strong>g certa<strong>in</strong> types of<br />
<strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g. The nature of larger retail firms as ‘<strong>in</strong>novation hubs’ <strong>in</strong>creases<br />
<strong>the</strong> possibility of attractive spillover effects, with retailers act<strong>in</strong>g as a catalyst for<br />
<strong>in</strong>novation with<strong>in</strong> <strong>the</strong> value cha<strong>in</strong> amongst suppliers, and with benefits for <strong>the</strong> sector as<br />
a whole: <strong>the</strong>reby enhanc<strong>in</strong>g <strong>UK</strong> productivity and competitiveness. Industry groups<br />
have lobbied for <strong>the</strong> ref<strong>in</strong><strong>in</strong>g of <strong>the</strong> R&D tax credit system for some time.<br />
Evidence: Exceptionally poor levels of take-up of tax credits by <strong>the</strong> sector; high rejection rates of<br />
applications which do not conform to relatively restrictive rules; lack of appropriate<br />
tra<strong>in</strong><strong>in</strong>g amongst <strong>in</strong>spectors to recognise legitimate claims from more ‘<strong>in</strong>tangible’<br />
applications never<strong>the</strong>less <strong>in</strong>volv<strong>in</strong>g technology. <strong>Retail</strong> firms <strong>in</strong> more enlightened<br />
jurisdictions benefit more from such <strong>in</strong>centive schemes.<br />
Analysis: Increas<strong>in</strong>g awareness and take-up will require:<br />
Conclusion/Next<br />
Steps:<br />
2.1 Identify<strong>in</strong>g and prioritis<strong>in</strong>g <strong>the</strong> k<strong>in</strong>ds of activities undertaken by retailers and<br />
by suppliers on <strong>the</strong>ir behalf which might qualify for support under both large<br />
bus<strong>in</strong>ess and SME schemes.<br />
2.2 Improv<strong>in</strong>g awareness of <strong>the</strong> schemes and of <strong>the</strong>se priorities amongst retailers,<br />
particularly retail SMEs outside London and <strong>the</strong> South-East.<br />
2.3 Improv<strong>in</strong>g <strong>the</strong> speed and transparency of <strong>the</strong> application process to reduce<br />
uncerta<strong>in</strong>ty<br />
2.4 Investigat<strong>in</strong>g <strong>the</strong> extent to which, without dilut<strong>in</strong>g <strong>the</strong> exist<strong>in</strong>g mechanisms,<br />
<strong>the</strong> R&D tax credit scheme might be both deepened and broadened to benefit<br />
service <strong>in</strong>novation<br />
Risks of <strong>in</strong>action: retailers will fail to fully exploit an exist<strong>in</strong>g f<strong>in</strong>ancial mechanism for<br />
<strong>the</strong> stimulation of <strong>in</strong>novation.<br />
BERR/HMRC to work with retailers and key third party suppliers to clarify <strong>the</strong> k<strong>in</strong>ds<br />
of activities undertaken by and for retailers which would qualify for tax credits and to<br />
exam<strong>in</strong>e ways <strong>in</strong> which <strong>the</strong> application and <strong>in</strong>spection process for tax relief on such<br />
activities might be fur<strong>the</strong>r streaml<strong>in</strong>ed.<br />
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. Promot<strong>in</strong>g <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
8.21 One of <strong>the</strong> biggest areas of uncerta<strong>in</strong>ty for retail bus<strong>in</strong>esses at present is <strong>the</strong> area of<br />
susta<strong>in</strong>ability and for this reason we devote a separate section of <strong>the</strong> report to this topic.<br />
Compet<strong>in</strong>g standards, a grow<strong>in</strong>g number of <strong>in</strong>dependent agencies and organizations<br />
seek<strong>in</strong>g to claim legitimacy <strong>in</strong> solutions provision, rapidly evolv<strong>in</strong>g (and sometimes<br />
conflict<strong>in</strong>g) Government policy, quickly chang<strong>in</strong>g consumer sentiment and potentially<br />
high costs create an atmosphere <strong>in</strong> which <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability can be seen as risky,<br />
short-term or simply cosmetic. This perception is not just reflected at <strong>the</strong> national level.<br />
The Corporate Leaders Group on Climate Change (whose retail members <strong>in</strong>clude <strong>the</strong><br />
John Lewis Partnership, Tesco and K<strong>in</strong>gfisher) have called for a b<strong>in</strong>d<strong>in</strong>g agreement on<br />
climate change at <strong>the</strong> Bali summit, <strong>in</strong> order to encourage bus<strong>in</strong>esses to <strong>in</strong>novate and<br />
<strong>in</strong>vest <strong>in</strong> low-carbon technologies 26 . Larger firms are fac<strong>in</strong>g <strong>in</strong>creas<strong>in</strong>gly significant<br />
<strong>in</strong>ternational challenges <strong>in</strong> terms of seek<strong>in</strong>g <strong>in</strong>novative solutions to manag<strong>in</strong>g carbon<br />
emissions and whilst smaller firms with correspond<strong>in</strong>gly smaller carbon footpr<strong>in</strong>ts have<br />
quantitatively smaller objectives, <strong>the</strong>y are often equally challeng<strong>in</strong>g.<br />
8.22 Government itself is very rapidly expand<strong>in</strong>g its <strong>in</strong>volvement with susta<strong>in</strong>ability and<br />
policies and programmes to combat climate change. A number of important Government<br />
<strong>in</strong>itiatives are directly relevant to <strong>the</strong> potential stimulation of susta<strong>in</strong>able <strong>in</strong>novation <strong>in</strong> <strong>the</strong><br />
retail sector:<br />
● In terms of susta<strong>in</strong>able consumption, <strong>the</strong> Government provides £2.1mn via<br />
EPSRC for a Green Logistics project which aims to improve <strong>the</strong> environmental and<br />
social susta<strong>in</strong>ability of <strong>the</strong> <strong>UK</strong> freight transport <strong>in</strong>dustry (of which retail logistics is a<br />
significant component), while ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g or improv<strong>in</strong>g its economic susta<strong>in</strong>ability.<br />
The research <strong>in</strong>volves a consortium of universities lead by <strong>the</strong> University of Leeds<br />
and supported by Cardiff, Heriot-Watt, Westm<strong>in</strong>ster, Southampton and Lancaster<br />
Universities. The project started <strong>in</strong> June 2006 and will lasts for 4 years. For example,<br />
one of <strong>the</strong> areas of <strong>in</strong>terest is <strong>in</strong> determ<strong>in</strong><strong>in</strong>g <strong>the</strong> most susta<strong>in</strong>able channel through<br />
which to sell different products (such as digital games versus loaves of bread).<br />
● In relation to low-carbon technology, Government <strong>in</strong>vestment <strong>in</strong> commercialis<strong>in</strong>g<br />
such technologies <strong>in</strong> <strong>the</strong> <strong>UK</strong> will exceed £370 million from 2008-2010, with an<br />
<strong>in</strong>crease of £170 million for <strong>the</strong> cross-Government Environmental Transformation<br />
Fund (ETF). The retail sector could potentially benefit from <strong>the</strong> scheme’s <strong>in</strong>terest <strong>in</strong><br />
low carbon build<strong>in</strong>gs. An Energy Technologies Institute will raise up to £1.1 billion<br />
to spend on low carbon energy technologies over <strong>the</strong> next ten years.<br />
● In relation to energy efficiency and <strong>the</strong> f<strong>in</strong>anc<strong>in</strong>g of susta<strong>in</strong>able <strong>in</strong>novation, 25% of<br />
<strong>the</strong> <strong>UK</strong>’s carbon output is emitted from non-domestic build<strong>in</strong>gs, with 10-15% of<br />
carbon output <strong>in</strong>curred dur<strong>in</strong>g construction and 10% dur<strong>in</strong>g decommission<strong>in</strong>g. For<br />
retail<strong>in</strong>g, this means work<strong>in</strong>g more closely with <strong>the</strong> development and construction<br />
sectors and highlights <strong>the</strong> potential of mixed use developments. For small and<br />
medium-sized retail bus<strong>in</strong>esses, <strong>in</strong>terest-free energy efficiency loans are available.<br />
SMEs <strong>in</strong> England and Scotland, and all bus<strong>in</strong>esses <strong>in</strong> Wales that have been trad<strong>in</strong>g for<br />
at least 12 months, can borrow from £5,000 to £100,000 <strong>in</strong> <strong>the</strong> form of a loan<br />
repayable over a period of up to 4 years.<br />
26 http://www.balicommunique.com/<strong>in</strong>dex.html. O<strong>the</strong>r retail and retail-related signatories <strong>in</strong>clude: <strong>the</strong> Body Shop, eBay, Gap Inc., Lend Lease,<br />
Marks & Spencer, Nike, Sa<strong>in</strong>sbury’s and <strong>the</strong> Warehouse.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
• In terms of packag<strong>in</strong>g and waste, data from <strong>the</strong> Environment Agency show that <strong>in</strong><br />
<strong>the</strong> <strong>UK</strong> <strong>the</strong> amount of retail waste <strong>in</strong>creased from around 8.5 million tonnes <strong>in</strong><br />
1998/99 to 12.5 million tonnes <strong>in</strong> 2002/03. WRAP suggests that as much as 50% of<br />
household waste, which ultimately ends up <strong>in</strong> landfill, has orig<strong>in</strong>ated from a purchase<br />
from <strong>the</strong> top 5 retail supermarket cha<strong>in</strong>s. Packag<strong>in</strong>g and waste is a very visible aspect<br />
of susta<strong>in</strong>able consumption and one over which consumers express most concern<br />
(70% of global consumers expressed similar levels of concern about packag<strong>in</strong>g<br />
waste) 27 . This is one area <strong>in</strong> which <strong>in</strong>novative solutions by <strong>the</strong> retail sector have<br />
abounded. For example, <strong>in</strong> relation to plastic carrier bag use, Waitrose has trialled<br />
‘carrier bag free’ stores and checkouts; Tesco has pledged to reduce packag<strong>in</strong>g by<br />
25% and provide on-pack <strong>in</strong>formation on recyclability; Asda has committed to<br />
reduc<strong>in</strong>g own label packag<strong>in</strong>g by 25% over <strong>the</strong> next year, but only Netto have moved<br />
beyond trials to charge for bags everywhere. Yet <strong>the</strong> evidence <strong>in</strong> relation to, for<br />
example, <strong>in</strong> relation to plastic bag levies is still unclear (Lamb, 2005), tensions still<br />
exist between commercial and environmental objectives and <strong>the</strong>re is a lack of good<br />
practice <strong>in</strong> non-foods where 1mn tons of textiles are thrown away each year.<br />
• In relation to standards, BSI and <strong>the</strong> Carbon Trust’s draft product carbon<br />
footpr<strong>in</strong>t<strong>in</strong>g standard, just out for technical consultation, is hoped to provide a<br />
reliable and consistent framework for susta<strong>in</strong>able product <strong>in</strong>novation by retail firms,<br />
although product carbon footpr<strong>in</strong>t<strong>in</strong>g is not without its challenges. Recently, Tesco<br />
announced that it would work with <strong>the</strong> Trust to assess <strong>the</strong> carbon footpr<strong>in</strong>t of 30<br />
own-brand products.<br />
• In relation to skills, research by <strong>the</strong> Australian Greenhouse Office identified several<br />
years ago that tra<strong>in</strong><strong>in</strong>g of retail staff on <strong>the</strong> awareness of environmental issues so that<br />
<strong>the</strong>y were “equipped and motivated to handle customer questions” is key, for<br />
example, to <strong>the</strong> development of <strong>in</strong>novative environmental systems that promote cocreated<br />
recycl<strong>in</strong>g solutions. Work by <strong>the</strong> Resource Efficiency KTN has supported this<br />
f<strong>in</strong>d<strong>in</strong>g <strong>in</strong> <strong>the</strong> <strong>UK</strong> and <strong>the</strong> KTN has been work<strong>in</strong>g with SkillSmart <strong>Retail</strong> and <strong>the</strong><br />
Bas<strong>in</strong>gstoke College of Technology to develop a 1-day basic level environmental<br />
awareness skills programme.<br />
• F<strong>in</strong>ally, <strong>the</strong> ‘horizontalisation’ of policy (to create an appropriate <strong>in</strong>frastructure for<br />
susta<strong>in</strong>able <strong>in</strong>novation) is illustrated by <strong>the</strong> Department for Transport’s recent<br />
consultation paper on a new low carbon transport <strong>in</strong>frastructure (Department for<br />
Transport, 2007).<br />
8.23 This is just a small snapshot of <strong>the</strong> widespread consultations, <strong>in</strong>itiatives and projects <strong>in</strong><br />
relation to susta<strong>in</strong>ability, all of which have complex and <strong>in</strong>terlock<strong>in</strong>g implications for <strong>the</strong><br />
retail sector. But what should be <strong>the</strong> priorities for retailers’ attention? Care must be taken<br />
to avoid ‘<strong>in</strong>itiative-itis’, which can risk add<strong>in</strong>g to <strong>the</strong> uncerta<strong>in</strong>ty of retail firms, ra<strong>the</strong>r than<br />
provid<strong>in</strong>g <strong>the</strong> k<strong>in</strong>d of <strong>in</strong>tegrated, authoritative guidance that will provide <strong>the</strong> retail sector<br />
with a framework with<strong>in</strong> which it can pursue <strong>in</strong>novation with confidence. It is important<br />
that <strong>the</strong> retail sector can have confidence <strong>in</strong> <strong>the</strong> long-term direction and <strong>in</strong>tegration of<br />
Government policies on susta<strong>in</strong>ability <strong>in</strong> order to secure <strong>the</strong> sector’s will<strong>in</strong>g participation<br />
<strong>in</strong> both projects and consultations.<br />
27 AC Nielsen, 2007.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
8.24 With a few notable, widely publicised, exceptions, retailers’ <strong>in</strong>novation <strong>in</strong> relation to<br />
susta<strong>in</strong>ability has tended to be somewhat piecemeal. In part, aga<strong>in</strong>, this reflects a lack of<br />
resource – both f<strong>in</strong>ancial and human – with<strong>in</strong> <strong>the</strong> sector; but it also reflects <strong>the</strong> difficulty<br />
<strong>in</strong> position<strong>in</strong>g this k<strong>in</strong>d of <strong>in</strong>novation <strong>in</strong> relation to more explicitly commercial demands<br />
on <strong>the</strong> bus<strong>in</strong>ess, alongside a relatively low awareness and - even when aware - a degree of<br />
uncerta<strong>in</strong>ty <strong>in</strong> relation to <strong>the</strong> relevance of Government policy and <strong>in</strong>itiatives <strong>in</strong> this area.<br />
It will be critical to identify <strong>the</strong> most important priorities not just for large, higher profile,<br />
retail bus<strong>in</strong>esses but also for SMEs.<br />
8.25 Much of this uncerta<strong>in</strong>ty has to do with <strong>the</strong> absence of appropriate standards. For<br />
example, one of <strong>the</strong> chief barriers cited to <strong>in</strong>novation <strong>in</strong> relation to environmental<br />
objectives was <strong>the</strong> persistence of an account<strong>in</strong>g methodology that fails to recognise <strong>the</strong><br />
triple bottom l<strong>in</strong>e: which accounts for <strong>the</strong> costs but fails to dist<strong>in</strong>guish <strong>the</strong> environmental<br />
benefits that lead to carbon footpr<strong>in</strong>t reduction. Standards <strong>in</strong> relation to account<strong>in</strong>g<br />
practices are needed to permit <strong>the</strong> correct attribution of spend<strong>in</strong>g towards environmental<br />
goals. There rema<strong>in</strong> <strong>in</strong>consistencies <strong>in</strong> account<strong>in</strong>g practices <strong>in</strong> relation to environmental<br />
outlays, which are primarily due to lack of sufficient and uniform authoritative account<strong>in</strong>g<br />
standards and ever-chang<strong>in</strong>g public policy and regulatory standards. 28<br />
8.26 The SIGMA Project (a collaborative exercise between BSI Global, BERR and <strong>the</strong> notfor-profit<br />
organization AccountAbility) launched guidel<strong>in</strong>es <strong>in</strong> 2003 to assist firms <strong>in</strong><br />
develop<strong>in</strong>g a standards-based framework for manag<strong>in</strong>g susta<strong>in</strong>ability. Alliance Boots and<br />
Marks & Spencer have been <strong>the</strong> only retail partners <strong>in</strong> this <strong>in</strong>itiative:<br />
“The Boots Group has a long stand<strong>in</strong>g commitment to <strong>in</strong>corporate susta<strong>in</strong>able development pr<strong>in</strong>ciples <strong>in</strong>to<br />
its bus<strong>in</strong>ess operations. Collaboration with <strong>the</strong> Sigma project is a natural progression of this philosophy.<br />
Us<strong>in</strong>g <strong>the</strong> latest th<strong>in</strong>k<strong>in</strong>g, Sigma has provided <strong>the</strong> stimulus to develop new processes, enabl<strong>in</strong>g us to<br />
rema<strong>in</strong> a lead<strong>in</strong>g edge susta<strong>in</strong>able bus<strong>in</strong>ess and re<strong>in</strong>force <strong>the</strong> trust our customers place <strong>in</strong> <strong>the</strong> Boots name.”<br />
But <strong>the</strong>re are still significant challenges, as AccountAbility comments:<br />
“There are now over 300 standards aimed at assist<strong>in</strong>g bus<strong>in</strong>esses <strong>in</strong> meet<strong>in</strong>g <strong>the</strong> goal of susta<strong>in</strong>ability.<br />
Convergence towards a global architecture of standards that are not just compliance or risk management<br />
mechanisms is crucial.” (AccountAbility)<br />
28 Razaee, Z. et. al., (1995), ‘Corporate governance and accountability for environmental concerns’, Managerial Audit<strong>in</strong>g Journal, 10(8), 27-33.<br />
Page 67
Recommendation 3:<br />
Promote <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability.<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Desired outcomes: The reduction of risk for retailers <strong>in</strong>novat<strong>in</strong>g <strong>in</strong> susta<strong>in</strong>ability through <strong>the</strong> application of<br />
a mean<strong>in</strong>gful susta<strong>in</strong>ability framework, hard measures of performance aga<strong>in</strong>st this<br />
framework, and prioritisation of fund<strong>in</strong>g support and advice to <strong>the</strong> retail sector to<br />
stimulate appropriate <strong>in</strong>novation.<br />
Background: A small number of very large retailers, toge<strong>the</strong>r with a number of smaller speciality<br />
bus<strong>in</strong>esses with strong ethical values, have developed relatively clear strategies <strong>in</strong><br />
relation to susta<strong>in</strong>ability which have resulted <strong>in</strong> <strong>in</strong>novative products, processes as well<br />
as wider, more <strong>in</strong>tangible <strong>in</strong>novation. However, <strong>the</strong> rema<strong>in</strong>der of <strong>the</strong> sector struggles to<br />
come to terms with <strong>the</strong> challenge largely because of <strong>the</strong> cacophony of conflict<strong>in</strong>g<br />
advice and guidance from a wide variety of sources.<br />
Evidence: The lack of widespread retail support for <strong>the</strong> work of organisations as varied as <strong>the</strong><br />
Carbon Trust and <strong>the</strong> Resource Efficiency KTN, alongside disjo<strong>in</strong>ted, often populist<br />
(and potentially <strong>in</strong>effective) <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability.<br />
Analysis: Eight specific measures which might act as stimuli for <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability have<br />
been identified by <strong>the</strong> sector:<br />
• Support mechanisms<br />
3.1 VAT reductions to stimulate green product <strong>in</strong>novation<br />
(work at <strong>the</strong> European level required to reduce VAT <strong>in</strong> relation to such<br />
products as energy efficient light bulbs & DIY materials)<br />
3.2 Bus<strong>in</strong>ess rate relief on energy efficient build<strong>in</strong>gs<br />
(There is disagreement on <strong>the</strong> extent to which rates relief might stimulate<br />
<strong>in</strong>novation. This should be fur<strong>the</strong>r <strong>in</strong>vestigated for retailers <strong>in</strong> <strong>the</strong> context of<br />
<strong>the</strong> bus<strong>in</strong>ess requirement to display Energy Performance Certificates)<br />
3.3 Encourage development of shared waste facilities by SMEs<br />
(Most attention has focused on <strong>the</strong> largest retail firms. Innovative solutions are<br />
required to ensure higher recycl<strong>in</strong>g rates amongst <strong>the</strong> <strong>UK</strong>’s 167,000 smaller<br />
retail enterprises)<br />
• Reduction of barriers<br />
3.4 Faster and easier plann<strong>in</strong>g regimes for susta<strong>in</strong>able technologies relevant to<br />
retail<strong>in</strong>g<br />
(for example, <strong>the</strong> need to dist<strong>in</strong>guish between applications for microw<strong>in</strong>d<br />
projects and large scale w<strong>in</strong>d turb<strong>in</strong>e schemes)<br />
3.5 Foster a standards-based framework to manage susta<strong>in</strong>ability and reduce<br />
uncerta<strong>in</strong>ty and risk<br />
(for example, <strong>in</strong> relation to account<strong>in</strong>g standards)<br />
3.6 Work towards identify<strong>in</strong>g susta<strong>in</strong>ability metrics and require retailers to publicly<br />
report on <strong>the</strong>ir achievement of <strong>the</strong>se<br />
(for example with<strong>in</strong> Social Responsibility paragraphs of annual reports)<br />
• Foster skills<br />
3.7 Build environmental awareness amongst retail staff<br />
(through <strong>in</strong>centivis<strong>in</strong>g or provid<strong>in</strong>g appropriate tra<strong>in</strong><strong>in</strong>g and development)<br />
3.8 Low carbon technology skills to support growth <strong>in</strong> retail <strong>in</strong>itiatives<br />
(for example, <strong>in</strong>creas<strong>in</strong>g <strong>the</strong> number of tra<strong>in</strong>ed technicians available to work<br />
on low-carbon technology projects)<br />
Page 68
Conclusion/Next<br />
Steps:<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
The creative and entrepreneurial zeal of <strong>the</strong> retail sector is perfectly capable of adapt<strong>in</strong>g<br />
its talents to <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability, given well-structured, consistent and carefully<br />
targeted advice and support from Government and related agencies and partners,<br />
which <strong>in</strong>clude <strong>the</strong> Resource Efficiency KTN, <strong>the</strong> Carbon Trust, WRAP and <strong>the</strong> Forum<br />
for <strong>the</strong> Future. The risks of <strong>in</strong>action <strong>in</strong>clude <strong>the</strong> perpetuation of isolated, piecemeal and<br />
potentially <strong>in</strong>effective actions by firms which hampers <strong>the</strong> sector’s progress towards<br />
susta<strong>in</strong>ability targets.<br />
Government should work with <strong>the</strong> retail sector <strong>in</strong> identify<strong>in</strong>g and dissem<strong>in</strong>at<strong>in</strong>g<br />
priorities for <strong>in</strong>novation <strong>in</strong> susta<strong>in</strong>ability. This should occur through <strong>the</strong> development<br />
of a mean<strong>in</strong>gful framework for action, <strong>in</strong>clud<strong>in</strong>g <strong>the</strong> provision of evidence for <strong>the</strong><br />
effectiveness of fund<strong>in</strong>g <strong>in</strong>centives, priorities for barrier reduction and any skills<br />
shortages or gaps which can be addressed at <strong>the</strong> national or regional level.<br />
Page 69
c. Foster<strong>in</strong>g skills and organizational <strong>in</strong>novation<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
8.27 The third broad area for our recommendations is <strong>in</strong> relation to <strong>the</strong> foster<strong>in</strong>g of skills and<br />
organizational <strong>in</strong>novation relevant to retail <strong>in</strong>novation. The Government has already<br />
played an extensive role <strong>in</strong> <strong>the</strong> broader skills arena for retail<strong>in</strong>g, through Skillsmart <strong>Retail</strong>,<br />
via <strong>the</strong> Regional Development Agencies and through brokerage services adm<strong>in</strong>istered by<br />
Bus<strong>in</strong>ess L<strong>in</strong>k. However, we are particularly <strong>in</strong>terested <strong>in</strong> <strong>the</strong> extent to which <strong>in</strong>novationrelated<br />
skills are identified and supported. Skills issues <strong>in</strong> relation to retail <strong>in</strong>novation arise<br />
<strong>in</strong> relation to four particular areas: <strong>the</strong> specialist or technical skills, often cross-sectoral<br />
<strong>in</strong> nature, required to deliver specialised products or processes; <strong>the</strong> skills needed to<br />
foster<strong>in</strong>g a culture of <strong>in</strong>novation, <strong>the</strong> skills related to <strong>the</strong> management of <strong>in</strong>novation<br />
or of <strong>in</strong>novation projects, as well as <strong>the</strong> somewhat particular needs <strong>in</strong> relation to<br />
<strong>in</strong>novation skills of <strong>the</strong> SME sector.<br />
8.28 In its sponsor<strong>in</strong>g of Skillsmart <strong>Retail</strong> as one of <strong>the</strong> first <strong>Retail</strong> <strong>Sector</strong> Skills Councils <strong>in</strong><br />
2002, <strong>the</strong> Government demonstrated <strong>the</strong> importance of <strong>the</strong> sector <strong>in</strong> terms of job<br />
creation as a ‘gateway’ employer and <strong>in</strong> develop<strong>in</strong>g a skilled workforce <strong>in</strong> <strong>the</strong> <strong>UK</strong>.<br />
SkillSmart <strong>Retail</strong> has s<strong>in</strong>ce developed National Occupational Standards, specialised<br />
Diplomas and foundation degree programmes. 28 <strong>UK</strong> universities now deliver 42 retailspecific<br />
degree courses (Figure 8.2)<br />
Figure 8.2. <strong>Retail</strong> skills tra<strong>in</strong><strong>in</strong>g and qualifications available <strong>in</strong> England<br />
Source: Skillsmart <strong>Retail</strong>, 2007.<br />
8.29 The <strong>Retail</strong> <strong>Sector</strong> Skills Agreement is <strong>the</strong> largest collaborative research project of its k<strong>in</strong>d,<br />
and is designed to identify and address <strong>the</strong> sector’s skills needs. The Council has a<br />
responsibility to retail firms of all sizes and a concern not just for core retail skills, but<br />
also <strong>in</strong> relation to future skills needs. A National Skills Academy for <strong>Retail</strong> will be<br />
established <strong>in</strong> April 2008 “to give access to world class skills and bus<strong>in</strong>ess support for retailers<br />
whatever <strong>the</strong>ir size and wherever <strong>the</strong>y are located.” Core skills and store management tra<strong>in</strong><strong>in</strong>g and<br />
qualifications necessarily lie at <strong>the</strong> heart of this support, ra<strong>the</strong>r than such areas as<br />
<strong>in</strong>novation, creativity and new product and process development per se. Nor is <strong>the</strong><br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Academy likely to prioritise specialised ICT or technical development <strong>in</strong>-post, nor<br />
especially strategic leadership issues. These are important gaps, s<strong>in</strong>ce out respondents<br />
observed that <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g is often h<strong>in</strong>dered by:<br />
“…on occasion a lack of technical skills, but often a lack of leadership skills to drive/demand <strong>in</strong>novation<br />
and tie everyth<strong>in</strong>g toge<strong>the</strong>r.”<br />
8.30 On <strong>the</strong> ground locally, wider activity is currently tak<strong>in</strong>g place on <strong>the</strong> skills agenda, but<br />
only part of this activity is relevant to <strong>in</strong>novation-specific skills. This <strong>in</strong>cludes <strong>the</strong><br />
<strong>in</strong>tegration of <strong>the</strong> Tra<strong>in</strong> to Ga<strong>in</strong> skills brok<strong>in</strong>g service with Bus<strong>in</strong>ess L<strong>in</strong>k’s Information,<br />
Diagnosis and Brokerage (IDB) service, managed by <strong>the</strong> Regional Development<br />
Agencies; <strong>the</strong> Qualification and Curriculum Authority’s current consultation on <strong>the</strong><br />
accreditation of employers’ own ‘<strong>in</strong>-house’ tra<strong>in</strong><strong>in</strong>g; and specific work around <strong>in</strong>novation<br />
be<strong>in</strong>g undertaken <strong>in</strong> <strong>the</strong> regions by <strong>the</strong> Regional Development Agencies and Higher<br />
Education Institutions (although <strong>the</strong> relationships and clusters established here have<br />
aga<strong>in</strong> been ma<strong>in</strong>ly <strong>in</strong> respect of <strong>the</strong> science & technology base 29 ). However, feedback<br />
from retailers suggests a degree of dissatisfaction with <strong>the</strong> priority accorded to <strong>the</strong> sector<br />
by Bus<strong>in</strong>ess L<strong>in</strong>k amongst its many responsibilities.<br />
8.31 Many of <strong>the</strong> k<strong>in</strong>ds of specialist skills required to support retail <strong>in</strong>novation are as likely to<br />
come from o<strong>the</strong>r sector skills councils as from Skillsmart. These <strong>in</strong>clude:<br />
• e-skills <strong>UK</strong> (ICT and telecoms skills);<br />
• Skills for Logistics (freight logistics and wholesal<strong>in</strong>g <strong>in</strong>dustry);<br />
• Skillset (broadcast, film, video, <strong>in</strong>teractive media and photo imag<strong>in</strong>g);<br />
• SummitSkills (build<strong>in</strong>g services eng<strong>in</strong>eer<strong>in</strong>g); and<br />
• Skillfast <strong>UK</strong> (fashion and textiles)<br />
8.32 Dur<strong>in</strong>g 2007, <strong>the</strong> 25 <strong>Sector</strong> Skills Councils established <strong>the</strong> Alliance of <strong>Sector</strong> Skills<br />
Councils (TASSC), whose purpose is to support <strong>the</strong> SSCs <strong>in</strong> achiev<strong>in</strong>g <strong>the</strong>ir collective<br />
agenda, <strong>in</strong>clud<strong>in</strong>g tak<strong>in</strong>g greater responsibility for <strong>the</strong>ir own collective action and<br />
performance. The Alliance sees <strong>the</strong> l<strong>in</strong>k between <strong>in</strong>novation and <strong>the</strong> expressed shortage<br />
<strong>in</strong> technical skills as shared <strong>in</strong> common by a number of sectors and is encourag<strong>in</strong>g <strong>the</strong><br />
SSCs, where appropriate, to work collaboratively to address <strong>the</strong>se needs.<br />
8.33 The Leitch Review of Skills made some helpful observations <strong>in</strong> this area. It noted <strong>the</strong><br />
<strong>in</strong>creas<strong>in</strong>g specialisation of skills as new ways of produc<strong>in</strong>g goods and services (such as ecommerce)<br />
evolved. It po<strong>in</strong>ted to retail<strong>in</strong>g as be<strong>in</strong>g a sector where specialisation was<br />
accelerat<strong>in</strong>g. For example, e-skills <strong>UK</strong> has drawn attention to <strong>the</strong> lack of e-bus<strong>in</strong>ess skills<br />
(ra<strong>the</strong>r than just professional ICT skills) which are needed to address <strong>the</strong> longer term<br />
development needs of firms. In many ways <strong>the</strong>se are cross-discipl<strong>in</strong>ary skills: compris<strong>in</strong>g<br />
bus<strong>in</strong>ess, creative and technical skills partially learned <strong>in</strong>: ‘bus<strong>in</strong>ess studies, commerce,<br />
multimedia, multimedia, <strong>in</strong>formation systems, f<strong>in</strong>e art, librarianship, journalism, film<br />
studies, photography …’ (Expert Group on Future Skills Needs 2001). As <strong>the</strong> retail<br />
sector grapples with a multi-channel future, <strong>in</strong>novation will <strong>in</strong>creas<strong>in</strong>gly be driven by a<br />
range of overlapp<strong>in</strong>g skill sets. This is particularly <strong>the</strong> case given that <strong>in</strong>novation with<strong>in</strong><br />
<strong>the</strong> service sector is as likely to span firms and whole value cha<strong>in</strong>s as well as channels to<br />
market. But outsourc<strong>in</strong>g <strong>the</strong> problem or rely<strong>in</strong>g upon <strong>the</strong> expertise with<strong>in</strong> supplier<br />
29 See for example <strong>the</strong> discussion of <strong>the</strong> creation of ‘science cities’ <strong>in</strong> RDA National Secretariat, (2006), ‘Br<strong>in</strong>g<strong>in</strong>g Regional Prosperity’, Regional<br />
Insight, Sept/Oct.<br />
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<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
companies – as some firms have done – simply transfers <strong>the</strong> problem (and <strong>in</strong> some cases<br />
<strong>the</strong> <strong>in</strong>novation potential) to those firms.<br />
8.34 It is difficult if not impossible to tra<strong>in</strong> to deliver an <strong>in</strong>novation culture, but it is possible<br />
to tra<strong>in</strong> for management of <strong>the</strong> <strong>in</strong>novation process, or for <strong>the</strong> management of<br />
organizational change. Project management skills (required to implement <strong>in</strong>novative ideas<br />
with<strong>in</strong> <strong>the</strong> sector) also appear sought after. In relation to strategic leadership skills, <strong>the</strong><br />
Leitch Review suggested that <strong>the</strong> “highest level of skills drive and facilitate <strong>in</strong>novation, leadership<br />
and management” and urged Government to provide employers with clearer <strong>in</strong>centives and<br />
mechanisms to engage and <strong>in</strong>vest <strong>in</strong> Higher Education, through lifelong learn<strong>in</strong>g.<br />
Re<strong>in</strong>forc<strong>in</strong>g this, <strong>the</strong> Lambert Review of <strong>the</strong> <strong>UK</strong>’s HE system stressed <strong>the</strong> need to ensure<br />
that courses put on by Universities <strong>in</strong> particular areas were relevant to <strong>the</strong> needs of<br />
bus<strong>in</strong>ess.<br />
8.35 F<strong>in</strong>ally, for retail SMEs, attitudes towards <strong>in</strong>novation and preferences for exposure to<br />
<strong>in</strong>novation-related skills development may be ra<strong>the</strong>r different from those of larger firms.<br />
For example, <strong>the</strong> general reluctance to engage <strong>in</strong> formal ‘tra<strong>in</strong><strong>in</strong>g’ has been noted by a<br />
number of commentators and forms of peer-to-peer mentor<strong>in</strong>g appear to offer better<br />
results, but good practice is isolated 30 . Different k<strong>in</strong>ds of <strong>in</strong>novation may also be<br />
important to smaller firms to allow <strong>the</strong>m to th<strong>in</strong>k differently about <strong>the</strong>ir bus<strong>in</strong>esses – for<br />
example, new approaches to product buy<strong>in</strong>g and presentation can provide for a<br />
dist<strong>in</strong>ctive form of <strong>in</strong>novation.<br />
8.36 Support for <strong>in</strong>novation by retail SMEs has tended to be provided at a regional or local<br />
level. The RDAs have conventionally been seen as <strong>the</strong> home for such <strong>in</strong>volvement and<br />
<strong>in</strong>vestment, alongside work by Bus<strong>in</strong>ess L<strong>in</strong>k and Job Centres Plus. Skillsmart <strong>Retail</strong> has<br />
also identified <strong>the</strong> importance of local context <strong>in</strong> assist<strong>in</strong>g retail SMEs. The council’s<br />
‘location model’, developed by its <strong>in</strong>-house research team, has proved a useful vehicle for<br />
focus<strong>in</strong>g awareness relation to skills and personal development at <strong>the</strong> local level when it<br />
has been conducted. For example, follow<strong>in</strong>g a mystery shopper exercise and local market<br />
review <strong>in</strong> Colchester, 35 <strong>in</strong>dependent retail bus<strong>in</strong>esses attended a discussion of<br />
opportunities to improve <strong>the</strong>ir performance. A significant proportion of <strong>the</strong>se firms<br />
subsequently engaged <strong>in</strong> tra<strong>in</strong><strong>in</strong>g <strong>in</strong>itiatives. Skillsmart <strong>Retail</strong>’s ‘Location Wise’ and ‘Skill<br />
Shops’ <strong>in</strong>itiatives – outl<strong>in</strong>ed <strong>in</strong> its most recent <strong>Sector</strong> Skills Agreement report – seeks to<br />
consolidate <strong>the</strong> learn<strong>in</strong>g from <strong>the</strong> location model as a mechanism for provid<strong>in</strong>g “practical<br />
advice and best practice for those wish<strong>in</strong>g to design <strong>in</strong>terventions that are relevant for<br />
<strong>the</strong>ir locations” (Skillsmart <strong>Retail</strong>, 2007b).<br />
8.37 The skills council’s proposed Coaches and Mentors 4 <strong>Retail</strong> scheme seeks to build upon <strong>the</strong><br />
preference for mentor<strong>in</strong>g amongst SMEs by coach<strong>in</strong>g smaller retailers <strong>in</strong> “bite-size<br />
chunks to match <strong>the</strong> phas<strong>in</strong>g of <strong>the</strong> retail year”. This complements its onl<strong>in</strong>e <strong>Retail</strong>Detail<br />
toolkit, launched <strong>in</strong> 2005 31 . However, replicat<strong>in</strong>g skills support and mentor<strong>in</strong>g activity at<br />
<strong>the</strong> local level nationwide presents a number of resourc<strong>in</strong>g challenges and it would seem<br />
sensible for a fur<strong>the</strong>r degree of <strong>in</strong>tegration and collaboration between providers to be<br />
encouraged, to improve <strong>the</strong> clarity and accessibility of support on <strong>the</strong> ground. Moves <strong>in</strong><br />
this direction would also be consistent with <strong>the</strong> pr<strong>in</strong>ciples of BERR’s Bus<strong>in</strong>ess Support<br />
Simplification Programme.<br />
30 See for example http://www.dormen.org.uk/ma<strong>in</strong>.asp and Kent, T., C. Dennis, and S. Tanton, (2003), ‘An evaluation of mentor<strong>in</strong>g for SME<br />
retailers’, International Journal of <strong>Retail</strong> & Distribution Management, p. 440.<br />
31 http://www.skillsmartretail.com/retaildetail/features.htm<br />
Page 72
Recommendation 4:<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Identify and support <strong>the</strong> complex sets of skills required for retail <strong>in</strong>novation.<br />
Desired outcome: Development of appropriate mechanisms to identify and support <strong>in</strong> a more <strong>in</strong>tegrated<br />
way <strong>the</strong> skills required with<strong>in</strong> retail bus<strong>in</strong>esses to stimulate, manage and susta<strong>in</strong><br />
<strong>in</strong>novation - with<strong>in</strong> both large and small retail firms.<br />
Background: Strategic <strong>in</strong>novation with<strong>in</strong> retail<strong>in</strong>g requires <strong>in</strong>creas<strong>in</strong>gly complex and varied sets of<br />
skills. <strong>Retail</strong> employers, <strong>in</strong> common with many o<strong>the</strong>r service sectors, are <strong>in</strong> <strong>the</strong> market<br />
for a number of scarce skill-sets, such as those <strong>in</strong> relation to project management, ebus<strong>in</strong>ess,<br />
logistics, build<strong>in</strong>g services eng<strong>in</strong>eer<strong>in</strong>g and fashion and textile design. SMEs<br />
have less complex but none<strong>the</strong>less still challeng<strong>in</strong>g skills needs <strong>in</strong> relation to<br />
<strong>in</strong>novation.<br />
Evidence: Expressed technical skills shortages, gaps and mismatches reported <strong>in</strong> <strong>the</strong> sector.<br />
Shortage of skills <strong>in</strong> <strong>in</strong>novation and project management for SMEs.<br />
Analysis: Five specific actions flow from this desired outcome:<br />
Conclusion/Next<br />
Steps:<br />
4.1 Provision of <strong>in</strong>novation awareness tra<strong>in</strong><strong>in</strong>g amongst employees<br />
(promot<strong>in</strong>g a culture of retail <strong>in</strong>novation)<br />
4.2 Provision of ‘management of <strong>in</strong>novation’ skills tra<strong>in</strong><strong>in</strong>g<br />
(leadership and project management of <strong>in</strong>novation often lack<strong>in</strong>g)<br />
4.3 Provision of cross-sector technical skills tra<strong>in</strong><strong>in</strong>g capability<br />
(shar<strong>in</strong>g employer needs across sector boundaries); and for SMEs<br />
4.4 Development of <strong>in</strong>novative approaches to areas such as product buy<strong>in</strong>g and<br />
presentation for SMEs<br />
(SME’s lack skills to source and market new products)<br />
4.5 Provision of an <strong>in</strong>tegrated support structure for retail SME skills and mentor<strong>in</strong>g at<br />
<strong>the</strong> local level which fur<strong>the</strong>r reduces present duplication.<br />
The risks of <strong>in</strong>action <strong>in</strong> this area <strong>in</strong>clude wasteful duplication of <strong>in</strong>vestment and<br />
bus<strong>in</strong>ess support activity, and resultant confusion amongst retail bus<strong>in</strong>ess, especially<br />
SMEs at <strong>the</strong> local level. The absence of required skills may work to stifle <strong>in</strong>novation.<br />
Identify <strong>the</strong> lead co-ord<strong>in</strong>at<strong>in</strong>g agency on retail skills at <strong>the</strong> local level. Take steps to<br />
better <strong>in</strong>tegrate <strong>the</strong> work of <strong>the</strong> exist<strong>in</strong>g relevant agencies to meet both large and small<br />
retail bus<strong>in</strong>ess requirements <strong>in</strong> relation to retail <strong>in</strong>novation skills.<br />
Page 73
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Appendix 1<br />
Research Methodology<br />
35000<br />
30000<br />
25000<br />
20000<br />
15000<br />
10000<br />
5000<br />
<strong>Innovation</strong><br />
Technological <strong>Innovation</strong><br />
Service <strong>Innovation</strong><br />
<strong>Retail</strong> <strong>Innovation</strong><br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
Apart from be<strong>in</strong>g difficult to measure only with traditional <strong>in</strong>put and output measures or may be<br />
because of that <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g is also vastly under-researched <strong>in</strong> academic terms. For<br />
example, whilst <strong>the</strong> title keyword ‘<strong>in</strong>novation’ generated some 32,861 peer reviewed academic<br />
publications with<strong>in</strong> a lead<strong>in</strong>g journal aggregator, and ‘technological <strong>in</strong>novation’ 13,916, only 155<br />
featured ‘service <strong>in</strong>novation’ and a mere 12 explored ‘retail <strong>in</strong>novation’ 32<br />
Figure 1. Under-researched nature of <strong>in</strong>novation <strong>in</strong> retail<strong>in</strong>g<br />
The report draws on extensive<br />
secondary and primary research <strong>in</strong> order<br />
to establish a more coherent, sectorspecific<br />
characterization of <strong>in</strong>novation.<br />
It analyses for <strong>the</strong> first time <strong>the</strong> retailspecific<br />
responses to <strong>the</strong> most recent<br />
Community <strong>Innovation</strong> Survey. It br<strong>in</strong>gs<br />
toge<strong>the</strong>r a wide range of secondary<br />
material deal<strong>in</strong>g with <strong>in</strong>novation<br />
(exam<strong>in</strong><strong>in</strong>g its relevance through a retail<br />
lens) and with Government activity and<br />
policy potentially appropriate to <strong>the</strong><br />
stimulation and support of retail<br />
<strong>in</strong>novation.<br />
<strong>Innovation</strong><br />
0<br />
2005<br />
27601<br />
2006<br />
31339<br />
2007<br />
32861<br />
The primary research draws upon<br />
selected <strong>in</strong>sights from a series of <strong>in</strong>depth<br />
<strong>in</strong>terviews and discussions<br />
Technological <strong>Innovation</strong> 11858 12920 13916<br />
conducted by one of <strong>the</strong> authors as part<br />
Service <strong>Innovation</strong> 127 136 155<br />
of his doctoral research. with over 50<br />
<strong>Retail</strong> <strong>Innovation</strong> 13 12 13<br />
senior retail executives and o<strong>the</strong>r<br />
<strong>in</strong>dustry experts from over 30 retail<br />
bus<strong>in</strong>esses, consult<strong>in</strong>g firms and <strong>in</strong>dustry associations with<strong>in</strong> <strong>the</strong> <strong>UK</strong> and elsewhere on how <strong>the</strong>y<br />
def<strong>in</strong>e, encourage and manage <strong>in</strong>novation 33 .<br />
The mixed purposive sample was selected <strong>in</strong> a way ensure adequate representation of both large-<br />
and medium-sized firms from 12 different retail sub-sectors, thus <strong>the</strong> sample <strong>in</strong>cluded retailers<br />
with a turnover of between £15bn and £15m from 12 different retail sectors 34 .<br />
Qualitative <strong>in</strong>terviews and <strong>the</strong> case study approach are established methodologies <strong>in</strong> management<br />
science for explor<strong>in</strong>g novel or complex social phenomena such as <strong>in</strong>novation and for<br />
understand<strong>in</strong>g behaviours, values and believes and <strong>the</strong>ir context (Calori, Johnson et al., 1992;<br />
Boiral, 2003; Adams, 2004; Bryman, 2004; Hristov and Reynolds, 2005). The degree of<br />
generalisability which is a consideration <strong>in</strong> qualitative research, because of its tendency to employ<br />
case studies or smaller samples has been m<strong>in</strong>imised to some extent through <strong>the</strong> use of a larger<br />
mixed purposive sample of <strong>in</strong>terviews and <strong>the</strong> triangulation of primary with secondary data.<br />
32 EBSCO’s Bus<strong>in</strong>ess Source Premier (01.08. 2007)<br />
33 Hristov (2007)<br />
34 Hristov (2007)<br />
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Appendix 2<br />
Glossary of Abbreviations<br />
BERR Department for Bus<strong>in</strong>ess, Enterprise & Regulatory Reform<br />
BRC British <strong>Retail</strong> Consortium<br />
BSSA British Shops and Stores Association<br />
CIS Community <strong>Innovation</strong> Survey<br />
CSR Corporate social responsibility<br />
DEFRA Department for <strong>the</strong> Environment, Food and Rural Affairs<br />
DIUS Department for <strong>Innovation</strong>, Universities and Skills<br />
EDLP Every Day Low Price<br />
EPSRC Eng<strong>in</strong>eer<strong>in</strong>g and Physical Sciences Research Council<br />
ETF Environmental Transformation Fund<br />
FCO Foreign & Commonwealth Office<br />
ICT Information & Communications Technology<br />
IGD Institute for Grocery Distribution<br />
IP Intellectual Property<br />
IRS Internal Revenue Service<br />
ISO International Standards Organization<br />
KIBS Knowledge Intensive Bus<strong>in</strong>ess Services<br />
KPI Key performance <strong>in</strong>dicator<br />
KTN Knowledge Transfer Network<br />
NAICS North American Industry Classification System<br />
NESTA National Endowment for Science, Technology and <strong>the</strong> Arts<br />
NMW National M<strong>in</strong>imum Wage<br />
NPD New product development<br />
OXIRM Oxford Institute of <strong>Retail</strong> Management<br />
RFID Radio Frequency Identification<br />
ROI Return on <strong>in</strong>vestment<br />
ROIC Return on <strong>in</strong>vestment capital<br />
ROS Return on sales<br />
SKU Stock-keep<strong>in</strong>g unit<br />
<strong>UK</strong>TI United K<strong>in</strong>gdom Trade & Investment<br />
VCN Venture Capital Network<br />
WRAP Waste & Resources Action Programme<br />
WWF World Wildlife Fund<br />
<strong>Innovation</strong> <strong>in</strong> <strong>the</strong> <strong>UK</strong> <strong>Retail</strong> <strong>Sector</strong><br />
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