Innovation in the UK Retail Sector - Nesta

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Executive Summary Innovation in the UK Retail Sector 1. In the current discussion on the stimulation of innovation in services, the practice of innovation in retailing is poorly understood and inadequately measured. And yet retailing is the eighth biggest sector of the world economy in terms of total market value and accounts for 7% of total value-added and 10% of the UK’s working population. The retail sector makes direct contributions to GDP and employment, but also makes indirect contributions to demand and economic growth through its work with suppliers and business service firms, as well as to the UK’s social and environmental performance. Innovation by retailers plays a critical role in allowing the sector to make these contributions. The 17th annual edition of the UK’s R&D Scorecard notes that Tesco and Marks & Spencer are amongst the UK’s ‘R&D leaders’ and ‘fastest growing R&D spenders’ respectively. 2. However, conventional measures of innovation suggest that the retail sector scores relatively lowly compared to sectors such as pharmaceuticals, biotechnology or knowledge-intensive based services. 40% of UK retail firms claimed to be ‘innovation active’ in 2005. Whilst these results are not dissimilar to those for many other service sectors, it also suggests that conventional measures of innovation may not capture the full picture. Is there less innovation in retailing, or do retailers innovate differently? The distinctive characteristics of retail innovation 3. Our research suggests that innovation in retailing has several distinctive characteristics which are not easily captured by conventional measures of innovation. Firstly, retailers are acting as innovation broadeners in the value chain, or innovation hubs, deciphering existing or impending consumer needs and communicating them upstream to suppliers. Secondly, the retail environment is one in which innovations can be easily copied. Such a low appropriability environment causes innovating retailers to work differently, perhaps starting small, or working incrementally, before rapidly scaling up hitherto hidden innovative activities. Thirdly, much retail innovation is non-technological in nature. Whilst technology is important, it has a smaller role in relation to innovation than in other sectors. Fourthly, however, some retailers have hybrid characteristics which can make them more than purely service businesses. Some retailers are vertically integrated (such as Zara or Migros). Others may exhibit a ‘manufacturing’ approach to product innovation – for example, in relation to own brands. Finally, retailers can experience a reverse innovation cycle, where – unlike in manufacturing – financial and organizational costs attached to innovation are low at the beginning and high at the end, following perhaps an extended roll-out. 4. Retailers recognise the crucial role of innovation for the performance of any retail business, but attribute a real range of meanings to the term, which may contribute to under-reporting in surveys. Whilst innovation is seen by all as a necessary means for survival and growth, how to stimulate, manage and measure it is a matter of organizational choice. Retailers make the distinction between strategic retail innovation and operational retail innovation. Strategic innovation represents more a radical departure from ‘business as usual’, (developing a wholly new online offer, or a new format) whilst the majority of operational innovation comes from what many prefer to call ‘newness’, or a ‘stage below innovation’. Such innovation is inevitably incremental, and might include anything from the extension of own brand ranges through to experimentation with checkout queue management techniques. Further, retail innovation appears to occur in three main applications areas: offer-related, (in product, service category, channel or format), support-related (technology, systems and the supply chain), and organization-related (providing innovative management and delivery frameworks for the previous two). The drivers of retail innovation 5. There is broad agreement amongst retailers as to the drivers of innovation within the sector: both those external and those internal to the firm. As might be expected from a customer-facing industry, the most significant external driver of retail innovation is the customer. One-stop shopping, the dollar store concept, in-store theatre, multi-channel retailing, fast fashion, EDLP or more holistic customer centricity initiatives are all innovative responses to changing consumer trends. Growing international competition coupled, with continued industry concentration and the disruptive effects of the Internet on consumer demand and shopping habits also invariably affect the way in which and the pace with Page 4
Innovation in the UK Retail Sector which retailers innovate. In terms of internal drivers, the majority of retailers think that strategy drives innovation in terms of its direction, the resources available for it and the timelines devoted to it, since innovation often requires sustained support. Many also talked about ‘the will to implement new ideas’ being as important as the ideas themselves and highlighted the role of the vision and leadership of senior management as ‘entrepreneurs of the business’ and in creating a culture within innovation could flourish. Barriers to retail innovation 6. The majority of retailers do not perceive there to be any barriers to innovation within their businesses. Amongst those that do, the biggest barriers are reportedly in relation to costs, in particular the cost of finance and the perceived economic risks of innovation (especially for SMEs). Shortages are seen in relation to technical, leadership as well as project management skills. The majority of retailers claim to know their markets well and to have little concern that lack of knowledge about technological possibilities works to prevent innovation. In relation to regulation, the majority of retail firms report no experience of barriers preventing innovation, although a number of specific issues do emerge. These include: the availability of allowances for mitigating some of the risks of innovation, as well as a lack of a common agenda across Government to stimulate investment in sustainable innovation, which often results in conflicting outcomes on the ground for firms. Measuring retail innovation 7. Innovation needs to be measured in order to be successfully managed. Retailers tend to focus most on short term tangible performance outputs, based on cost benefit analysis and captured through traditional measures of performance but much less on the longer term commercial impact of innovation as a value added activity. Measures are adapted from existing KPIs, rather than being innovation-specific, since retail innovation is often incremental and dispersed across different divisional budgets. The vast majority are financial are relate to sales and market share impact, rate of return and measures of profitability. Retailers also recognise that the soft benefits of innovation - in terms, for example, of brand value, or total impact on the business - are less well measured, due to limitations in management accounting systems, but some progress is being made in tracking the share of new activities in the broader context of the business, including customer perceptions about the retail and its brand. Stimulating and supporting innovation in retailing 8. Governments around the world have recognised their responsibility for supporting and stimulating innovative activity by firms. Similarly, however, many governments have also historically shared a preoccupation with the manufacturing sector over services, and support for technological over nontechnological forms of innovation. This is now changing and the present UK Government initiative into Innovation in Services forms part of this broader response. Existing Government policies towards innovation can be adapted to the needs of service sector firms in three particular ways: • Deepening of existing policy (making innovation policies more ‘service-friendly’); • Broadening of existing policy (recognising that innovation within the service sector are more likely to span firms as well as whole value chains); and • Horizontalisation of existing policy (recognising that other policies not explicitly designed to stimulate innovation may – indirectly – improve the climate for service sector innovation.) 9. We identify four distinct areas of policy focus which provide the basis for our recommendations: a. Provision of support mechanisms for retail innovation; b. Promoting innovation in sustainability by the retail sector; and c. Fostering skills and organizational innovation in the retail sector. 10. We also make recommendations for those areas in which the Government might better focus and communicate existing activity, in addition to potentially providing new stimuli which might matter particularly to retailers because of their commercial benefits. Page 5
Page 1 and 2: Report for NESTA December 2007 Inno
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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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