Innovation in the UK Retail Sector - Nesta

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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
Innovation in the UK Retail Sector Retailers have not been immune to this growing activism as it has extended into broader areas of social and environmental responsibility. Solutions for retailers run from ‘choice editing’ in product range, to the use of environmental or social sustainability as a differentiator in the creation and design of formats, to a complete ethical makeover. 2.15 As a result, the largest retail firms are increasingly expected to take the lead over issues of social responsibility and accountability related to consumption. This brings new opportunities and challenges for innovative behaviour in the sector in terms, for example, of: • The environmental impact of commercial activities (for example, Wal-Mart’s Project Aurora will, amongst other things, invest $500 million in technologies that will reduce greenhouse gases from the companies’ stores and distribution centres by 20 percent over the next seven years); • Ethical sourcing (for example, the values expressed by Lush, the cosmetics grocer, lead it to buying only those ingredients which are not tested on animals, using vegetarian ingredients, made by hand with the minimum of packaging - http://www.lush.co.uk/LushLife/WeBelieve.aspx); and • Responsible consumption (for example, in addressing concerns over childhood obesity and healthier lifestyles, Sainsbury's has developed its ‘Active Kids’ campaign, spending £34mn over two years in subsidising the purchase of sports equipment by schools, scouts and guide movements, and has commissioned a research programme to discover what parents of young children buy and how that varies across regions and socio-economic groups). 2.16 There is a potential dilemma for some firms in that the pressure towards providing value for money formats pushes firms towards cheaper, and potentially less sustainable, procurement. Similarly a contrasting growth in demand for service and experience amongst some consumers can be seen as both an attractive non-price differentiator when set against online competitors, but also a potentially costly consideration in designing new formats in the light of what we have said already about the increasing cost of space and of retail labour. Getting the balance right in response to consumer pressure is difficult: “It’s also finding the trade-off between what customers want (price, convenience, choice) and what retailers have to deliver to shareholders (profits, margins, sales growth). For example, unmanned kiosks may not be so pleasant for a customer as is the ‘live’ interaction with someone on the floor, but then the customer may trade off this inconvenience for the better price and the time saving.” (Finance Director, general merchandiser) iii. Competition and innovation drivers 2.17 In general terms, levels of competition ultimately determine the mix and range of retailing on offer to consumers and the extent to which continual innovation is required to build a switching barrier between, say, one retail format and another. With increased levels of competition amongst larger scale retailers, achieving that differentiation on a sustainable basis is costly and requires retailers to make choices: “There’s a perception now that you can only pull some of the levers. You have to make a choice between price, choice and breadth because of increased levels of competition. You can’t compete on all the choice criteria.” (Director, variety store retailer) Page 13
Page 1 and 2: Report for NESTA December 2007 Inno
Page 3 and 4: Contents Innovation in the UK Retai
Page 5 and 6: Innovation in the UK Retail Sector
Page 9 and 10: 2. The nature and contribution of r
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Page 23 and 24: v. Retailers’ reverse innovation
Page 41 and 42: Vignette 5.3: Currys customer recyc
Page 43 and 44: 6. What are the barriers to retail
Page 47 and 48: 7. What are the measures of retail
Page 49 and 50: . Types of Measures Innovation in t
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Innovation in the UK Retail Sector
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. Promoting innovation in sustainab
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Conclusion/Next Steps: Innovation i
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Recommendation 4: Innovation in the
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Appendix 1 Research Methodology 350
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Innovation in the UK Retail Sector - Nesta

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