Innovation in the UK Retail Sector - Nesta

Innovation in the UK Retail Sector
2.11 At the same time, retailers themselves have been exposed to cost inflation in much the
same way as consumers: not least in terms of utilities, property and transport. The 23%
growth in retail sales value looks strong beside a fall in telecommunications costs, catering
cleaning and market research over the same 6-year period; but does not appear to have
kept pace with increases in costs of waste disposal, transport & logistics, property rental
and banking services. The introduction of the NMW, wage inflation and increased
staffing levels has meant that the proportion that employment costs comprise of UK
retail sales has increased from 10.5% to 13% over the past ten years.
“Despite a slow down in growth [in corporate costs], the largest upward effect came from freight transport
by road, reflecting increases in fuel prices. Other notable upward contributions came from: sewerage
services, following the setting of new price limits by Ofwat; property rental prices following general increases
across the industry; and waste disposal prices following general rises coupled with increases to landfill
charges being passed onto customers.”
(National Statistics Office, Corporate Services Prices Index, 2006)
2.12 It has been argued that the combination of price deflation accompanied by cost inflation
has led some retailers into an increasingly difficult financial position and focused
attention upon some types of innovation (such as process-related innovation delivering
productivity benefits) over others. Firms can put pressure on suppliers to reduce the cost
of goods or can also accept a fall in margin; cut other costs, or persuade consumers to
trade up to higher margin products within a category.
ii. Demographic and consumer behavioural drivers
2.13 We have already suggested that the paradox presented by consumers’ lack of appreciation
of price falls in certain categories of consumer goods can be largely explained by the ‘halo
effect’ of price increases occurring in more obvious categories - such as household
utilities and transport. Many consumers are already inclined to believe that the selling
price of a product is substantially higher than its ‘fair’ price would be.
“Consumers also now play games with retailers – sitting tight and waiting for the discounts to come.
Because purchases are not necessities (except food), they have more choice about when they buy.”
(Retailer)
Greater sensitivity to price and greater wariness of retailers’ promises on price, together
with the growth of greater price information availability as a result of the Internet, has led
to a greater focus on value formats by retailers. An increasing number of sectors have
‘gone to value’.
“Value retailers have 18% of the market [in the UK], but in the US it is 35%; there's plenty to go
for.” (John King, Matalan)
“This concern with value for money is actually embedded in much broader concerns that people have about,
for example, what to put in their kids’ packed lunches, or about the health impacts of different sorts of
foods on themselves and their loved ones.” (Barnett et al, 2005)
2.14 Consumers have also begun to exert greater control within the buying process, not least
in response to the non-price concerns expressed above, ranging from word of mouth
effects to product boycotts. The National Consumer Council’s ‘Active Consumer Index’,
which tracks switching trends for six services markets, has risen 52% since 2000.
Page 12