Innovation in the UK Retail Sector - Nesta

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Innovation in the UK Retail Sector 3. What are the distinctive characteristics of retail innovation? a. How different is retail innovation? 3.1 What do conventional measures report as the extent of innovation in retailing? Data recording factors such as R&D intensity 3 and patent citation, suggests that retailing on a global scale scores relatively lowly compared to sectors such as pharmaceuticals, biotechnology or technology hardware and equipment. The Community Innovation Survey, a four-yearly pan-European examination of innovation activity, was extended to include services – and retailing – for the first time during its most recent iteration in 2005. 4 Figure 3.1 below shows the extent and nature of retail innovation compared to other sectors. 40% of retail firms surveyed claimed to be ‘innovation active’ 5 . Figure 3.1. Extent of innovation in retailing per cent 80 70 60 50 40 30 20 10 0 57 Innovation active Source: Community Innovation Survey (CIS4), 2005. 3.2 The survey suggests that: 40 25 Product innovator 16 59 69 of which, new to market 16 Process innovator 7 30 29 of which, new to industry 54 Innovation-related expenditure • UK retailers report lower levels of innovation than all sectors in the UK as a whole: 40% of firms are ‘innovation active’, compared with 57% in the economy as a whole. The sector scores below the all sector average for every category of innovative activity but one; and is apparently significantly lower, for example, in terms of process innovation. • Retailing did score highly on ‘new to market’ product innovations (suggesting high levels of competition in the industry and/or constant search for new business streams and markets). 3 R&D as % of sales 4 Retailing comprised 1,545 of the total of 16,445 UK firms surveyed (9.3% of responses). Of these, 18% of respondent firms employed more than 250 people. The survey sought to capture activity between 2002 and 2004. 5 Innovation in the survey is defined as “major changes aimed at enhancing competitive position, performance, know-how or capabilities for future enhancements. These can be new or significantly improved goods, services or processes for making or providing them. It includes spending on innovation activities, for example on machinery and equipment, R&D, training, goods and service design or marketing.” 36 30 Either product or process innovators 19 11 Both product and process innovators 5 13 Cooperation agreements 9 33 Wider Innovator 21 All sectors Retail trade (Div 10) Page 16
Innovation in the UK Retail Sector • Innovation-related expenditure of retailers is lower than the average; it looks as though this smaller number of innovations was both cheaper and had greater impact than on average. 3.3 It is important to stress that these results are not dissimilar to other ‘low innovation’ engineering sectors and for other services (with the notable exception of knowledge intensive business services (KIBS)) 6 . And other evidence tells us of the capability of retailers to innovate in ways which lead to efficient economic performance, which suggests that the CIS does not capture the full picture. For example, decomposing productivity growth in the US from 1995 to 2000 suggests that the whole of its acceleration is driven by six sectors, the top three being wholesaling, retailing, and security and commodity broking. In fact the joint contribution of these three key sectors was twice as great as the next three i.e., electronic and electric equipment (semiconductors), industrial machinery and equipment (computers) and telecoms (Solow, Bosworth et al., 2001). The data since year 2000 suggests that retailing continues to be among seven sectors which altogether accounted for 85% of all the productivity growth of the US economy 7 . None of these, with the exception of computers and electronics, are among the conventionally R&D intensive sectors (Farrell, Bailey et al. 2005; Hughes 2007). More recent figures from NAICS suggest that retailing continues to be among the top contributors to the US productivity growth (McKinsey Quarterly, 2006). About 12% of labour productivity gains in the second half of the 1990s could be traced back to one retailer alone: Wal-Mart (Johnson, 2002). 3.4 One other major indicator of the level of innovation within UK firms is the regularly conducted R&D Scoreboard (DIUS, 2007). The 17 th annual Edition was published in 2007 and shows that Tesco and Marks & Spencer are amongst the UK’s ‘R&D leaders’ and ‘fastest growing R&D spenders’ respectively 8 . In relation to the sector as a whole, however, there are significant deficiencies in the Scoreboard (including significant omissions, misallocation of firms – including pharmaceutical suppliers - to the retail sector and some evidence of double-counting) 9 . Whether this is as a result of nonresponse by major firms, the growth of private equity in the sector, a lack of an R&D line in public company accounts (or other accounting complexities arising from a firm’s diversified activities), or their not falling into the top 850 UK firms (or top 1,250 global firms), is unclear. For whatever reasons, however, the Scoreboard cannot therefore be regarded as a reliable indicator of retailing R&D. 3.5 This evidence is alongside the increasing realisation is that the sole use of R&D intensity, patent registrations and other ‘hard’ measures of innovation fail to reflect the variety of innovation activities in knowledge based service firms. OECD’s ‘Frascati’ Manual 10 acknowledges that hard measures need to be examined within a broader conceptual framework, 6 A classification of those services defined as KIBS can be found at: http://www2.cst.gov.uk/cst/reports/files/knowledge-intensiveservices/services-study-annexes.pdf 7 These were retailing, finance and insurance, computer and electronic products, wholesaling, administrative and support services, real estate and miscellaneous professional and scientific services. 8 Tesco ranked 21 st of the top 850 UK firms in terms of its R&D expenditure in 2006 (+12% on the previous year). Marks & Spencer ranked 14 th of the top 850 UK firms in its increase of R&D expenditure in 2006. 9 The limitations of the Scoreboard methodology are described at http://www.innovation.gov.uk/rd_scoreboard/?p=33. The firms allocated to food, drug and general retailers can be seen in the main tables, downloadable at http://www.innovation.gov.uk/rd_scoreboard/downloads/2007_UK_RD_Scoreboard_Web.csv 10 The OECD Frascati Manual (2002) proposes standard practice for surveys of R&D Page 17
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
Page 65 and 66: . Promoting innovation in sustainab
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Innovation in the UK Retail Sector
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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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