Innovation in the UK Retail Sector - Nesta

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
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