Dipsi

In 2009, UK retail sales were over 285billion and are growing, despite the economic downturn in 2007.
During 2010, the industry created an extra 12,750 full-time jobs, a 2.1% increase on the previous year. In 2010, there were over 286,000 retail units and more than third of retail spending is done through shops. (British Retail Consortium, 2009) It is becoming increasingly popular for UK customers to buy their products online and this area of the industry has seen continued growth since before the 2007 recession. The UK now has 150,000 online retail business and more than 600,000 British jobs are either directly in or support e-retail (Interactive Media in Retail Group (IMRG), 2010). However, e-retailing currently only accounts for less than 7% of total retail sales although this is predicted to rise. There are plenty of graduate opportunities across the sector and many of the leading companies have graduate schemes. Retail graduate jobs offer structured training in many areas, such as management, accounting, IT and creative roles, as well as benefits like staff discounts and pensions.
What kind of work can I do?

Buying - sourcing new products and developing ranges each season. Merchandising - working with the buyers, looking after the departments budget, analysing sales and data of the product sales. Design - creating design ideas for new products for each season. Marketing - communicating the brand to customers, through stores and online. PR - maintaining public image for the company. HR - hiring and training staff, providing support to managers. IT - managing the internal business IT systems. Finance - analysing and reporting on the businesss finances. Store operations - managing a store. Visual merchandising - designing and producing product display. Warehouse and logistics - stock storage and distribution.
Whats it like working in this sector?

The retail industry is highly commercial, driven by sales and profit. It is a very dynamic industry, always changing to appeal to customers and compete with competition. Working in head office is generally a Monday to Friday job. Head office staff are responsible for monitoring the sales figures for the whole business each week and planning for future ranges and company growth.
Working in stores is a lot different to head office, it is likely to involve evenings and weekends and there is more face to face interaction with the customers. Working in a shop gives you first hand experience of the weekly sales and targets and your customers expectations.
How big is this sector?

Retail is the UK's largest private sector employer. The current UK retail market is dominated by a comparatively small number of large retailers who have over 500 employees. These large retailers employ 65% of all people working in retail and have 69% of all the annual turnover of retail businesses. (Skill Smart Retail LMI report, November 2009).
Oxfards
Report for
NESTA December 2007
Innovation in the UK Retail Sector

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Preface
Oxford Institute of Retail Management (OXIRM) The Oxford Institute of Retail Management (OXIRM) is a leading centre of retail studies based at the Sad Business School, University of Oxford. OXIRM was created in 1985 to relate sound scholarship to the practical needs of retailers, service companies and public sector agencies. It undertakes management development programmes for companies, conducts research with direct relevance to practitioners and acts as a centre for education and networking activity. Authors Latchezar Hristov and Dr. Jonathan Reynolds Latchezar Hristov is a senior lecturer in marketing at Sheffield Hallam University and doctoral researcher in the area of management and innovation at Sad Business School, University of Oxford. Dr. Jonathan Reynolds is a lecturer in management studies at the University of Oxfords Sad Business School, and Director of the Oxford Institute of Retail Management. Innovation in the UK Retail Sector
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Contents 0. Executive Summary 4 1. Introduction 8 2. The nature and contribution of retailing as a sector 9 a. The size and growth of the retail sector b. Drivers of change 3. What are the distinctive characteristics of retail innovation? 16 a. How different is retail innovation? b. Selected characteristics of retail innovation i. Retailers as innovation hubs ii. The low appropriability of the retail environment iii. Predominance of non-technological innovation iv. Hybrid characteristics of retail innovation v. Retailers reverse innovation cycle 4. How do retailers think about innovation? 26 a. Strategic retail innovation b. Operational retail innovation c. The retail innovation pyramid 5. What drives retail innovation? 34 a. External to the retailer b. Internal to the retailer 6. What are the barriers to retail innovation? 43
7. What are the measures of retail innovation? 47 a. The extent of measurement b. Types of measures c. Levels of application 8. Recommendations to stimulate and support innovation in retailing 54 a. Promoting innovation b. Facilitating barrier reduction c. Fostering skills and organizational innovation d. Promoting innovation in sustainability 9. References and further reading 74 Appendix 1: Research Methodology 78 Appendix 2: Glossary of Terms Innovation in the UK Retail Sector
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Executive Summary
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 UKs 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 UKs 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 UKs R&D Scorecard notes that Tesco and Marks & Spencer are amongst the UKs 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 5 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 6 Recommendation 1: Improve the effectiveness of innovation-related support activity within Government. This will require: A more systematic approach to co-ordinating information & expertise in Government & NDPBs which mimimises bureaucracy and improves access. The provision of a one stop shop hosting information on initiatives, support and services available to the sector, especially to SMEs. A better mechanism for identification, prioritising and channelling of commercial, innovation-related initiatives and research to firms (a single voice). Encouragement of longer term horizon scanning that is more relevant to retailing: facilitating the showcasing of new ideas with commercial potential and supporting projects on the margin. Government should identify an appropriate mechanism or intermediary to channel innovation-relevant initiatives simply and efficiently to the correct individuals within the sector and to prioritise those of most commercial relevance to the sector. Evidence that the sector was responding with purpose and conviction to any integrating efforts by the Government would be an important demonstration of commitment. Recommendation 2: Increase the awareness and take-up of R&D tax credits by the retail sector. This will require: Identifying and prioritising the kinds of activities undertaken by retailers and by suppliers on their behalf which might qualify for support under both large business and SME schemes. Improving awareness of the schemes and of these priorities amongst retailers, particularly retail SMEs outside London and the South-East. Improving the speed and transparency of the application process to reduce uncertainty. Investigating the extent to which, without diluting the existing mechanisms, the R&D tax credit scheme might be both deepened and broadened to benefit service innovation Government should work with retailers and key third party suppliers to clarify the kinds of activities undertaken by and for retailers which would qualify for tax credits and to examine ways in which the application and inspection process for tax relief on such activities might be further streamlined. Recommendation 3: Promote innovation by retailers in sustainability. Eight specific measures which might act as stimuli for innovation in sustainability have been identified by the sector: Provision of support mechanisms VAT reductions to stimulate green product innovation, Business rate relief on energy efficient buildings, and Encourage development of shared waste facilities by SMEs. Reduction of barriers Faster and easier planning regimes for sustainable technologies relevant to retailing Fostering a standards-based framework to manage sustainability and reduce uncertainty and risk
Page 7 Working towards identifying sustainability metrics, requiring retailers to publicly report on their achievement. Fostering of skills Building environmental awareness amongst retail staff
Training for low carbon technology skills to support growth in retail initiatives The Government should work with the retail sector in identifying and disseminating priorities for innovation in sustainability. This should occur through the development of a meaningful framework for action, including the provision of evidence for the effectiveness of funding incentives, priorities for barrier reduction and any skills shortages or gaps which can be addressed at the national or regional level. Recommendation 4: Identify and support the complex sets of skills required for retail innovation. This will require: Provision of innovation awareness training amongst employees Provision of management of innovation skills training Provision of cross-sector technical skills training capability and, for SMEs, Development of innovative approaches to areas such as product buying and presentation for SMEs Provision of an integrated support structure for retail SME skills and mentoring at the local level which further reduces present duplication. The Government should identify the lead co-ordinating agency on retail skills at the local level. It should take further steps to better integrate the work of the existing relevant agencies to meet both large and small retail business requirements in relation to retail innovation skills.

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1. Introduction
1.1 There is a broad consensus that innovation deals with the successful exploitation of ideas which leads to sustainable economic growth. However, the precise meanings, practices, measurements of and potential support for the innovative activities of firms largely depend on the context in which they occur. The present Innovation in Services initiative recognises that innovation in services may be different in its nature, incidence and measurability than that in more tangible sectors of the economy, and that different actions and policies may be required of Government in support of service sector innovation. What, then, of innovation in the retail sector, one of the largest in terms of value added and employment within the UK service sector? Retailing is considered to be a service but is, of course, a hybrid economic activity performing a bridging role between production and consumption, in which firms bring together assortments of goods relevant to the needs of consumers. Yet the nature of innovation in this important sector is often poorly understood and inadequately measured. 1.2 Over the last forty years, UK retailers have become much more active in their own right within the value chain. Indeed, large, professionalised, organizations now run most of the retailing in western economies and are now coming to do so in emerging economies. In addition to being substantial commercial enterprises, such retailers have also become trusted brands with, in some cases, retailers own label brands being regarded as of similar or higher quality than those of branded manufacturers. Now retailing is the legitimate focus of business strategy, marketing, operations management and other conventional business disciplines. How do such companies innovate, and what kind of innovation matters for such firms? How do small and medium-sized enterprises firms which contribute to the vital entrepreneurial froth of the sector - undertake innovation? 1.3 This report has been commissioned by NESTA to examine innovation in the retail sector. It seeks to answer the following questions, using a common format and structure: What is the innovation that matters in the sector? What is driving this innovation? What are the barriers to further innovation? How is this innovation evidenced within the sector, and how might this inform the development of new metrics and tools for benchmarking innovation performance? It finally considers and makes recommendations for:
The role for Government in supporting these particular forms and systems of innovation to create greater economic and social value 1.4 The report combines findings from a variety of sources. It analyses for the first time the retail-specific responses to the most recent Community Innovation Survey. It draws upon selected insights from a series of in-depth interviews and discussions conducted by one of the authors as part of his doctoral research with over 50 senior retail executives and other industry experts from over 30 retail businesses, consulting firms and industry associations (within the UK and elsewhere) on how they define, encourage and manage innovation. It brings together a wide range of secondary material dealing with innovation (examining its relevance through a retail lens). It reviews existing Government activity in this area. Finally, the report makes recommendations on the particular ways in which Government may improve the effectiveness of its stimulation and support of innovation within the sector. Innovation in the UK Retail Sector
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2. The nature and contribution of retailing

a. The size and growth of the retail sector 2.1 Retailers were once seen as downstream resellers of products, simply ciphers in manufacturers distribution channels, intermediaries whose only role was to enable the flow of goods and services between suppliers and consumers - and who were of themselves incapable of innovation. This conclusion could be attributed partly to the dominant nineteenth century view that manufacturing rather than services provided the primary motor of economic growth and partly to the fact that in many developed markets, until the early 1970s the retail industry was fragmented, mainly consisting of single-store and smaller chain retailers. 2.2 This is a view, curiously, reflected until very recently in the way in which innovation is defined and measured. As little as fifteen years ago, the late Keith Pavitt (1984) in seeking to explain variations in the nature and impact of innovation between sectors, in terms of their contribution to technological change1, suggested that innovation in retail firms was essentially supplier-dominated. Firms in the sector, he suggested, were passive adopters of supplier technologies rather than more active non-technological innovators. Such views have been strongly contested, but have become embedded in policy. According to McGoldrick (2002, p.2) it is equally, if not more, realistic to talk about channels of supply within a retailer-centred vertical marketing system. 2.3 Indeed, today, retailers are no longer hired links in a manufacturers supply chain but comprise an independent market, the focus of a large group of customers for whom they buy (McVey, 1960; Spriggs, 1994; Reynolds, 2004). They provide readily identifiable locations where final consumers enter into the transactions by which they acquire goods and services sourced by the retailer. In addition, they provide support services of various kinds. As such retailing is an extremely significant economic activity which bridges production and consumption and affects most of the population every day (Burt, 2003). It is the eight-biggest sector of the world economy in terms of total market value (Financial Times, 2006). Whilst as recently as 1990, there were no retailers in the US Fortune 500, by 2006 Fortune reported that nearly one fifth was now made up of general merchandisers, food & drug store and speciality retailers alone (Fortune, 2006). 2.4 In the US, retail trade accounts for 9.2 % of the GDP and employs 17.4% of the total working population (Hristov, Cuthbertson et al., 2004). In the UK the sector represents 7% of total value-added and employs 2.6 million (10%) of the total working population (Burt, 2003). In 2006 general retailing was the UKs eighth biggest contributor to value added. Tesco is the biggest UK private employer (240,000 employees) (FT 500, 2001), the twelfth biggest individual contributor to value added and among the eight fastest growing
UK companies (DTI, 2005; DTI, 2006).

1 Pavitts
essentially manufacturing-led perspective distinguished among three main types of firms; (1) supplier dominated (2) science-based, (3) production-intensive firms.

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Table 2.1. Key indicators of UK retail performance and economic contribution, 1990-2006.
UK 1990 1995 2000 2006 90/95 95/00 00/06 (*05) Sales (mn) 159,519 171,535 207,168 255,438 8% 21% 23% GVA (mn) n/a 29,598 49,415 (*)60,507 n/a 67% (*)22% Index of Services (Retail trade) n/a 73.8 86.4 112.5 n/a 17% 30% Enterprises n/a 209,386 214,876 (*)201,420 n/a 3% (*)-6% Employment (**) 2,101,882 2,146,940 2,978,000 3,109,000 2% 39% 4% Source: Office of National Statistics, 2007, 2003, 2000. (*) 2005 data; (**) Average during the year
2.5 The contributions of retailing can be seen as economic, social and environmental in their nature. From an economic perspective, retailers make both: Direct contributions towards GDP, employment and the supply of vital products and services to the population which stimulates demand and economic growth. (The output of the sector is considerable (see Table 2.1) and stretches across the whole services-to-goods continuum with offerings ranging from intangible-dominant pure services such as insurance or internet access, to tangible-dominant physical
products such as food or furniture); as well as: Indirect contributions, which are less easily recognised and work in the form of a multiplier effect. (For instance, by developing new services, new formats, new products, or new stores, retailers stimulate demand not only for goods for re-sale but also for a wide range of intermediate inputs which they may buy from other industries to produce their output and which stimulate business activities and employment outside the sector. Such inputs may be in the form of transportation and construction services, consultancy, ICT, advertising and other business services. Similarly, efficiencies and productivity gains within the sector create the potential for retail price deflation which in tandem with increases in consumer real income stimulates consumer spending and has a positive effect on economic growth (Hristov, Howard et al., 2004). Between us, we've achieved a revolution in shopping over the past 10 years. The price deflation we've pushed through in clothing has even forced down the overall rate of inflation, which is pretty major stuff. (Andy Bond, CEO, Asda) 2.6 However, retailing has a role to play not only in economic but also in social terms. Branding is the dominant strategy around which retail competition is structured. In the case of the retail sector, products, ranges and the company itself may be branded. (Pettinger, 2004) Some retail brands (not always the largest) perform as cultural innovators, creating or assisting in the creation of trends for new products and services; or making such products and services more widely available to larger sections of the population. For example, Innovation in the UK Retail Sector
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clothing retailer Zaras quick response, vertically integrated business model made an opportunity of the transience of fashion to create distinctive competitive advantage, whilst Marks & Spencers growth of its Simply Food smaller format store was explicitly designed to bring convenience foods to more convenient locations. A retailer with strong brand equity will be able to convey clearer value to customers which in turn will provide a more rigorous basis for innovation within the firm. 2.7 Finally, as in other sectors, retailing has also needed to come to terms with the contemporary challenge of the triple bottom line, where innovation has to service the need for environmental and not just economic and social - performance. Partly because of their position in the value chain, in being closest to the consumer, retailers have also become reference points for their customers with regard to topical socio-economic or lifestyle debates about the environment, health, nutrition or fair trade. It is also in the nature of retail businesses to strive to understand their customers and to quickly respond to new trends, needs or wants and, in the process, retailers brands have increasingly to function as guarantors for product quality, traceability, authenticity, safety, reliability and convenience. b. Drivers of change 2.8 The retailing that we see today is the product of four main forces: economic, social, features arising from changing levels of competition and innovation (including technology), and those derived from evolving regulation. In some cases, these influences act as constraints, in some cases they provide real opportunities for experimentation and innovation. We elaborate upon the specific drivers for innovation as perceived by retail firms themselves, from both within as well as outside their organizations, in Section 5. We discuss regulation in the context of barriers to innovation in Section 6. Here, in line with other Innovation in Services reports, we briefly enumerate the main factors driving
change in the sector and identify the pressures to which it is responding. i. Economic drivers 2.9 Table 2.1 demonstrates that for much of the past fifteen years, the UK economys development has been underpinned by extensive growth in domestic consumption. The broad consequence of this has been the relatively untrammelled growth of retail businesses and an optimistic and entrepreneurial outlook towards experimentation and expansion in a variety of ways. Most recently, the Bank of England has sought to rein in consumer spending through a series of interest rate rises. This, in combination with concern over rising levels of personal debt and more general economic uncertainty, has led to growth in retail spending faltering. 2.10 In practice during this period, UK shoppers have experienced substantial price decreases in a number of categories of consumer products over the past fifteen years in categories such as clothing by as much as 20% and in audio-visual goods by as much as 60% (Office of National Statistics, 2007). However, the debt which is of concern to consumers has not necessarily been incurred in consuming retail goods, but as a result of higher utility, transport and housing bills. The pressure has therefore been upon retailers to clearly communicate fair, if not low, prices to those consumers for whom it is important. Those retailers which can continually demonstrate value in their propositions will win out against those retailers with muddled price points or value propositions. Innovation in the UK Retail Sector
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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 Councils Active Consumer Index, which tracks switching trends for six services markets, has risen 52% since 2000. Innovation in the UK Retail Sector
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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-Marts 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: Its 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: Theres 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 cant compete on all the choice criteria. (Director, variety store retailer) Innovation in the UK Retail Sector
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2.18 Technology has played a complex role in relation to retail change. Retailers themselves have been generally reluctant adopters of technology (CEC, 1991). The majority of firms have tended to be adapters rather than innovators, using information technology to support existing operations. As a result, investment in ICT conferred little lasting competitive advantage even if it managed to raise rudimentary barriers to entry. Indeed, successful retail ICT for many in the 1990s comprised projects that did not involve long term research & development, provided a visible financial benefit, came without extensive capital commitment and provided for low risk, staged implementation. Even today, ICT accounts for extremely low levels of capital spend in the sector. However, a number of leading firms have used technology to achieve significant gains in productivity (Johnson, 2002). In addition, disruptive innovations driven by technology, such as ecommerce, have resulted in significant challenges for the sector.2 For example, the anticipated compound annual growth rate between 2007 and 2012 for retail online spending is 14%. The expectation is that online sales in the EU will overtake those in the USA by 2011. 2.19 One driver of domestic format innovation comes of course from continually growing international activity within the UK. Estimates made in 2005 suggested that over 500 non-UK retailers currently trade in the UK, numbers which have been rising over the past twenty years, with high proportions of operators in clothing, footwear and accessories, health & beauty, toys and games and department & variety store retailing (Retail Knowledge Bank, 2005). iv. Regulatory drivers 2.20 Regulation is often seen by retailers as an unnecessary cost to the business, but regulation can work to direct and focus innovation in unanticipated and otherwise unexplored ways, in seeking to attain specific social, economic and environmental goals. There is no central financial analysis of the administrative burden of regulation on UK business, although the estimate is of some 20-40bn per annum across all firms (Better Regulation Task Force, 2005). The Task Force also estimated that small retailers were disproportionately affected
over large: with small shopkeepers spending 3-5 days a month dealing with a range of government administration (Better Regulation Task Force, 2001). 2.21 There is some evidence that the burden of retail regulation on the sector has reduced (Figure 2.1). Recent work by OECD suggested that the UK fell from the 8th to the 17th most regulated market from 1998 to 2003, although the difference was not statistically significant (OECD, 2006). Regulation can affect retailers in two ways in relation to innovation. The overall economic viability of any retail business model might be adversely affected or constrained. Additionally, however, because of the nature of retail business, regulation also influences the possible locations available for a particular retail format and the costs of servicing those locations.
2 Christenson
& Tedlow (1999) define disruptive technologies as innovations that change the economics of an industry (even if they may not be initially profitable innovations).

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Figure 2.1: Anti-competitive regulations in retail distribution, 1998-2003

Source: OECD International Regulation Database, 2006. Note: Graph ranked by extent of regulation in 2003. Scale of regulation from 0.0 to 6.0, with 6.0 being the most restrictive.
2.22 The OECD study did not include these kinds of regulatory constraints in its analysis. In addition to planning and competition policy, such regulations might include: Modally-constrained access to town and city centres by consumers (such as bus lanes, greenways and park & ride schemes); Delivery curfews (the British Retail Consortium suggested that some 32% of all retailers were adversely affected by a delivery curfew of some sort in 2005, at a cost of some 3.3mn), and the Cost of parking (Parking revenues in London alone were an estimated 500mn in 2005.)
0.0 1.0 2.0 3.0 4.0 5.0 6.0 Belgium Greece Spain Poland France Germany Norway Canada United States Finland Denmark Japan Italy Portugal United Kingdom Mexico Turkey Netherlands Korea Hungary Australia Ireland Switzerland Sweden 1998 2003

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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 intensity3 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 active5. Figure 3.1. Extent of innovation in retailing
Source: Community Innovation Survey (CIS4), 2005.
3.2 The survey suggests that: 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 4 Retailing
as % of sales 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.
57 25 59 16 30 54 30 11 13 33 40 16 69 7 29 36 19 5 9 21 0 10 20 30 40 50 60 70 80 Innovation active Product innovator of which, new to market Process innovator of which, new to industry Innovation-related expenditure
Either product or process innovators Both product and process innovators Cooperation agreements Wider Innovator per cent All sectors Retail trade (Div 10)

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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 economy7. 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 17th annual Edition was published in 2007 and shows that Tesco and Marks & Spencer are amongst the UKs R&D leaders and fastest growing R&D spenders respectively8. 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 firms 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. OECDs Frascati Manual10 acknowledges that hard measures need to be examined within a broader conceptual framework,
6A
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 21st 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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that relates them both to other types of resources intangible investment which covers not only R&D and related S&T activities but also expenditures on software, training, organisation, etc. (OECD, 2002, p.14). In relation to services these sentiments are echoed by the recent report commissioned by the US National Science Foundation (RTI International, 2005). Measuring service sectors (such as retailing) with direct R&D measures does not account for R&D flows between the manufacturing and services sectors, neither does it account for the large volumes of R&D services outsourcing. This results in potential under-representation of nonmanufacturing sectors such as retailing. Using both direct R&D expenditures and indirect R&D (consumed), such as R&D incorporated in equipment and intermediates, provides a different estimate of technology intensity for the service industry (RTI International, 2005, p. 2-3). 3.6 There is also evidence that in low innovation sectors such as oil production, construction or retail banking, large proportion of innovation is to a lesser extent technological, involving organisational and market change or melding technologies in delivering innovative services. This type of innovation remains largely hidden under the radar of the traditional measures of innovation (NESTA, 2007). Similarly, Jorma Ollia, the Chairman of the Board of Directors of Nokia points out that currently the most fertile area of innovation today in effect could be found in management (Economist, 2007). In this vein according the most recent BCG innovation survey among a cross section of senior executives, the retail sector appears among the most innovative; five retailers feature in the top twenty most innovative firms of 2007; i.e., Wal-Mart (11), Starbucks (14), Target (15) and Amazon.com (20), with another four retailers in the top 50 (i.e., Ikea, Costco, Best Buy, McDonalds) (Business Week, 2007). 3.7 The Community Innovation Survey sought to uncover aspects of hidden innovation for the first time in 2005. Wider innovation within firms was examined in the form of a question exploring new or significantly amended forms of organisation, business structures or practices, aimed at step changes in internal efficiency of effectiveness or in approaching markets and customers. This included the possible introduction of a new or significantly changed corporate strategy; advanced techniques such as knowledge management systems or an Investors in People initiative; organizational changes, such as out-sourcing or cross-functional team building; or marketing concepts or strategies, such as packaging or presentational changes to a product to target new markets, or new support services to open up new markets. Figure 3.2 shows a comparison between the retail sector, engineering and the survey average. Innovation in the UK Retail Sector
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Figure 3.2. The extent of reported wider innovation within retailing

Source: Community Innovation Survey 2004 (CIS4), 2005.
3.8 Just over a fifth of retail enterprises reported having engaged in one or other form of wider innovation during 2002-04. The most popular form was marketing-related; the least connected with the introduction of advanced management techniques. However, levels of wider innovation were below the national average for all firms and well below that reported for engineering.
3.9 So if there is a widespread perception that the best of UK retailing is creative and innovative, how might we explain such a discrepancy in terms of innovation performance according to the CIS4 innovation survey? There may be several explanations. Perhaps we are dazzled by the best practice of a few leading innovators in the sector, which serves to conceal a lack of innovative activity elsewhere in retailing. Or, as we have suggested, perhaps the environment for innovation in retailing is different and distinctive in some way that masks or changes its nature. Or it may be that retailers think about innovation differently, or conduct innovation of a somewhat different kind than that which is conventionally used as an indicator by the statistics. We examine some of these possible explanations below in identifying five distinguishing features of retail innovation and the environment in which it occurs. 3.10 Discussions with retailers as part of this research suggested that a lot of retail innovation is more about changes in how, where and when. Continuous and non-linear, innovation in retailing appears much closer to the entrepreneurial notion of innovation according to which it is immaterial whether innovations involve an element of scientific novelty or not. In this respect innovation is seen as an economic process of cause and effect which essentially involves putting available resources to new uses. According to Ogawa (1998), who explores supply chain innovations, retailers tend to develop functionally novel supply chain innovations in contrast to manufacturers who tend to develop innovations that improve on well-articulated needs. For instance in terms inventory-management systems retailers tend to focus on new approaches to inventory
0 5 10 15 20 25 30 35 40 45 WIDER INNOVATOR Corporate strategy Management Organisational structure Marketing per cent Retail trade Engineering All sectors

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management while manufacturers tend to develop improvements to the equipment used to deliver these new approaches. 3.11 The retail type of innovation appears more difficult to record than the manufacturer one, since manufacturing firms predominantly innovate in a staircase mode characterised by identifiable step-wise jumps in product development, while large part of retail innovations tends to occur in a continuous mode of organic change. This highlights the broader problem of under-recording services innovations in cases where innovation activities cannot be clearly described as definitive products or outcomes, for instance pertaining to process or organisational innovations which are hard to identify, define and grade. According to Tether (2005) the CIS, which was initially designed around the manufacturing continues to be more suited to record staircase innovations and may be still significantly under-recording continuous innovations more common service sectors such as retailing. b. Selected characteristics of retail innovation 3.12 The classic function of a retailer is as an intermediary, which involves the creation of assortment, break of bulk and the facilitation of value creation for consumers at convenient times and in convenient places, alongside the provision of product information and appropriate pricing architectures. In this context, our research suggests that innovation in retail organizations has five distinctive features: (1) Retailers role as innovation hubs, facilitating two-way innovation diffusion, (2) innovation in a retail environment of low appropriability, (3) predominance of non-technological innovation, (4) hybrid characteristics of retail innovation, (5) reverse innovation cycle (Hristov 2007). i. Retailers as innovation hubs
3.13 First, retailers are increasingly innovating by acting as intermediaries well beyond their core retail propositions. Firms such as Tesco, Wal-Mart, Carrefour, Best Buy, El Corte Ingls, Nordstrom, Sainsburys & Metro are rapidly diversifying through tie-ups with suppliers into financial services, telecoms, utilities, travel, amongst others. In many of these cases they innovate by intermediating in the value chain and thus increase the efficiency of market exchange. They do this through what we can call a two-way diffusion process (see Figure 3.3) comprising supply diffusion - which conventionally aggregates, augments and defuses new products, services and technologies from suppliers downstream to consumers - and demand diffusion - a relatively new feature in which the retailer deciphers existing or impending market/consumer needs and communicates them upstream, thus initiating and often co-creating innovations with suppliers. (See Vignette 3.1 Best Buy, 3.2 The Local Epicurean/Budgens, 3.3 Marks and Spencer) 3.14 This innovation broadening role of modern retailers suggests that many of them are in the position to act as innovation hubs within their supply chains. For instance Hughes (2007) highlights the importance of the diffusion and use of ICT as a general purpose technology beyond the ICT and other R&D intensive high-tech producing sectors. This may help explain why so-called unexpected user sectors with negligible conventional R&D spend such as retailing have been dominating movements in US aggregate productivity growth for the past ten years. The DIUS/BERR 2007 Scorecard exercise points towards similar examples of consumed R&D that is subsequently diffused by industries such as retailing and financial services (DIUS/BERR, 2007). Innovation in the UK Retail Sector
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In the supply chain, the retailer has the final responsibility towards the customers and thus for the whole chain (Chairman of the Board) Figure 3.3. Two-way innovation diffusion
Source: Hristov, 2007
ii. The low appropriability of the retail environment. 3.15 Secondly, the retail environment is one in which innovations can be easily copied. Teece (1986) defines what he calls regimes of appropriability - environmental factors external to innovating firms which affect an innovators ability to extract profits from their innovation. Such regimes can comprise the availability of legal instruments for protecting innovations like patents or copyrights, alongside technological conditions including production cycles or codified and tacit knowledge. 3.16 But operating in conditions of low appropriability causes knowledge spillovers between firms resulting in the rapid erosion of any first mover advantage. Sir Terry Leahy, Tesco CEO, has observed that the average dwell-time of an innovation in grocery retailing is around six weeks. In retailing there are low barriers to protecting intellectual property and thus high risk of not being able to extract profit from innovation. It is very difficult for retailers to make continuous big changes because they're constantly sort of measuring and matching each other (Board Director). In retailing generally you have those who create something new and those that copy. For example Home Depot has been copied everywhere by different retailers (Marketing Director). 3.17 If retail innovations can rapidly be copied, then continuous incremental change coupled with building airtight market matching capabilities through the rapid scaling up of innovation to the point of profitability, or simply through sheer economies of scale are the kinds of defence mechanisms used by retailers to protect their innovations. For instance Tesco
uses the strap line start small, scale up, think big.
Supply Demand Diffusion Diffusion Retailers as intermediary innovators
Generate Adopt Adapt Augment Diffuse
Efficiency Differentiation

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iii. Predominance of non-technological innovation. 3.18 Thirdly, retail innovation for the most part appears to comprise non-technological, customer facing activities which are driven by social-economic rather than technological forces. Of course, technology is a high profile and important enabler in what retailers do, as well as providing the capability for reaching out into untapped markets. Nevertheless, in contrast to manufacturing, technological trajectories are seen by retailers to have a relatively limited impact on the overall characteristics and focus of their innovation (Hristov & Reynolds, 2005). I think technology is always important, however its not the be all and end all because, you know, at the end of the day customers dont buy technology, not in our business, they buy the results of technology. So I think as long as its seen in terms of what the customer wants, does this provide things faster or better or cheaper, then you're in the right place. (HR Director). iv. Hybrid characteristics of retail innovation. 3.19 Fourthly, some vertically integrated retailers have their own production units or design facilities, such as Zara (Spain) part of Inditex, Migros (Switzerland), Tchibo (Germany), the S-Group (Finland) For instance Migros, the largest Swiss retailer is the second biggest chocolate producer in Switzerland (Hristov, 2004). Others consider themselves manufacturers without factories in the sense that they exert significant upstream influence over suppliers. These characteristics have specific consequences in terms of innovation. We might expect such retailers to exhibit many characteristics in common with manufacturers, such as a focus on step-wise rather than continuous innovation. On the other hand, all retailers provide services of various kinds and we might expect innovation here to be different from the predominantly linear innovation patterns of manufacturing. 3.20 Therefore retail innovation displays hybrid characteristics which are consistent with the complex nature of retail output. For instance, in the introduction of certain new product lines, there may be obligations on retailers to undertake scientific and quasi-scientific tests and trials. In many cases the NPD processes of retailers can be analogous to that of manufacturers. Sainsburys operate a five stage-gated system of NPD of (Stage 1) capture and develop ideas, (Stage 2) develop project, (Stage 3) develop concept samples to own brand strategy (Stage 4) production, trials and launch (Stage 5) product analysis and project performance. This is not an isolated example: similar linear innovation pipelines are used by ASDA, Boots and Marks & Spencer in their NPD. However in areas such as trading, customer services or sourcing, innovation appears non-linear and, at times, even ad-hoc. For instance some winning retail formats emerge from an opportunistic, experimental and incremental process, sometimes based more on intuition than rational analysis. Inside the business development area, under the Business Development Director, there's a very structured point to the way we do things. But in some cases innovation is much less structured,
in some cases its quite ad-hoc (Managing Director) But I would guess in retailing there isn't much organisation of innovation, I think its more experimental and haphazard and opportunistic because of the nature of the business (CEO of Industry Association). Innovation in the UK Retail Sector
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v. Retailers reverse innovation cycle. 3.21 Finally, retailing can experience a reverse innovation cycle (where financial and organizational costs are incurred at the end of the innovation process rather than at the beginning). This has also been observed in the financial services sector (Barras, 1986). But among multiple retailers we can also see both reverse innovation development and innovation investment cycles similar to those of many manufacturing firms. In manufacturing, the biggest financial outlays tend to be associated with R&D and the following NPD process. Once the product gets to market radical innovation gives way to incremental improvements throughout the product life cycle (as in the software industry). In retailing, the initial idea - even at the stage of initial prototyping - is relatively cheap and largely experimental. However, the process of scaling up an idea across a large portfolio of stores often requires radical innovations (such as in organisation and process) and major investment and management resource. For example, it took Tesco nearly 12 years from 1994 to 2006 to bring to full scale their initial idea of an Express store. That included trials of the concept, limited rollout, location planning, refinement of the concept and subsequent scaling up through the acquisition and re-branding of T&S Stores as well as organic growth to what is now a portfolio of over 730 stores. Once at a critical mass this innovation had a transformational effect on the market and led to a range of radical innovations in logistics and marketing. I think the actual development of a concept is not complex and as soon as you know it works, then you do it. However lets take PC World, it would have taken ten years from the point that it was clear that it was a success to having rolled out through the UK, and I dont know how much longer it will take to go out to Europe (CEO).
Vignette 3.1: Best Buy Context: Retailers as innovation hubs Example: Best Buy, the biggest US electrical retailer has set up what it refers to as a Venture Capital Network (VCN) for identifying promising technologies for new products or services. The role of this VCN is to speed up the transition of these technologies from concept to market. This is achieved through the creation of external innovation networks linking up venture capital firms with innovation start-ups working on particular retailer projects. Best Buy stores are then used to hot-house and test the innovations in a retail environment. For a number of years the retailer has also been pursuing a customer centricity program of segmenting their market and developing bespoke retail formats for each of the target segments, for instance affluent professionals seeking the best technology experience, younger males wanting cutting-edge new technology, fathers looking for technology to improve their lifestyle, mothers seeking technology to enrich their children's lives or small-business people using technology to improve their bottom line. The range and the services offered for each segment are tested in what the company refers to as lab stores, 68 of which are located throughout California.

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Vignette 3.2: The Local Epicurean/Budgens Context: Innovation in a small retailer Example: The Local Epicurean was founded in 2006 by Andrew Thornton, a retail consultant who acquired his first food store from Budgens and joined the Musgrave-Budgens-Londis (MBL) franchise. Less than two years later his company The Local Epicurean operates two Budgens branded stores, the first one of 9,000 sq ft in Londons Crouch End and the second of 7,000 sq ft, located in Belsize Park. The company employs altogether 170 people and has an annual turnover of about 17 million. Budgens as a retail brand is owned by MBL - Irelands largest food and grocery distributor. The business model is based on
independent retail operators who buy products from the company and to whom MBL provides sales, marketing, IT and logistical expertise. In the process the independent franchisees have a fair amount of freedom in terms of how they construct their ranges in view of local needs. According to Thornton: Consumer needs can be very different from one place to another therefore the benefit of such entrepreneurial model is that individuals who own their stores will do what is absolutely right for the local community. There some guidelines you have got to follow in terms of brand entity, but within that, how you work with the local community is up to you. Therefore while Thornton has to buy a substantial amount of his goods through the MBL system he does not have to buy all of them from there. So you can buy from Musgrave your corn flakes at competitive prices but you can also buy your bread from the local baker who is just 50 yards across the street. Thorntons two stores serve over 22,000 local customers seven days a week. Competition in the area is intense. Just within a walking distance from of his Crouch End store there are one Tesco Express and a Marks & Spencer Simply Food - both formidable competitors. Therefore as a retail entrepreneur, he sees his role in keeping the business fresh and attractive to customers: innovation is not a matter of choice but a matter of survival. We must innovate continuously and in a customer focused way to sustain and grow the business and my job is all about innovation really, business development, changing things making thins better. Thats how I would define innovation basically change in a business in line with what customers want. New ideas are implemented through a team of managers whose concern is the smooth day-to-day running of the business. The innovation effort of the company is channelled in three broad directions: (1) local sourcing, (2) environmental initiatives and (3) retailing tailored for the local community. 1. A distinctive store, localised product range and friendly services are seen as absolutely essential in establishing the two stores as local destinations. Since the acquisition, the Crouch End store has been refurbished to reflect Thorntons vision of innovative food retailer. The revamp included the introduction of zones for delicatessen, beers, wines and spirits and the introduction of new lines with emphasis on local foods. Additionally a food to go counter was installed replacing a chiller cabinet for pre-packed sandwiches. The new unit features juice and coffee bars for freshly made fruit juices, smoothies and Lavazza coffee and also offers freshly baked bread and made to order sandwiches. The store has an Epicurean Deli with fresh salads and meats all sourced locally. There are a many good food producers around London which we want to bring in our stores. In fact we are organising a meeting in January with about 15 of them and will be working with them to introduce their products into our stores. Both stores already offer a sizable range of direct from the producer SKUs, sourced within 100 miles and free from artificial colours and preservatives. There is also the product of the week initiative with regular supplier tasting in-store, shelf-edge labels clearly indicating the food miles of each of the local products. The stores offer fresh bread from Dunns - a local bakery, a range of food products from Suffolk and cheeses from Whitfield. 2. In terms of the environment, the company innovates through a range of initiatives. Pennies for plastic is one of them. We want to encourage people to re-use their bags, therefore for every bag not used in our stores we are donating 1 penny to a local charity. The campaign has helped raise money for building a new stage at the local school - Weston Park Primary. The message has been clearly publicised both in-store and through the media. The initiative has gradually gained momentum, the end result being that Budgens Crouch End has managed cut in 5 months their carrier bag usage by 55%. According to Thornton this is the first step towards altogether substituting the disposable plastic bags for the more environmental reusable and Jute bags. In March next year we are planning to give away 15,000 reusable and Juke bags and then we shall stop altogether offering disposable plastic bags in our stores. Other environmental initiatives include food composting, making sure that food products refuse is composted rather than to put in landfills and hoisting the heat emitted from the store chillers back into heating up the stores, thus reducing energy consumption. These initiatives are carried out in co-operation with environmental organisations, one of them - The Carbon Trust. 3. The third direction for innovation according to Andrew Thornton is local community retailing. This includes a range of initiatives the aim of which is to make local independent retailers the preferred destination for shoppers. There are many good independent retailers locally, but we have to market ourselves more effectively. The idea is make independent retailing in Crouch End more attractive and to encourage local shoppers to stop using their cars, travelling all that way to out of town shopping centres and instead just walking

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down to their local high street to for their shopping. Thornton refers to this set of initiatives as The Crouch End Project. The idea was initially developed with the head of the parents association at the local school where the Local Epicurean has built a new stage. 26 independent retailers have joined forces the project sponsoring the local fun run, school carol concerts, music, wine and cheese evenings. We have even designed our very own Crouch End cotton shopping bag and we are experimenting with a Crouch End
wedding list, that sort of innovations we develop with shoppers and retailers together. They are relatively inexpensive and easy to reverse if they dont work. We keep innovating since thats important both for us and our customers (Hristov, 2007 - Company interview). Vignette 3.3: Marks & Spencer Context: Innovation in sustainable development, co-innovation; retailers reverse innovation cycle Example: In October 2007 Marks and Spencer unveiled its first eco-store in Bournemouth. The completely refurbished 51,000 sq ft store incorporates a whole host of new eco-technologies. It is completely powered by renewable energy and is 25% more energy efficient. Its innovative footprint has been developed in line with the M&S Plan A in which the retailer has pledged 200 m over 5 years on innovating on sustainable and ethical projects. For instance by year 2012, M&S aims to: become carbon neutral, send no waste to landfill, extend sustainable sourcing, set new standards in ethical trading, and help customers and employees live a healthier lifestyle. The above is expected to be achieved in tandem with organisations such as WWF in the area of new sustainable store concepts, WRAP in area of eco-friendly packaging, and with their commercial suppliers on issues of reducing carbon emissions, and the development on new eco-products and healthier foods. The Bournemouth store which is the first of four planned in the next few years has its own green travel plan and bike racks to encourage customers and staff to cycle to the outlet. (www.marksandspencer.com, 23.10.2007)

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4. How do retailers think about innovation?

4.1 The retailers to whom we spoke as part of this research (Hristov, 2007) acknowledged overwhelmingly the crucial role of innovation for the performance of any retail business. Without innovation, they suggested, like-for-like growth and profit margins decline and organisations run into life-cycle issues: You get about two years under the sun and then suddenly there is a new kid on the block ever so often you have to take a long hard look at yourself (CEO) But our findings also indicated that there is a real range of meanings and interpretations among retail practitioners as to what constitutes innovation in retailing, and this may contribute to under-reporting in conventional surveys. Its seen not just as: A necessary means to continued existence, but also as Change with positive, long-lasting effects, A cross-business process of generating and implementing commercially viable ideas that deliver benefits to customers, and A process of implementation of new ideas which creates differentiation in the marketplace. 4.2 Further, retailers acknowledged that defining and measuring retail innovation was difficult since innovations were largely dispersed across the business: requiring the co-ordinated effort of a wide constituency of people across functional areas and including suppliers and customers. As a term, therefore, innovation often did not appear immediately self explanatory to retail practitioners. Or, as one senior consultant put it, Innovation, its too big a term. To communicate it, one has to break it into its component parts. 4.3 With some notable exceptions most of the retailers in the sample pointed out that they did not use the term in their everyday vocabulary. Yet they felt that their organisations innovated all the time without having innovation directors or departments. Some referred to innovation as a composite term which in practice needed to be translated into more concrete operational terminology such as: new product development (NPD), new SKUs, new categories, refreshing the range, new formats, new markets, or new applications of technology. It is very hard to define innovation. We are a fashion retailer; therefore every time you design a
new product is that innovation? How different does it have to be, to be innovation? We innovate in the product, in our designs, in our store environment, we are creative in the way we brand ourselves and in the way we interact with our customers but there are many levers to pull, I think the trick is to pull these at the right time and at the right level, rather than thinking next year I'm going for my store refit, or next year Im going to launch an all-new product offering, one has to be entrepreneurial about that. (CEO Fashion Retailer). 4.4 Some retailers perceive the term innovation as a much more radical departure from business as usual rather than incremental change in operational practices and new product development. Innovation in the UK Retail Sector
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We prefer to use newness. Innovation somehow carries the meaning of a radically new idea. I guess it is associated with blue sky thinking or something that has never been done before. The majority of our incremental growth comes from newness, which I would describe as a stage below innovation. We also use reinvention (Commercial Director). 4.5 So what therefore constitutes innovation in retailing? Summarising the views of over 50 senior industry practitioners, we suggest that a broadly acceptable definition might be: Elements of the retail offer (i.e., products, range, services, retail format, etc.) in tandem with the underpinning organisation and technologies needed to deliver these to the market, which are new or significantly improved as a result of the retailers existing market or technological knowledge. 4.6 Whilst interviews with retailers indicated a plethora of meanings and views as to what might constitute innovation, it also found a distinction between those innovations which were strategic and these which were more operational in character. a. Strategic retail innovation 4.7 Although retail innovation tends to follow a pattern of a continuous change mode rather than the more pronounced manufacturing pattern of series of step changes between periods of stability, there is evidence that more radical innovations are often qualified as strategic in the sense that they are guided by corporate strategy. Examples of these are sector hopping from food to non-food - for instance in the case of Sainsburys and ASDA - or pursuing new channels to market in the case of the John Lewis Partnership (Waitrose) with Ocado.com. (See also Vignette 4.1 Hotel Chocolat.) Strategic innovations might also involve the development of new retail formats for international markets, in the case of Tescos new Fresh and Easy concept for the US market. Similarly they involve innovative business models which combine a range of retail applications such as catering, retailing, entertainment and the internet often introduced by smaller retailers in rural communities. There are also examples of radically new approaches to sustainable development or retailer-supplier collaboration. (See Vignette 4.2 Migros, 4.5 - Zara and 4.6 TK Maxx, 4.7 - Somerset Local Direct). b. Operational retail innovation 4.8 At an operational level there seems to be a broad consensus that innovation is associated with new products, ideas or ways of operating. The predominant view suggests that
operational retail innovations are mainly continuous, incremental and with a cost or value-added focus. They often involve planning, management sponsorship or resource allocation and have short innovation cycles of between 3 to 18 months. For example, one typical approach to innovation is experimentation through test or lab stores or through continuous store trials. The US electrical retailer Best Buy has opened over 60 lab stores in which they test new ranges, technologies and services (discussed in Vignette 3.1, but see also 4.4). Similarly Metro set up its Future Store near Rheinberg in Germany (now closed) where alongside testing new technologies such self-checkouts, RFID and smart scales, they also tested and refined their new hypermarket footprint of Real Extra. Innovation in the UK Retail Sector
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Sainsbury also has its own a technology store in Hazel Grove where it tests the appeal of new concepts to its core customer base11. c. The retail innovation pyramid 4.9 What traditional innovation literature does not explore or explain at any length are the typical application areas in which retail innovation occurs. Our research has identified three such areas: (1) offer-related innovations, (2) support-related innovations and (3) organisation-related innovations. These areas are summarised in the retail innovation pyramid in Figure 4.1 at the apex of which is the retailers overall corporate strategy (Hristov, 2007). Figure 4.1. The retail innovation pyramid
4.10 Offer-related areas of innovation include innovations in product, service, category format, channel and market, etc. For example Tescos innovations in non-food categories including stationery, entertainment, house wares, clothing, electronics, financial services, telecoms and convenience store. For example the US retailer Whole Foods Market has extended their organic concept beyond their supermarket format into non-food by rolling out in 2005 their Lifestyle store of environmentally conscious clothing, house ware and other non-food products. By locating what they refer to as the Lifestyle Annexe next to their full-range supermarkets the company is creating one-stop retail destinations for the rapidly increasing number of environmentally conscious consumers. (See also the example of retail service innovation in Vignette 4.3 Retail Clinics). Such innovations are central for retailers since they involve customer interactions and have direct contribution to growth. They are often led by major functional areas like commercial (buying), retail operations, NPD or creative and marketing. In terms of deconstructing retail innovation
11 http://www.igd.com,
(26.03.2007) Strategy Offerrelated innovations Supportrelated innovations Organisationrelated innovations

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along the lines of the more traditional innovation typologies of product versus process, incremental versus radical, we conclude that all these are seen amongst retail practitioners. Nevertheless their prevalence appears distinctly retailer specific, for instance in the case of the novelty mix of a retail range. (See also Vignettes 4.1 Hotel Chocolat, 4.8 Smileys Delicatessen, Farm Shop and Caf). 4.11 Support-related areas of innovation: On the other hand, support-related areas of innovation encompass innovations in technology, systems and the supply chain, etc. Examples of these are the development of extranet capabilities in terms of electronic stock control, payment, invoicing and delivery systems, similarly sharpening customer focus through the introduction of customer databases and loyalty schemes or innovating in in-store technologies in terms of sustainable energy consumption, shelf-management
or payment systems. These are seen as key facilitators for the offer-related area and contributors to overall retailer efficiency and productivity (See Vignettes 4.9 - Boots and Tesco and 4.10 - The Mid Counties Co-op: payment systems innovation). 4.12 Organization-related innovations comprise the third area, which includes innovations with strategic or operational significance that provide management and delivery frameworks for the previous two - such as innovations in the retail model, in administrative processes, cross-functional teams or in new activities which require coherent management mechanisms such as in the case of CSR, sustainability and ecology. (See Vignettes 4.5 - Zara and 4.6 TK Maxx, 4.7 - Somerset Local Direct, 4.11 - ASDA and 4.12 - the Co-op). 4.13 The management levels and areas of retail innovation described above are summarised in the organising framework shown in Figure 4.2. Figure 4.2. Organising framework of retail innovation
Drivers of retail innovation: external internal Strategy Management of retail innovation: strategic operational Areas of retail innovation Market

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Vignette 4.1: Hotel Chocolat: multi-channel format Context: Offer-related innovation Example: British chocolate has been a joke for quite a while. We are at the forefront of its resurgence. (Angus Thirwell, cofounder). Hotel Chocolat has exploited a vacant niche within UK retailing for authentic, high quality, British-made chocolate. Hotel Chocolat was founded as a catalogue business in 1993. Its first store did not open until 2004. It now operates a corporate gifts service and a tasting club with 100,000 members, in addition to its web site and 22 outlets in the UK., which generate 39mn in sales. It won Emerging Retailer of the Year Award at the Retail Week Awards in 2007 as well as being nominated as a CoolBrand and plans international growth. It is already available online in New York, Boston, Atlanta, San Francisco and Chicago. Vignette 4.2: Migros sustainable brands Context: Brand innovation Example: Migros is the largest Swiss retailer with 2m co-operative members, 590 stores, and sales of CHF 21 billion. Over several years the retailer has agreed with its suppliers a set of ethical standards manifested through the launch of its range of own labels under the umbrella brand Engagement. Each individual label represents a kite mark for a particular initiative of Migros, for example the elimination of child labour, better living conditions and the conservation of tropical forests. These initiatives predate much UK activity. Examples of such labels are: BIO is for organic products manufactured without the use of chemical-synthetic pesticides and fertilizers, Max Havelaar (Maximal Fairness) is for products complying with our fair trade guidelines, 7-point meat guarantee label is for healthy meat from healthy animals, IP-SUISSE guarantees that the bread, flour, potatoes and rapeseed oil are produced in Switzerland under environmentally friendly conditions, Marine Stewardship Council guarantees that the fish is from sustainable fishing grounds, Forest Stewardship Council for timber from forests that are managed in an environmentally friendly and socially acceptable way ECO is guaranteeing environmentally friendly production of clothes, home textiles and shoes, Bio Cotton for organically grown cotton According to Claude Hauser the Chairman of Migros alongside technology and product extensions innovation in Migros is about principles. Although the company acknowledges that generally grocery markets are quite price sensitive there is also an increasing sensitivity among shoppers about ethical, environmental, and health issues underpinning the growing need for the Engagement brands (Hristov 2004; Migros 2006). Vignette 4.3: Retail Clinics Context: Co-innovation in new services Examples: Recent example of new service introductions in US retailing are the trials in-store retail clinics. In this case more than a dozen clinic operators in co-operation with retailers such as CVS, Wal-Mart, Target, Walgreens and Kerr Drug are piloting the
idea in-store clinics which will be providing convenient but limited service at a low cost offering basic procedures such as inoculations and treating common ailments such as strep throat, ear infections and allergies. These walk-in clinics are seen as alternative to the more expensive doctors surgeries and emergency rooms, although this has provoked serious backlash from family doctors who call for tighter regulation of such practices. In the UK in 1999 Boots trialled dental clinics in some of their high street stores after the acquisition of Dental Body Corporate and Wilson's Dentistry Limited, the initiative was later abandoned. The company however continues to offer flu jabs and free prescription collection. (www.usatoday.com; www.ft.com; www. bbc.co.uk, 21.10.2007) Vignette 4.4: Wal-Mart limits to format innovation Context: Retail format innovation Example: Having created the Supercenter years ago, Wal-Mart has continued to incrementally evolve the concept. Over time it has deliberately pushed the envelope creating new more productive versions of the format roughly 20 000 sq ft or more larger

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than the initial one, gradually taking it from 120,000 sq ft up to 200,000 sq ft. The new stores are testing added features which are subsequently rolled out nationwide such as new lines of clothing, extended electrical department selling computers, iPods and DVDs and a full-range grocery department. The stores are also testing new media with TV screens navigating shoppers in store. However, the standard Supercenter format did not work as well in Japan or Germany. According to Wall Street Journal the company is also working on two new smaller store concepts in direct response to Tescos US grocery stores. The first is an urban C-store catering for more affluent tastes in city centres while the second is a standalone retail unit offering a wide range of health services and products. (Accenture 2005; www.walmartfacts.com; www.csnews.com, 23.10.2007 ) Vignette 4.5: Zara: threats to fast fashion Context: Business model innovation Example: Zara, the retail subsidiary of Inditex was among the first proponents of the fast fashion business model which was built on the basis of: partial vertical integration, in-house design, buying of merchandise much closer to the season and fast feedback from stores. The model allows for high stock turnover, 4 weeks at most lead times from concept to consumer. The result is a constantly refreshed product range of more than 12 000 SKUs (e.g., new styles every week in low production quantities) and on average 17 customer visits per year. The when-its-gone-its-gone approach also means far less price mark downs, i.e. higher profitability. However the fast fashion model of Zara, Top Shop and H&M now appears to be under pressure from a new breed of clothing discounters such as Primark, Peakocks and fast growing grocery labels such as Cherokee (Tesco) and George (ASDA) which are managing to offer clothing with contemporary styling at discount prices. Vignette 4.6: TK Maxx: the off price model Context: Business model innovation Example: The off-price business model of TK Maxx (the British affiliate of the US company TJX), suggests another type of innovation. The appeal of its offer comes from a wide range of well-known designer brands sold at 20 to 60% discount. TK Maxx is able to do this through its opportunistic buying strategy. Unlike more traditional department stores which commit to quarterly buying cycles, the merchandising teams at TK Maxx wait until both suppliers and retailers have committed to their orders and then look for excess or unwanted stock at discount prices (Ritson, 2006). Vignette 4.7: Somerset Local Direct Context: Business model innovation Example: Somerset Local Food Direct is retailer offering their customers every day online the same quality of local foods as they can buy at farmers markets. The company was set up with the help of funding from DEFRA. The retailers philosophy is about supporting local food culture, providing value and convenience to customers and helping local agriculture survive in the face of imported produce. Most of its suppliers are farmers and producers who also sell at local farmers markets. Somerset Local Food Directs business model is simple. The company has a catalogue of locally sourced foods, augmented by organic and ethically sourced produce from further afield. It proudly emphasises the predominantly local nature of its range pointing out that 80% of suppliers can see the local landmark, Glastonbury Tor. The catalogue can be accessed online or as a paper copy. Customers can then place an order (80% do so on the web site, 20% by phone) up until Tuesday morning. The company then places orders with producers on Tuesday for exactly the amounts required to fulfil that weeks orders. Suppliers then deliver their produce to the Glastonbury warehouse on Wednesday and it is put out onto the shelves. The orders are picked and a fleet of vans delivers the orders to customers homes on Thursday and Friday. Produce is packed in insulated boxes to keep it fresh and this also means that customers do not need to be at home when it is delivered. Because of its origins, and numerous contacts in the farmers market movement, the company has been quickly able to develop a competitive product offer, achieving the necessary critical mass to be successful. Keys to profitability are strict control on costs, sufficient density of customers to make delivery viable and attractive range available in all seasons of the year. There is obviously a limit to the distance from the warehouse within which delivery is economic. Crucial to the whole operation is a computer

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software system, developed in-house. Given the determinedly local scale of the operation, Somerset Local Food Direct offers a remarkable range of goods, amounting to well over a 1,000 SKUs including fresh locally produced meats, vegetables, dairy
produce, eggs, breads, preserves and snacks. Such a range caters for a large proportion of the weekly requirements of customers which in tunrn generates additional customer loyalty. As a result, the average order value is healthy, with some customers ordering up to 80 worth of food at a time. This is important to the economics of the operation, as, even with a delivery charge of 3, small orders are unlikely to be economic to fulfil. This coupled with recommendations from satisfied customers has helped the delivery model of the retailer, which now operates on the basis of delivery clusters, where several drops are close together and thus make the delivery operation more efficient (www.localfooddirect.co.uk). Vignette 4.8: Smileys Delicatessen, Farm Shop and Caf Context: Offer-related innovation in a small rural retailer Example: Smileys is not a standard village shop but a hybrid retail concept balancing the range of lines stocked and the different needs of teashop/caf and the retail side. The shops range is tailored to the modern reality that most people buy their cans and packets at the large supermarkets and the role of local shops is to provide short life products bought between the weekly or fortnightly visits to large food stores. The shop has a large serve-over dairy and delicatessen section, with fresh produce, much of it local, a limited range of groceries (for the I forgot to buy it at the supermarket customer) together with a wide range of confectionery including loose sweets in jars for the nostalgic. Fresh produce is displayed with some flair in wicker baskets and in artistic piles. Friendly customer service is a key part of the offer together with a willingness to listen to customers requests for items not already stocked. However, the most interesting aspect of the shop is the mix of retail and caf. The caf section is totally integrated with the shop but delineated by a pillar and a change in floor tile colour. This has a French theme and feel. With 26 covers, the caf provides informal eating with the possibility of evening service as well at weekends or other times. Lunch has proved very popular, in particular on Sundays. The challenge is to produce a menu that is interesting whilst being not too difficult to produce without a dedicated chef on the premises, that is homemade without eliciting the response, Well, I could do it just as well at home. Catering provides much higher gross profit margins than retail but there are higher costs as well, in terms of time required to prepare and serve the food, wastage, space, etc. Hence managing the balance between the two halves of a business like this is crucial - being able to cope with the inevitable peaks in customer demands. Theories of retailing might suggest that the demand from the village itself is too small to sustain the shop or cafe on its own. However, there is also significant passing trade on the A road that passes through Sandford, the shop having a large forecourt for parking (The Rural Shops Alliance 2007). Vignette 4.9: Boots and Tesco: customer-centric supply chain innovation Context: Supply chain innovation Examples: In 2005 Boots launched the first phase of its Store-Friendly Supply Chain (SFSC) programme taking a more customer-centric perspective to the way it organise its supply chain. The aim is to improve stock availability and free up staff time in store to serve customers instead of unpacking and sorting merchandise. Boots claims that as a result of SFSC, over 80% of items are arriving at stores ready to go straight onto shelves, a huge saving in time and energy for busy store managers and their teams. (Boots Annual Report 2006) Tesco is improving the efficiency of its in-store operations and on-shelf availability by innovating in what the industry experts refer to the last 50 yards. In shelf-replenishment terms this means increased use of new design merchandising units, easier to refill freezer units with drop down fronts, shelf-ready packaging (SRP) and trials of in-store applications of RFID. Vignette 4.10: The Mid Counties Co-op: payment systems innovation Context: Retail applications of biometric technology Example: The Mid Counties Co-op has introduced a finger-touch payment system, enabling customers to pay for their shopping by scanning their fingerprint at the checkout. The biometric payment system developed by a consortium of a technology firm in San Francisco, Fujitsu and Pay By Touch has been tested by the Mid Counties Co-op in three of its stores in the Oxfordshire area. Customers using the Pay By Touch can set up an account at the store or over the internet. Once their fingerprint has been identified at the checkout the customer's bank account is automatically debited. The retailers own research suggests that Pay by Touch has the capacity to be up to 20% than using chip and PIN.

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According to the retailer the initial customer response to this innovation has been very encouraging. From a sample of 1000 Coop shoppers in the areas where the system is in operation half has already signed up to the scheme or planning to do so in the near future. The Co-op is the first retailer in the UK to launch this new technology which offers a secure and convenient way of payment. (www.software.silicon.com; www.imrg.org, 23.10.2007) Vignette 4.11: ASDA Context: Innovating in sustainable development Examples: Fair trade: ASDA claims to be the largest seller of Fairtrade fruit and vegetables in the UK, and is extending its Fairtrade lines across the range. Organics: ASDA has reported that it will increase its organic ranges from the current 300 SKUs to 1,000 SKUs by the end of 2007. Transport/logistics: The retailer has entered planning applications to install wind turbines at six of its UK distribution centres (www.planetretail.net, 03.08.2007). Eco stores footprint: The company is planning to open its first sustainable timber frame with view of lowering its carbon footprint. This will eradicate the use 500 tonnes of steel and is expected to save 450 tonnes of carbon emissions while improving the energy efficiency of the stores by 20%. The company aims to achieve zero waste going to landfill by 2010. (www.asda-press.co.uk, 18.10.2007)
Vignette 4.12: The Co-op Context: Innovating in sustainable development Examples: The Co-operative Group strives to evolve its business model in a sustainable manner by undertaking a number of commitments and environmental initiatives such as: 98% of outlets to be powered by green electricity The initiation of wind farm projects Solar power and micro-wind installations on two Head Offices Commitment to reduce energy consumption by 25% by 2012 The entire own-brand household paper range sourced from responsibly managed forests and recycling facilities certified by the Forest Stewardship Council. (Presentation by Martin Beaumont, CEO, at the BRC conference (2007) The secrets of retail success)

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5. What drives retail innovation?

5.1 This section focuses on exploring the specific drivers of innovation in retailing as seen by the interview component of our research. Managers perceptions about the drivers of innovation help us to understand how organisational responses are shaped in terms of strategies, structures, directions and the ways in which innovation is measured. In most cases, there is broad agreement on what these drivers are and that they fall into two broad categories: those external to the firm and those internal: Drivers external to the retailer drivers comprise (1) customer/consumer trends, (2) the competitive environment, (3) industry cycles and organisational growth, (4) the regulatory environment, (5) technology, and (6) retailer-supplier relations; Drivers internal to the retailer comprise (1) strategy and business planning, (2) top management vision and leadership, (3) operational efficiency, (4) organizational culture and structure, (5) innovation reward mechanisms, and (6) availability of resources (financial and human) (Hristov 2007). Figures 5.1 and 5.2 summarise the relative importance of the six main drivers as seen by a sample of 34 interviewees. a. External to the retailer Figure 5.1. External drivers of innovation
Source: Company interviews content analysis, (Hristov, 2007).
5.2 Customer/consumer trends: By a long way in terms of share of responses (65%) of managers consider changing consumer trends to be the major external driver of retail innovation. This is unsurprising because of the very nature of retailing as a consumer facing activity. Consumer trends are multidimensional and include socio-economic, technological, demographic components, like changes in terms of mobility, sustainable
65% 53% 47% 18% 18% 12% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Customer/consumer trends The competitive environment Industry cycles and organisational growth Technology The regulatory environment Retailer-supplier relations

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consumption, consumer welfare, use of technology, fragmentation of demand, or the emergence of a global consumer. Interviewees acknowledged that commercial survival and success are intrinsically linked to their ability to innovate simultaneously across all
these areas of change. This results in plethora of retail initiatives around the retail offer, delivery channels and the underpinning operations. 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. Here the dilemma for senior managers seems to be to what extent retailers need to be customer-driven (focused on expressed consumer needs) and to what extent they could actually drive consumer demand by focusing on latent needs. Ultimately of course all adds up to innovation in the proposition to the customer because the customers buying the product and the service and its happening through the supply chain and they're buying it through different channels (Marketing Director) I think the need to have competitive advantage over other people on the High Street, they want to be able to have that product that nobody else has got ahead of everyone else. I think they are very keen to improve the customer environment I think they [retailers] are quite focused on the customer areas in terms of delivering innovation (Senior Manager, Industry Association). 5.3 The competitive environment: (a 53% share of responses.) Growing international competition coupled, with continued industry concentration and the effects of the Internet on consumer demand and shopping habits invariably affects the pace with which retailers innovate. Interviewees distinguished between two types of competition: the first are competitive pressures from direct competition in the marketplace from incumbents in pursuit of market share and customer patronage. The second is what many retailers referred to as fear from industry disruptions coming within or from outside the sector. These might include radically new retail business models, enabling technologies or even new product propositions which compete with retailing for share of consumer wallet. By definition, these often indirect competitive challenges are much more unpredictable. While sustaining innovation is about incremental improvement along established industry trajectories, innovations that result from disruptive competition are often simpler and cheaper, but require very different set of commercial capabilities which incumbents may find difficult to develop. I think a lot of it is down to competition, its always trying to be one step ahead other people or watching the competition lead and then trying to follow very quickly (Innovation Director). A disruption to your normal business model from competitive activity, rapid market change - I think these are main drivers on a macro level. (Marketing Director). 5.4 Industry cycles and organisational growth has a 47% share of responses. Here managers associate industry cycles with their own organisational lifecycle. In this respect innovation is seen as the means for continued existence. Retailing experiences distinct phases of development, and change through innovation is seen by incumbents as critical for developing new differential advantages and revenue streams. This is nowhere more relevant than to retailers in mature and saturated markets. According to one Commercial Innovation in the UK Retail Sector
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Director about fifty to sixty percent of like-for-like food retail growth in one of their markets comes from innovation rather than business as usual. This drives companies to change their strategies, structures and propositions. As the CEO of a leading discounter pointed out, Innovation on a strategic level is about positive change and improvement, I dont want to innovate and make things worse. Sometime change entails radical innovation or reinvention of the business model which requires leadership from the very top of the organisation (Hristov and Reynolds, 2005). Our department store model was in decline, we had to do something and go back to our routes of being more radically innovative. We had to redefine ourselves, and thats what we did (CEO). 5.5 The regulatory environment was included in 18% of responses. However considering that the driver it becomes apparent it has a wide ranging area of impact associated with all other drives. A wide-ranging regulatory environment (addressing relates to competition and consumer protection legislation, planning, transportation and the environment) is seen as important in shaping the direction of many retail innovations. In their pursuit for growth retailers constantly see the need to adapt their strategies to the environments in which they operate. In the spatial planning regime has given rise to new types of shopping outlets at new locations (see Vignettes 5.1 IKEA, 5.2 responses to regulation and 5.3 Currys customer recycling proposition). We grow organically through buying land and building the stores ourselves. This however is not always possible. In some markets such as the UK, there are hardly any locations left, and there we combine organic growth with possible acquisitions. (Executive Chairman) In many service industries de- and re-regulation can trigger the scope for innovation. In retailing the liberalisation of opening hours of shops in combination with changes in the spatial planning regime has given rise to new types of shopping outlets at new locations (van Ark, Broersma and den Hertog, 2003). 5.6 Technology: (18% of respondents). The role of technology is seen increasingly as supportive to the customer facing functions in retail organisations. Without ignoring the technological dimension, interviewees appear, to reinforce the generally nontechnological focus of retail innovation. Indeed, some commentators point toward lack of enthusiasm among some retailers to innovate in the ICT area. There are however many notable examples of retailers who behave as early adopters or generators of retail technologies (Hristov and Reynolds, 2005). (See Vignettes 5.4 Marks & Spencer and 5.5 Tesco in a Box) Retailing is not like some aspects of manufacturing which is primarily about technological lead. In retailing these [factors] are going to be further down the interest list, retailers think in terms of how can we better understand our customers, listen to customers, deliver what they need in the right format and so on oh, and by the way, how can we usefully deploy technology in order to achieve that? (Strategy Director).

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Big, big, big, which is why I do development and IT, because the two are interlinked, whether it be new software that allows us to do things we haven't done before like link together databases, whether it be new technology like handsets, what mobile phones are going to do with Bluetooth, 3G, I mean all of that is a driver of innovation So its how you tie the technology into practical usage at some point in the future, (Business development and IT Director). 5.7 Retailer-supplier relations: (12%) This final driver of innovation highlights the importance of the relationship between retailers and their suppliers as an intrinsic part of the two way innovation diffusion innovation. The link appears particularly strong in retail areas such as NPD, buying, logistics and ICT. The continuous growth of retailer brands, diversification, geographical expansion, and multi-channel retailing, coupled with the constant quest for greater efficiency strengthen this complex but essential relationship. (See Vignette 5.6 Waitrose.) We dont manufacture anything, so although we have product development technologists and buyers here, obviously with our suppliers there's an equivalent team, so there would be product developers, technologists and commercial people there. And we talk about a partnership and there's this constant well who does the innovation, where do the ideas come from (NPD Director). b. Internal to the retailer Figure 5.2. Internal drivers of innovation
5.8 Strategy and business planning account for 71% of all responses. Senior managers characterise strategic planning as a decision making process which translates the retailers intent into a realized strategy. This involves the development of sales, profit or competitive objectives in line with the retailers business model and in pursuit of opportunities in the market place. Strategizing involves the allocation of financial, human resources into new competences. The interviewees drew clear connections between strategy and innovation. The predominant view is that strategy drives innovation
71% 36% 32% 21% 12% 9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Strategy and business planning Organisational culture and structure Top management vision and leadership Operational efficiency Innovation reward mechanisms Availability of resources
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in terms of direction, resources availability and timelines. Evidence of that is the existence of organizational routines such as annual planning cycles, regular board meetings with innovation on the agenda, strategic and range reviews in the course of which innovation is discussed and planned. Innovation is not always about ideas, many people have ideas, it is not even about skills many have these as well - it is about the will of implementing new ides, the dogged determination to bring them the market through a well thought-out strategy (Marketing Director). 5.9 Top management vision and leadership: 32% of respondents highlighted the role of the top management team in innovation. Practitioners see the role of retail directors as the leading entrepreneurs of the business who provide strategic and operational support for innovation, sponsoring as well as producing new ideas (Hristov and Reynolds, 2005). Beyond their strategic role, senior executives see the need to get involved in front-end decisions, which keeps them in touch with the operational side of the business and ensures a feedback loop for bottom-up creative ideas. As a manager I deal with both strategic and operational issues. At present we have more than 750 stores across five markets I have approved every single location and have personally opened most of our major stores. I travel a lot between the markets, meeting managers and people important to our business. With our store managers I discuss the local ranges, what sells and what doesnt and how we can improve our position. There is always room for improvement (Executive Chairman). Senior management also see their role in achieving the right balance between the business as usual which generates revenues here and now and the need for new revenue streams which will deliver future growth. Many of them acknowledge the potential tensions between these two seemingly disparate business areas. Innovation is a balancing act. I feel conscious that even if an organisation is doing well I still have to provoke its innovation instincts (CEO). 5.10 Operational efficiency: 21% of practitioners emphasised that much innovation in retailing is driven by the need to improve operational efficiency. There are fundamentally two ways of increasing output: (1) to increase the number of inputs into the value creation process, or (2) to find new ways of increasing the output from the same number of inputs. The second one gives rise to cost driven innovation. Evaluation of key performance indicators such as space productivity, asset productivity, financial productivity or employee productivity provides scope for innovative solutions to reduce operating costs. Therefore considerable innovation occurs in the support areas of a retail business its systems, logistics or store operations. The efficiency side, yes, seeking to do more for less, if you like, to drive profit growth. I guess thats because we feel that thats more under our control (Marketing Director). we've had to really kind of refine and refine our processes and our systems to make ourselves a much
more productive beast (Business Development Director). Innovation in the UK Retail Sector
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5.11 Organizational culture and structure: This driver accounts for 36% of responses. Senior managers see culture and structure as closely related. A retail culture is manifested through patterns of shared beliefs, values, attitudes and behaviour (the way we do things around here) in relation to organisational goals and strategies. A particular organizational structure (including innovation delivery mechanisms) has the capacity to reinforce a culture of innovation by channeling and streamlining the decision making process. This must be carefully handled, however. Some interviewees pointed out that over structuring the culture could actually work to stifle a more entrepreneurial culture. For us innovation is a strategic priority, we made this conscious decision a few years ago. It is part of our intention to continue as the market leader. This meant that we had to instil a culture of innovation consistent with our heritage and the structure to support it. It seems simple but not that easy, it takes time. (Marketing Director) In a turnaround situation it is somewhat easier to be innovative in a radical way. I had to change the business and to take away a whole management layer to make sure that innovation ideas do not loose their edge by the time they get to me (CEO). 5.12 Innovation reward mechanisms: This factor featured in 12% of the responses from senior executives. This relatively low score could be explained in that some retailers do not have specific mechanisms for rewarding innovation, most appear to maintain broader staff development or appraisal systems which reward job performance but may not necessarily encourage innovation orientated behaviour. Nevertheless, there are some examples of innovation specific schemes among some retailers. We have clear performance appraisals and people have growth targets which hopefully encourages innovation, we dont give a specific reward for innovation, so there's nothing direct but there is something indirect (Head of Format Development). No, I dont think we do specific mechanisms for rewarding innovative behaviour, perhaps with the exception of a suggestion scheme which is primarily targeted at staff in-store, and they do receive a small share of any saving or benefit that comes from the suggestion up to a capped amount (IT Director). 5.13 Availability of resources (human and financial) as a driver featured in only in 9% of the responses but nevertheless it pointed towards the fact that any lack of such resources can be a significant barrier to innovation. Resource availability determines the scope, scale and timing of the innovation initiatives undertaken during the planning cycle. According to some retailers, good resource allocation means funnelling the right resources at the right time, others suggest a fixed capacity approach to innovation, recognising the limits of how much innovation a business can cope with at any one point: once one initiative is
through the innovation funnel then another can replace it. Sometimes people have too much on, too many priorities in the business. We don't have the spare capacity or time to innovate. Innovation needs a separate delivery framework and ring fenced resources. Innovation in the UK Retail Sector
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New ideas can easily get suppressed and eliminated simply in the quest for earnings, growth and performance (CEO). There are some markets that you may want to go into, because of the opportunities they provide, but this may involve a period of sustained investment, which could mean that you have to go down before you go up. It is a balancing equation of how much you can loose before you gain. This could be a challenge to innovation. You have to make a commercial decision which ideas you are going to exploit and which not. Some ideas have to get parked for a while (HR Director).
Vignette 5.1: IKEA, Coventry Context: The regulatory environment as a driver for innovation Example: IKEAs need to develop its business in the UK coincided with the opportunity to experiment with its first multi-level (more than 2 storey) store in the context of the Town Centres First policy. The 23,850 m2 gross development (on four levels, with three levels of car parking), proposed for the city centre of Coventry, follows a five-year site search in and around the city. The companys trading concept - its retail format - is well-established and has hitherto varied little in the 34 countries in which the firm trades. The concept is based on self service (with the requirement for a self-serve warehouse), a Market Hall for home furnishing accessories, and a Showroom. IKEA has made several significant compromises in the development of the Coventry concept. In the Coventry design, customers will park on one of the three lowest levels, or will arrive by bus or on foot, and will start their shopping in the showroom on the topmost, sixth level. The market hall is on the floor below, and the self serve warehouse split between levels four and three. Home delivery and bistro facilities are on the ground floor. Up to 15 HGVs a day will provide a regular supply of goods inward. Car parking provision is well below the current Government maximum. Further adaptation had been resisted, however. Disaggregation of the IKEA concept into separate units had been acknowledged by the Secretary of State to be inappropriate. IKEA stresses that doing this would have led to higher prices. Vignette 5.2: Drivers of innovation Context: The regulatory environment Examples: Retailers strategies and the attractiveness of particular technologies are influenced and directed by the regulatory environment within which retailers operate. For instance: An unanticipated consequence of a more restrictive planning policy towards out- and edge-of-town retail development, combined with adoption of congestion charging or road pricing may be to reinforce the attractiveness of e-commerce technologies amongst consumers and retailers. Already, e-commerce market shares in the UK are running broadly twice as high as in the US. UK total online sales for 2006 reached 30.2bn, exceeding the forecasted 30bn. Another significant emerging driver is that around future environmental regulation. Firms with extensive property portfolios, such as retailers, are substantial energy users. Further, increased responsibilities for recycling will add complexity to the logistics function. Technologies such as design simulation and modelling applications are likely to be important in producing more energy efficient stores. Similarly, improved materials handling and vehicle utilisation systems will materially assist retailers seeking to meet their recycling responsibilities cost effectively. For instance Boots are aiming to reduce reliance on landfill by reusing and recycling over 17 different types of material which otherwise would be disposed of to landfill. Many grocery retailers use backhauling of waste to increase fleet utilisation through minimising empty running or trailers back from stores. (Reynolds 2005; www.imrg.org; www.bitc.org.uk, 18.10.2007)

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Vignette 5.3: Currys customer recycling proposition Context: Using regulation to improve customer service Example: In July 2007 the UK Government introduced the Waste Electrical and Electronic Equipment (WEEE) Directive. Many retailers elected to join the Governments own take-back scheme, where consumers take goods to designated recycling facilities. Others retailers charged for collection. Currys, whose parent company DSGi had the experience of implementing the Directive in 12 countries, instead offered a different customer alternative to the Directive: the UKs first and only free in-store and home collection recycling service.
Customers are able to return their old products to any store, even if the original item was not bought at Currys. Home delivery customers can have appliances collected at the same time. In addition to investing in the scheme infrastructure, Currys has invested in promoting free in-store and home collection of recyclable goods through its latest TV advertising campaign. This has the dual benefit of raising awareness in recycling and shows Currys as willing to go the extra mile for customers. The scheme is providing Currys with the opportunity to deliver (and communicate) better customer service, and customer feedback has been overwhelming. Customers are delighted to have the opportunity to recycle without the inconvenience of transporting old equipment themselves. Since the scheme was launched in store on 1 July, the number of products collected has been almost double Currys expectations. Approximately 85% of all appliances are recycled and many products are reused some for charity. Currys is delighted that its innovative solution to a piece of legislation has been so successful. In addition, the transportation of the equipment has not added any additional miles to the supply chain as Currys existing delivery lorries that would otherwise return to the Newark national delivery centre empty are being used for collections (DSGi, 2007) Vignette 5.4: Marks & Spencer and RFID Context: Applications of new technologies Example: Following a successful trial in 42 stores in May 2007 Marks & Spencer has completed installation of RFID infrastructure in its 120 largest stores which allows for better supply chain visibility, more accurate and efficient stock taking and improved availability of products in their stores. The company is also finalising training some of its staff on the BT RFID technology (Friedlos 2007). Vignette 5.5: Tesco in a Box Context: Applications of new technologies Example: Tesco in a Box is Tescos solution to the need for consistency of execution when entering a new market. It comprises a centralised web-based management information system which measures stores against key business performance indicators. Tesco in a Box went live in the first store in Turkey in March 2005 and has been rolled out to the company's Japanese and Chinese businesses. A later version incorporates supply chain and merchandise management software. Business intelligence can be reproduced in other countries at minimal cost (Company).

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Vignette 5.6: Waitrose Context: Innovating in sustainable development, retailer-supplier relations Example: Waitrose is looking for innovative ways in delivering the triple bottom line, in terms of economic, social and environmental performance. The supermarket is championing seasonal British produce from local producers. This is part of its transport optimisation initiative to reduce food miles by ensuring more effective utilisation of its lorry fleet. The company is also allowing local producers to deliver directly to stores. While this has positive effect on local farming communities and satisfies the growing consumer need for local produce this also needs to be balanced in environmental terms. The retailers own research suggests that in logistical terms growing flowers, for instance, in Kenya and flying them in to the UK could be more energy efficient than growing these flowers in glasshouses in the Europe and transporting them by road to the UK. The supermarkets relationship with farmers is increasingly built on its own farming experience. In Leckford north Hampshire, Waitrose operates 4000 acre farm. The farm has more than 1,000 cattle, 12,000 hens, an apple orchard and mushroom producing facilities which are the sole supplier of white mushrooms to the supermarket. The farm has been in ownership of John Lewis since 1946 and although it is far from being the major provider of agricultural produce for the Group it nevertheless is a source of practical experience about understanding the challenges of modern farming. Such insights are invaluable at a time when supermarket-supplier relationships have come under scrutiny from regulators at the Competition Commission (Davey, 2007; John Lewis, 2007).

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6. What are the barriers to retail innovation?

6.1 Conventional analyses of barriers to innovation within the Community Innovation Survey and elsewhere tend break down the likely obstacles into four broad sets of factors: costs and knowledge (linked to difficulties internal to the firm) and market-related and other, largely regulatory, factors (linked to difficulties external to the firm). The CIS responses are based on a specific question asking what factors constrained your innovation or influenced you not to innovate? In some senses, the barriers represent the obverse of the drivers discussed in the previous section, and will not bear duplication, but this section draws attention to a small number of distinctive features of barriers to retail innovation. Figure 6.1. Retail Trade Barriers to Innovation
6.2 At the aggregate level, (shown in Figure 6.1), we might conclude that the majority of retailers do not perceive there to be any barriers to innovation within their firms.
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. These results were reinforced by comments we received in consulting over this research, as illustrated in the quotations below: There is difficulty in encouraging risk and innovation in challenging business conditions. Financial uncertainty. Innovation never occurs when people are worried about job security. People resources and business pressures to achieve financial targets stifle innovation. 6.3 The smallest range of barriers is reportedly in relation to level of knowledge. The majority of retailers would seem to know their markets well and to have little concern that lack of knowledge about technological possibilities works to prevent innovation. The greatest concerns in this area are over the availability of skilled personnel:
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Excessive perceived economic risks Direct innovation costs too high Cost of finance Avaibility of finance Lack of qualified personnel Lack of information on technology Lack of information on markets Market dominated by established enterprises Uncertain demand for innovative goods or services Need to meet UK Government regulations Need to meet EU regulations Cost factors Knowledge factors Market factors Other factors Not experienced Low Medium High

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On occasion there is a lack of technical skills, but more often there is a lack of leadership skills to drive/demand innovation and tie everything together (Retailer). Research institutes were also a source of talent so their decline has aggravated the skills shortage (Retailer). 6.4 In relation to regulation, EU regulations are perceived to be less of a barrier than are domestic regulations. However, there is relatively little difference between the retail sector and the responses to the survey from all sectors in relation to barriers: the majority of all firms report no experience of barriers preventing innovation, although concerns about erosion of components of the science and research base, supported by Government, do prompt comment: There has been an erosion of government funding into research institutes. E.g. Silsoe Institute no longer exists. They developed the concept of Precision Agriculture in response to concerns about labour shortages and pesticides (Retailer). As do concerns over the availability of allowances for mitigating some of the risks of innovation: Risk allowance for business, allowing shared risk in terms of financial investments (Retailer). There are some specific concerns expressed in relation to the regulation of sustainable technology: Planning regulations: wind turbines, solar panels, mezzanines and expansion of stores. 6.5 But perhaps the biggest concern (which relates to sustainability but to other areas of Governments attitude and policies towards innovation) is: Lack of inter-departmental co-operation within government and lack of common agendas. 6.6 One of the most significant market factors inhibiting or shaping innovation in retailing is
derived, as we have suggested, from the ease with which many innovations can be copied. Another way of illustrating this is to examine the extent of protection of innovation employed by innovation active firms. Figure 6.2 shows this for the retail sector. Innovation in the UK Retail Sector
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Figure 6.2. Nature of protection of innovation employed: retail trade

6.7 Relatively low levels of innovation protection are employed by retail firms and there is a tendency to use informal (such as secrecy) over formal methods (such as patents). In part, this relates to the nature and incidence of retail innovation often not patentable or capable of being trademarked, and where designs may be much less complex than in, say, manufacturing. Retailers appear to rely more on secrecy and lead times in protecting the new things they do from competitors. But the majority in every case who do not employ either formal or informal protection mechanisms reinforces the visibility and in many cases transparency of retail innovations, particularly customer-facing ones. 6.8 When compared to the protection employed by, say, engineering firms, (Figure 6.3) the irrelevance of all kinds of protection for retailing becomes clear. The nature of often complex proprietary engineering projects leads to very low levels of appropriability and the likely greater success of informal mechanisms, whilst the tangible nature of much innovation in engineering lends itself also to formal protection mechanisms. Engineering projects are habitually front-loaded in terms of cost and often require more complex financing; retailing innovation is more incremental, cheaper, and can be turned off relatively quickly if it fails or becomes more expensive than originally budgeted. Retail projects are more often back-loaded from the point of view of finance, as we have suggested. Retailers appear to be more confident of their markets and relevant technology better, but the relative difference in relation to technology not as high. Finally, the two sectors are closer on regulatory barriers, but engineering appears more affected by EU regulation than UK. We might speculate that this reflects actual or perceived lack of services legislation at EU level.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Registration of design Trademarks Patents Confidentiality agreements Copyright Secrecy Complexity of design Lead-time advantage on competitors Formal Strategic Not used Low Medium High

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Figure 6.3. Comparisons of perceived barriers to innovation: retail trade vs. engineering
0 50 100 150 200 250 300 350 400 Excessive perceived economic risks Direct innovation costs too high Cost of finance Avaibility of finance Lack of qualified personnel Lack of information on technology Lack of information on markets Market dominated by established enterprises Uncertain demand for innovative goods or services Need to meet UK Government regulations Need to meet EU regulations Cost factors Knowledge factors Market factors Other factors Extent of barrier (weighted Retail trade Engineering score, max= 1,000)

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7. What are the measures of retail innovation?

7.1 Innovation needs to be measured in order to be successfully managed. The focus of this
section is to explore the ways in which the senior managers interviewed as part of this research seek to measure innovation. Wider meanings of innovation as new ideas to market are typically cascaded across the business and translated into business specific operational terminology and targets such as, new SKUs, new product categories, new retail formats, number of new products in the range or share of customers, etc. In this case retailers strive to put measurement systems into place in order to be able to monitor and review levels of business performance and the extent to which their initial strategies are being realised. Measurement of innovation in retailing can be categorised in terms of its type (1) financial and (2) non-financial and its level of application: (1) project specific, (2) functional and (3) corporate level (Hristov, 2007). The Community Innovation Survey does not ask questions about innovation measurement. a. The extent of measurement 7.2 With some notable exceptions, most senior managers pointed out that retail firms tend not to use innovation-specific metrics or KPIs12, rather they measure their innovation activities by adapting existing performance measures. In part, this is because retail innovation is largely incremental, iterative and often dispersed across different divisional budgets, considerable perceptual differences exist as to what exactly is recorded as innovation as opposed to simply good business practice within different functional areas such as product design, buying or retail operations. Measuring retail innovation tends to be focused most on short term tangible performance outputs, based on cost benefit analysis and captured through traditional measures of performance and much less on the longer term commercial impact of innovation as a value added activity. It's very difficult, I mean it is very, very difficult, to define and measure innovation in some parts of the business. For instance funnily enough, our design team dont get financially bonused for being innovative, thats part and parcel of what they do our buying teams on the other hand do get heavily incentivised on bonuses and operations (CEO, Fashion Retailer). People traditionally tend to overestimate the short term impact of innovation and technology and underestimate their long term benefits, and I think that's probably happening here (Strategy Director). 7.3 From the 37 senior managers who were asked to think about how innovation was measured in retailing, all gave examples where aspects of innovation are measured by non-specific performance measures, nearly a fifth were of the opinion that retailers generally do not use specific measures related to innovation while 16% of practitioners pointed out that although they use general performance measures they adapt these and attach to then predetermined or completely adapted success criteria designed to give innovations the chance to succeed. So each product you launch has predetermined success criteria, and the sales of new lines are monitored against such criteria on a weekly basis. But only a third of what we launch hits its success criteria (Director NPID).
12 Key
Performance Indicators (KPI) are metrics that management managers have identified key important variables reflecting the organisational or operational performance.

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We have completely different criteria for new products, yes, completely different criteria because it depends on the stage the project or the range or the brand [has reached]. we do have completely different criteria for the mature brands (Business Development Director). 7.4 Therefore measuring innovation in retailing often boils down to measuring business organisational and operational performance with more traditional although organisationally adapted measures of performance. Practitioners appear not to be short of such measures: We are very measurement-driven, so on the non-food side well know performance by category, by product, evolution by product, percentage, innovation, all of those things we have (CEO). 7.5 But retail practitioners also realise that the soft benefits of innovation - in terms of brand value, or total impact on the business - are less well measured, due to limitations in the management accounting systems, and the lack of integration between pre-existing budgeting silos. As a result, they are not sufficiently understood. Further, most retail measures tracking innovation are designed for products, and are fewer available to measure process innovation and precious little focus on organisational innovations or longer term drivers of growth. I think that the difficulty comes more when you try and set strategic targets for innovation where a measure like, say; in five years time X percent of our sales will come from new products (Senior Manager, Strategy Department). I dont think retailers are very good at assessing the soft benefits of innovation. The language that talks to them best is money, bottom line, and how much extra is in the till, that's how they tend to think of it (Retail Consultant). Figure 7.1. Usage of financial and non-financial measures of innovation
84% 65% 59% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Overal financial measures Overall non-financial Financial and non-financial measures

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b. Types of Measures 7.6 Although the precise nature of the retail measures of innovation varies among companies, depending on sub-sector or upon managerial choices, there are broadly two main types: (1) financial and (2) non-financial measures (Figure 7.1). i. Financial measures 7.7 Financial measures provide visibility about the concrete contribution of innovation to the top and bottom lines of the business. The role of these measures is to ensure continuous performance improvement based on the evaluation of the data about rates of return,
profit margins, costs-benefit ratios etc. They are seen as essential for delivering the necessary data for setting the strategic objectives (where do we want to go?), for deciding upon resource allocation (how might we get there?) and for continuous tracking, review and corrective actions along the way (how do we check progress?). 7.8 84% of our respondents essentially use at least one or more financial measures, the top 3 measures being sales and market share measures, rate of return measures and measures of profitability: I look at all the things that are going to affect change, ninety-nine of them are financialrelated- they have a financial benefit. There are some that have a financial cost, [such as] we were innovative in the way that we pay our store managers, thats going to increase our costs - but we think long-term it will reduce training, so its an economic deal (CEO). Well fundamentally we measure sales, margin, and return on invested capital (Marketing Director). Sales and market share measures have a 78% share of responses. These include measures of sales in volume and value, incremental sales from new products and services, like-for-like sales since launch, sales densities (per sq ft/sq m) of new products, categories, or retail formats. Some retailers have sales targets for new products or share of new products in the range, whilst others use broader measures such as overall share of market, share of customers or share of wallet. For a first year we actually set a target for a number of fresh products. That will be one of the KPIs, where historically it has not been a KPI (Marketing Director). Like for like sales volumes, and sales per sq ft of the different brands and how they compare with the overall performance of the chain as well two-year payback for new initiatives. Very, very simple, its part of the mechanics of the business (CEO). Rate of return measures i.e., ROI, ROIC, ROS13. (64%). The sector uses rates of return of new products, services or other innovation initiatives as financial measures of innovation. These include ROI from 6 to 12 months for new products (depending
13 ROI
return on investment, ROIC return on investment capital, ROS return on sales

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on product), ROI from new retail formats, ROI from new projects, ROS targets after product launch, discounted cash flow, etc. (See Figure 7.2). Its always return on investment (ROI) - at the end of the day we are here to make a profit. But because of new brand considerations, we are also now starting from their perspective to look at things like web page impressions (E-commerce Manager). We have a realistic Finance Director who is aware of the value of marketing but is encouraging us to qualify everything on an ROI basis (Marketing Director, Grocery Retailer). Profit margins: 37% of practitioners considered profit margins as an essential
measure for tracking the success or failure of new products and as a contributing factor (among others) in continuing or discontinuing a new product or a category. I think we measure its performance using all the standard financial matrixes that we use for the mainstream business, but you have to have a more of a relaxed investment targets for it. I think if you expect the same rate of payback or the same rate of return you get from investment in your core business, youll never support a new start-up business (CEO). Figure 7.2. Key financial measures of innovation
ii. Non-financial measures of innovation 7.9 Non-financial measures of innovation have been relatively recently applied in retailing. They are designed to track the share of new activities in the broader context of the business, over a longer period of time, or to measure on a regular basis some of the soft benefits of innovation such as customer perceptions about the retailer and its brand (i.e., levels of satisfaction, awareness, loyalty, perceived quality, image or positioning vis--vis competition, etc.). These are of three types: (1) number of (or % of) new products, (2) consumer insights and (3) time-related measures (see Figure 7.3).
84% 78% 65% 37% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Overal financial measures Sales and market share Rate of return measures (ROI, ROIC, ROS, etc.) Profit margins

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Number of (or %) new products: 59% of the senior managers interviewed gave example of at least one of these: for instance overall number of new products, SKU, categories, or introductions of modified products versus entirely new products. Some referred to these as semi-innovation versus true innovation, others as straight swaps in the range substituting old products with new ones, or the percentage of sales coming from new products. One large DIY retailer, for example, tracks the percentage of product purchasing versus the percentage of project purchasing (i.e., a kitchen unit versus a whole new kitchen). Some NPD departments track their performance as percentage of sales of all own brand products introduced in the range for one year period. Some managers see these measures as a fairly crude indication of innovativeness, emphasising the importance of quality over quantity of launches. Other practitioners believed that these measures, when tracked longitudinally, served to highlight the overall rate of innovation. Percentage of sales of new products is something I measure but we dont think that big is always
good any more. Its a measure but its not a measure that is in proportion to how [successful we are]. We dont want to see more necessarily in fact we want to see fewer but more successful new products launched rather than more (NPID Director). Consumer insights: 34% of managers believed that customer insights were essential non-financial indicator for levels of successful innovation in the business. Markets change, consumer needs change and retailers need to continuously innovate in anticipation of these changes. Our customers are changing and so are their needs, innovation keeps us relevantwithout innovation our like-for-like growth will not succeed, you get into product life cycle issues, youll degrade your margins and profitability, and will end up commoditising your offer (Commercial Director). Here retailer KPIs include changing levels of consumer acquisition and retention, lifetime value, measures of loyalty such as net promoter scores, satisfaction, usage rates, conversion rates, frequency of purchase and repeat purchase. Time-related measures: Time span (pre- or post-launch) will depend on the overall strategic value of the opportunity. These are often referred to as milestones for tracking market penetration levels (for example, the first milestone might be 6 months, then 8 months or 6 weeks from launch). Other measures might include time to market or speed to market. 7.10 59% of respondents gave examples of combining financial with non-financial measures of innovation (see Figure 7.1). Innovation in the UK Retail Sector
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Figure 7.3. Key non-financial measures of innovation

c. Levels of application 7.11 Finally, retailers measure the benefits of innovation at different levels. The interview responses we analysed pointed towards three main levels of measures: (1) project specific measures (KPIs), (2) functional level measures (function-specific KPIs), and (3) corporate level measures (corporate performance measures). 7.12 Project metrics are most bespoke and detailed. They are designed with specific project outcomes in mind and measure the extent to which the project objectives are met in terms of inputs, outputs, timescales for product development, budget limits, perceived risks and the amount of management time involved. Senior managers saw the projects at functional level as the responsibility of the functional budget holders: i.e., heads of functional areas or departments. The metrics are drawn from within those departments with input from management accounting. For projects at a corporate level in some retailers, the practice is that project specific measures will emerge through a consultation process or will be produced by cross-disciplinary teams from the departments involved in the project. In other retailers, the CFOs and their teams will be responsible for setting the KPIs alone or together with business development departments who are often responsible for the planning and delivery of the project. 7.13 Functional measures are designed to reflect levels of innovation input and output within individual functional areas. For instance NPD departments will have a clear set of measures in terms of profitability, cost benefit, time management and a range of reflecting technology and operational processes. These metrics are designed to measure
newness with functional flavour as well as the functional contribution to innovation and present a mix of financial and non-financial measures of performance. Innovation in functional areas may be managed as part of the core business activities or as separate projects as described above. 7.14 Corporate measures track the incremental contribution of innovation to the business as a whole and may comprise input and output measures, as well as financial and non65% 59% 35% 24% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Overall non-financial Number (or %) of new products Customer insights Time Measures

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financial measures. Corporate level measures may assess, for instance, the overall input of financial of non-financial resources in new initiatives such as the development of new ranges of product, new retail formats or the impact of moving into new markets. 7.15 Overall product-related innovation measures appear most developed and most commonly used. In general most retail measures are non-specific, adapted to measure innovation or mostly its hard benefits - for instance in areas like NPD, where the innovation process resembles the linearity characteristic to the patterns of innovation found in manufacturing. Much less susceptible to measurement are the process, wider service innovations and organisational innovations undertaken by retailers - those associated with change, process design, marketing or training and development. According to some of our interviewees, these innovations are not sufficiently understood, nor are they sufficiently measured. In terms of timescale most of the discussed measures of innovation are relatively short-term, often following the retailers planning cycles and frequently do not account for the longer term effects or commercial benefits of innovation like learning or new competence building (Hristov, 2007). Innovation in the UK Retail Sector
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8. Recommendations to stimulate and support innovation in retailing

8.1 Understanding the sources of information and methods of co-operation conventionally employed by the retail sector in relation to innovation provides a useful backdrop to the development of recommendations of ways in which Government might stimulate and support innovation in the sector. The Community Innovation Survey identifies four broad sources of support and co-operation: Internal to the firm, Market-related (including customers, competitors and suppliers), Institutional (including government and university sources) and Other (which include conferences, industry associations and scientific journals) Figure 8.1. Sources of information & co-operation for innovation
Source: Community Innovation Survey (CIS4), 2005. Base: all innovation active
8.2 Predictably, retail innovators appeared most reliant on market sources for their
information with over 50% of both customers and suppliers identified as relevant to innovation (and 19% of innovation active firms suggesting that customers were very important to their innovation activities). These sources were well ahead of consultants or private R&D resources. Competitors comprised useful information resources, partly because much customer-facing innovation in retailing is inherently visible (even if not easily capable of emulation). All these sources comprise excellent examples of retailers exploiting so-called open innovation, as well as providing evidence to support our notion of retailers acting as innovation hubs.14 A smaller proportion of firms (42%) claimed to make use of internal sources, whilst of other sources, attendance at conferences and trade fairs appeared to be most highly regarded. Finally, only a small minority (between 10-11% of firms) considered any institutional sources of information
14 Open
innovation is defined as the exploitation of ideas generated from outside the traditional enterprise unit.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Within your enterprise or enterprise group Suppliers Clients or customers Competitors Consultants, commercial labs, private R&D institutes Universities or other HEIs Government or public research institutes Conferences, trade fairs, exhibitions Scientific journals Professional and industry associations Technical, industry or service standards Internal Market sources Institutional sources Other sources per cent
Not used Low Medium High

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or stimulation to have been at all important; and notably - no single respondent felt that government played a highly important role in this regard. 8.3 It is important to put these findings into context in a number of ways. First, in line with earlier analysis, retailers appeared to rely less on any single source of information than UK firms on average, apart from their particular interest in conferences, trade fairs & exhibitions. Whilst low levels of importance are also attributed both to universities and to government by firms in general, such institutional sources appeared less than half as important for the retail sector (Figure 8.2). Secondly, it has been suggested by the sector that more recently, the largest retail firms have engaged more extensively with universities and other research institutions, although such evidence is necessarily anecdotal. For example, in 2006 five leading fashion retailers came together in a joint initiative with Government to fund the Fashion Retail Academy15 under the auspices of the University of the Arts London, and in 2007 Tesco announced a 25mn Sustainable Consumption Institute (SCI) at the University of Manchester16. Finally, the position in the UK is not universally reflected elsewhere in Europe. The European level data from the Community Innovation Study suggests, for example, that service firms in Nordic countries have more extensive links with Government and HEI sources than is the case in other markets. Figure 8.2. Sources of information & co-operation for innovation: retail sector and all sector comparison (weighted data)
Source: Community Innovation Survey (CIS4), 2005. Base: all innovation active. Note: weighted data. High importance=*10, medium importance=*5, low importance=*1; not important=0
8.4 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 non-technological forms of innovation. In the Netherlands, for example:
15 See 16 See
http://www.fashionretailacademy.ac.uk http://www.manchester.ac.uk/aboutus/news/archive/list/item/index.htm?year=2007&month=september&id=123544
0 50 100 150 200 250 300 350 400 450 Within your enterprise or enterprise group Suppliers
Clients or customers Competitors Consultants, commercial labs, private R&D institutes Universities or other HEIs Government or public research institutes Conferences, trade fairs, exhibitions Scientific journals Professional and industry associations Technical, industry or service standards Internal Market sources Institutional sources Other sources Importance of source of innovation (weighted, max = 1,000) Retail trade All sectors

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a bias remains towards supporting technological innovation in mainly manufacturing firms. (den Hertog, Segers and van Ark, 2003). This has led to a number of initiatives at both international and national levels to remedy the perceived imbalance (CEC, 2007, Forfs Ireland, 2007). The Council of the European Union reached broad-ranging conclusions in its deliberations on competitiveness in November 2007, highlighting the increased role of services and: the importance of supporting all forms of innovation including non-technological innovation (Council of the European Union, 2007) The present UK Government initiative into Innovation in Services forms part of this broader response. 8.5 It has been suggested that existing Government policies towards innovation can be adapted to the needs of service sector firms in three particular ways: Deepening of existing policy (by making innovation policies more service-friendly); Broadening of existing policy (by recognising that innovation within the service sector are more likely to span firms as well as whole value chains); and Horizontalisation of existing policy (by recognising that other policies not explicitly designed to stimulate innovation may indirectly improve the climate for service sector innovation. Such initiatives include those in relation to human capital (training and development) and deregulation (den Hertog et al, 2003)). 8.6 If the UK Government is perceived to do less in stimulating innovation in services, or existing policies fail to recognise the distinctive characteristics of the sector, then this might serve to explain why the retail sector extensively discounts Governments influence on firms thinking in this area. In practice, Oxfords research reveals that the Government is engaged in a significant number of activities with varying degrees of relevance to retail innovation. This section reviews in summary what Government already does that is relevant to stimulating and supporting innovation in retailing. The review is not designed as an exhaustive catalogue of Government services, but a prioritised appreciation of current activity, which can be seen in three distinct areas: Provision of support mechanisms for retail innovation; Promoting innovation in sustainability by the retail sector; and Fostering skills and organizational innovation in the retail sector. 8.7 Alongside this review, it makes 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. For each recommendation, the report follows a standard structure: Innovation in the UK Retail Sector
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Desired outcome Background Evidence Analysis (including the impact of the recommendation, the potential benefits arising from action or risks arising from inaction) Conclusions/next steps Early drafts of these recommendations have benefitted from feedback by the practitioner members of BERRs Retail Innovation Group and the authors of this report are grateful for their commentary. a. Provision of support mechanisms for retail innovation 8.8 The role of Government in providing support mechanisms for retail innovation as in other sectors should be to encourage risk-taking and innovation, particularly in challenging business conditions. Such mechanisms can be of several different kinds: offering information broking, educational and horizon scanning services; advising on protection of intellectual property linked to innovation; financing or subsidising R&D through grants or tax credits, or even targeting public procurement to favour innovative activities. Much of Governments current activity directly in relation to retail innovation falls within the first category. i. Information, education and horizon scanning 8.9 There is widespread informational broking activity provided by different levels of UK Government potentially to support innovation in retailing. This comes from BERR, DEFRA, DIUS, the Department for Transport, DCLG, the Regional Development Agencies and numerous other governmental and non-departmental public bodies (NDPBs), as well as Local Authorities. Thinking about the future is an area where Government has already played a part in bringing together interested parties and acting as a catalyst, or retail knowledge hub. The retail futures work undertaken by Forum for the Future and sponsored by Tesco and Unilever might usefully be made available to a wider audience. Similarly, in relation to specific areas of interest expressed by the sector such as retail crime activities by Government have led to tangible outcomes. For example, discussions with the Home Office and the Design Council may lead to the rolling out of the Home Office Design Against Crime initiative across service sectors. This may be a good example of a new way of government working with retailers - as a catalyst for innovation. 8.10 However, retailers feel that the lack of inter-departmental co-operation within government (a single voice) and lack of an integrated agenda can make communication of these activities confusing and sometime conflicting. Retailers themselves apart from perhaps the very largest firms have limited resources that they can devote to such conversations. Leading retailers and their trading associations have been active in supporting many of the Governments recent initiatives17. But even for the largest firms such requests must be prioritised on the basis of their commercial, or broader social or environmental, potential. Of course, from the Governments point of view, evidence that
17 See
for example recent Government consultations involving the retail sector: http://www.brc.org.uk/ConsResp04.asp?iMode=3.

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the sector was responding with purpose and conviction to any integrating efforts would be an important demonstration of commitment. 8.11 Some of the most significant informational initiatives in relation to innovation are the Knowledge Transfer Networks (KTNs)). The 22 UK Knowledge Transfer Networks currently in existence are the main plank of the Governments investment in technology
transfer and knowledge exchange between industry and the science base. The first KTNs, funded by the Government, Regional Development Agencies and the Research Councils, were established in 2005 and the number continues to grow. The opportunity of creating a Retail KTN has been explored on a number of occasions, but has not been taken up by the sector. However, Quotec identified 14 existing KTNs with skills and expertise of relevance to the retail sector within five specific areas: Innovation in retail products Technology to improve the manufacture, marketing & sale of retail products Sustainability, efficient use of resources and the reduction of waste; Retail logistics, transport and security and Health & safety (Quotec, 2007). Table 8.1 summarises the 14 KTNs and their particular points of relevance. Table 8.1. KTN relevance to retail sector
KTN Product Innovation Improved manufactur ing, marketing & sales Sustainable use of resources Logistics, transport & security Health & safety Resource Efficiency Electronic-Enabled Products Bioscience for Business Food Processing Industrial Mathematics Sensors Industrial Pollution Management Grid Computing Now! Materials Location & Timing UK Displays and Lighting Low Carbon & Fuel Cell Technologies Modern Built Environment Health Technology
Source: Knee, 2007; www.ktnetworks.co.uk

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8.12 It is important to recognise that KTNs are essentially technology-focused networks grounded in the UK science & R&D base and may be less appropriate vehicles for stimulating the kind of wider innovation sought by retail firms. However, of the 14 KTNs to have pointed to the relevance of their activities to retailing, few have been able to generate direct contacts within the sector. For example, companies and academics within the Displays and Lighting KTN are developing the new technology platform of
Plastic Electronics which has widespread implications for retail processes. But they have yet to engage with significant end-users from the sector. Some KTNs have reported difficulty reaching the most appropriate individuals within retail firms; retailer attendance at relevant events has been relatively poor and only a small number of individual retailers have fielded speakers at KTN conferences. However, retailers have worked on a limited number of specific issues with certain KTNs in the past, some, but not all, of which have been technology-focused. For example: Project E-Flex (Electronics-Enabled Products KTN) explored the efficiency of home delivery, including vehicle, software and refrigeration design, in which the John Lewis Partnership participated. Project NAPSTER (Industrial Mathematics KTN) examined the effect of weather upon operations, using data from Marks & Spencer. Smart Textiles (Materials KTN) working with an unspecified range of leading retailers to support their introduction of smart textiles and nanotechnology. Electronic shelf edge labels (Displays & Lighting KTN) the former in volume trial at a number of major store locations. KTN activities in respect of innovation in sustainability are dealt with separately below. 8.13 Identifying specific application areas (often technological) where there are common concerns has led to effective action which generates real business benefits to retailers. For example, an event run by BERR with BRC - by retailers for retailers, followed by the setting up of the RFID Business Benefits Action Group is an example of where government can work effectively with the retail sector on a technology issue. Innovation in the UK Retail Sector
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Recommendation 1: Improve the effectiveness of innovation-related support activity within Government.

Desired outcomes: Better integration and clear and simple communication between the innovationrelated information, education and horizon scanning services and networks funded by Government, and the retail sector. An improvement in Government credibility with the sector. The provision of a single voice for retailing within Government. Background: The informational activities undertaken by Government, funded agencies of Government and academics that are relevant to retailers are poorly integrated and often poorly aligned with the commercial priorities of the sector. For example, the considerable numbers of initiatives which arise from KTN activities are not communicated in a coherent or appropriate way to retail firms. Such firms (even the largest) also lack the resources to become aware of or respond to ad hoc initiatives. Evidence: Poor attendance at events, lack of access to key retail managers for advice on policy formulation, limited retailer awareness of and participation in projects, particularly amongst smaller firms but also within some large businesses. Analysis: Three specific actions flow from this desired outcome: 1.1 A more systematic approach to co-ordinating information & expertise in Government & NDPBs (e.g. KTNs, Envirowise, Chemistry Leadership Council) which mimimises bureaucracy and improves access. The provision of a one stop shop hosting information on initiatives, support and services available to the sector, especially to SMEs. 1.2 A better mechanism for identification, prioritising and channelling of commercial, innovation-related initiatives and research to firms (a single voice). 1.3 Encouragement of longer term horizon scanning that is more relevant to retailing: facilitating the showcasing of new ideas with commercial potential and supporting projects on the margin. The benefits of action in this area includes the demonstration of better value for
money from existing Government activity and the possibility of mutual agreement between the sector and Government on priorities in innovation-related support. The risks of inaction are that the fragmented nature of knowledge-broking activity of relevance to retailers combined with retailers limited human resources leads to a cycle of failure in support. The sector becomes de-emphasised in future work by agencies such as the KTNs and a mindset develops amongst retailers that such Government activity is not helpful or relevant to their commercial activities. Conclusion/Next Steps: Identify an appropriate mechanism or intermediary to channel innovation-relevant initiatives simply and efficiently to the correct individuals within the sector and to prioritise those of most commercial relevance to the sector. Develop appropriate KPIs to measure success (e.g. impact on smaller, hard-to-reach SME sector; direct attribution of innovation to Government initiatives). Evidence that the sector was responding with purpose and conviction to any integrating efforts by the Government would be an important demonstration of commitment.

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ii. Advising on protection of intellectual property linked to innovation 8.14 A second role played by government in relation to innovation more generally is in providing advice on IP issues linked to the protection of innovation by firms. The Community Innovation Survey indicated that retailers tend not to use formal mechanisms such as trademarks and patents to protect retail innovation, in preference to confidentiality agreements or simple secrecy. In part, this was related to the nature of wider innovation in the sector and the difficulty of patenting incremental, customerfacing or service process-related service innovations. Broadly-based service innovations are themselves often inherently complex, collaborative and therefore difficult to copy. Further, software, or particular business methods, are not patentable in Europe at present (and the prevailing view is that the latter may not be defensibly patentable in any case). As a result, we do not feel that a particular recommendation to Government is yet necessary in this area, since retailers appear to be well able to employ informal methods of protection. iii. Financing or subsidising R&D by the retail sector 8.15 As well as supporting innovation in kind through information provision and broking and through advice on the protection of innovation, Governments also have the option to directly subsidise or indirectly support through such vehicles as tax credits or the targeted funding of institutional research programmes, the innovative activities undertaken by firms. For example, the UK Government introduced a tax credit scheme in April 2000 designed to reward those companies both large and SME - engaging in R&D (Table 8.2). The international evidence to date suggests that such tax incentives are effective in stimulating R&D intensity (Harrison & Simpson, 2003). But such support has tended to be most attractive to those sectors most closely associated with the science base. Around 5,500 companies claim per year, (and there had been up to 20,000 claims by 2006)18 but we understand that, in a typical year, less than 1% of applications for tax credits have tended to be directly attributable to retail firms. Why is this so? Table 8.2. Comparison of the two UK R&D tax credit schemes
SME scheme Large company scheme 150% rate of enhanced deduction 125% rate of enhanced deduction Payable credit of up to 24 for every 100 of qualifying expenditure on R&D No payable credit Company can claim for expenditure on R&D it sub-contracts to others Company can only claim for expenditure on
R&D it carries out itself, unless it sub-contracts R&D to certain qualifying bodies, individuals or partnerships of individuals Company cannot claim for contributions to independent research Company can claim for contributions to independent research Claim can be reduced if the R&D project is subsidised or a grant is received in respect of it No reduction for grant or subsidy Company must own the intellectual property arising out of the R&D Company need not own the intellectual property arising out of the R&D Source: HMRC, 2007.
18 http://www.hmrc.gov.uk/randd/,
HM Treasury/BERR, (2007), Productivity in the UK: 7. Securing long-term prosperity, November, para.
2.18.

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8.16 In part, it arises from the schemes use of a technology-focused definition of R&D employed which is linked to the OECDs Frascati manual. This in turn is linked to the need to conform to related accounting definitions of R&D expenditure19. As a result, it is unlikely that the definition will be diluted, but one consequence is that it has been more difficult to determine whether certain types of innovation (for example hidden, nontechnological, process-based or even some innovation involving software applications) with less tangible inputs and measureable outputs qualify for relief. 8.17 R&D tax incentives are used widely internationally to encourage innovation, with schemes being either volume-based or incremental20. The US retail sector is often cited as being more innovative and productive than that in the UK. In the US, federal and state tax credits schemes are certainly much more readily utilised by the retail sector, although the same bias to certain sectors exists within both jurisdictions. Nevertheless, from 19982001, $186mn was directly claimed in R&E21 tax credits by US retailers, representing 3% of claim volume and 7% of returns (National Science Foundation, 2005). Indeed, such has been the growth of interest in federal R&E credits, mediated by third party tax advisers, that the IRS has designated research and experimentation credit claims as a tier one compliance issue. Using a somewhat different definition of R&D/R&E in the US potentially allows the scheme to recognise many of the particular kinds of innovation practiced by retail firms, including own brand development and service-oriented ICT systems in areas ranging from merchandising, price optimization, point of sale, sales audit, labour scheduling, transportation management, space utilization and warehouse management, to e-commerce22. For example, the wages paid to a retailers textile development specialists, designers, process engineers, and others involved in new product and process development may qualify for the research credit. 8.18 The scheme as operated in the UK has also been viewed by commentators as inconsistent and overcomplicated in relation to qualifying costs, subcontracting and the applications and inspection process itself23. For example, the nature of retail innovation amongst larger firms means that complex subcontracting rules fail fully to accommodate the notion that retailers can act as innovation hubs for the value chain and indeed for the industry as a whole. They do this by stimulating suppliers into developing new and innovative products and services on their behalf which can be brought to market, creating attractive spillover effects. Or by accommodating open innovation, which would also benefit the sector as a whole. Further, whilst HMRC make clear that the Government wants
companies undertaking R&D to get the reliefs to which they are entitled in a simple way24 this does not appear to have been the experience anecdotally from retailers to date. For example, in terms of administration, few even large firms will have the kinds of project accounting systems which could make these kinds of applications more straightforward. Whilst Business Link offers a useful online eligibility assessment25, smaller firms find that they
19 R&D
for tax purposes in the UK takes place when a project seeks to achieve an advance in underlying science or technology. Those activities which directly contribute to this advance through the resolution of scientific or technological uncertainty are defined as R&D. Certain qualifying indirect activities also count. (HMRC, 2004). 20 A useful summary of international R&D tax incentives can be found at: http://public.deloitte.com/media/0424/Global%20Incentive%20Matrix.pdf 21 R&E: Research and Experimentation 22 See the discussion in Deloitte, (2007), Research and Development Tax Incentives for the Retail and Textile Industries, Deloitte Development LLC, http://www.deloitte.com/dtt/cda/doc/content/US_Tax_r%26dretail_101607.pdf 23 See, for example, Arnott, S., (2006), Industry calls for R&D tax credit shake-up, Computing, 15th March, http://www.computing.co.uk/computing/news/2151992/industry-calls-tax-credits 24 http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD85100.htm
25
http://www.businesslink.gov.uk/bdotg/action/logicToolStart?r.l1=1073858808&r.l3=1077465866&type=BLTTOOL&itemId=1077460433&r.l 2 =1073859200&r.s=sc

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often require specialist tax advice in order to navigate the application process and this can be burdensome and disproportionately expensive: many companies remain unaware of the potential relief available or are sceptical of their ability to make a valid claim (Deloitte, 2007). 8.19 Efforts have recently been made to increase awareness of tax credits amongst smaller UK firms and improve the regional administration of applications. New specialist HMRC units have been established to counter the dominance of applications from London and the South East, as well as to create centres of expertise. Towards the end of 2006, tax inspectors undertook training to improve their understanding of software-related applications. However, it is too early to judge the effectiveness of these measures in stimulating uptake of incentives. 8.20 Whilst there might not be scope for dilution of R&D tax credits, there might be potential for a degree of extension and simplification. For example, the i2010 working group recommended that R&D tax credits might be extended to include capital expenditure (allowed in other jurisdictions, including Canada) which would allow those companies capitalising manpower costs to be eligible to apply (Information Age Partnership, 2007). The working group also suggested that the scheme could be widened to allow the cost of overhead activities indirectly supporting R&D work to be included. Innovation in the UK Retail Sector
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Recommendation 2: Increase the take-up of R&D tax credits by the retail sector.
Desired outcome: Improved awareness and utilisation of R&D tax credits within the UK retail sector. Background: R&D tax credits were originally launched in April 2000 to reward innovation by firms, but favour a manufacturing mindset. They are less appropriate for some kinds of innovation, particularly the wider innovation practised by retail firms, and by suppliers on their behalf. This mindset is out of step with tax incentives in other jurisdictions. R&D tax credits are a potentially attractive way for stimulating certain types of innovation in retailing. The nature of larger retail firms as innovation hubs increases the possibility of attractive spillover effects, with retailers acting as a catalyst for innovation within the value chain amongst suppliers, and with benefits for the sector as a whole: thereby enhancing UK productivity and competitiveness. Industry groups have lobbied for the refining of the R&D tax credit system for some time.
Evidence: Exceptionally poor levels of take-up of tax credits by the sector; high rejection rates of applications which do not conform to relatively restrictive rules; lack of appropriate training amongst inspectors to recognise legitimate claims from more intangible applications nevertheless involving technology. Retail firms in more enlightened jurisdictions benefit more from such incentive schemes. Analysis: Increasing awareness and take-up will require: 2.1 Identifying and prioritising the kinds of activities undertaken by retailers and by suppliers on their behalf which might qualify for support under both large business and SME schemes. 2.2 Improving awareness of the schemes and of these priorities amongst retailers, particularly retail SMEs outside London and the South-East. 2.3 Improving the speed and transparency of the application process to reduce uncertainty 2.4 Investigating the extent to which, without diluting the existing mechanisms, the R&D tax credit scheme might be both deepened and broadened to benefit service innovation Risks of inaction: retailers will fail to fully exploit an existing financial mechanism for the stimulation of innovation. Conclusion/Next Steps: BERR/HMRC to work with retailers and key third party suppliers to clarify the kinds of activities undertaken by and for retailers which would qualify for tax credits and to examine ways in which the application and inspection process for tax relief on such activities might be further streamlined.

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b. Promoting innovation in sustainability 8.21 One of the biggest areas of uncertainty for retail businesses at present is the area of sustainability and for this reason we devote a separate section of the report to this topic. Competing standards, a growing number of independent agencies and organizations seeking to claim legitimacy in solutions provision, rapidly evolving (and sometimes conflicting) Government policy, quickly changing consumer sentiment and potentially high costs create an atmosphere in which innovation in sustainability can be seen as risky, short-term or simply cosmetic. This perception is not just reflected at the national level. The Corporate Leaders Group on Climate Change (whose retail members include the John Lewis Partnership, Tesco and Kingfisher) have called for a binding agreement on climate change at the Bali summit, in order to encourage businesses to innovate and invest in low-carbon technologies26. Larger firms are facing increasingly significant international challenges in terms of seeking innovative solutions to managing carbon emissions and whilst smaller firms with correspondingly smaller carbon footprints have quantitatively smaller objectives, they are often equally challenging. 8.22 Government itself is very rapidly expanding its involvement with sustainability and policies and programmes to combat climate change. A number of important Government initiatives are directly relevant to the potential stimulation of sustainable innovation in the retail sector: In terms of sustainable consumption, the Government provides 2.1mn via EPSRC for a Green Logistics project which aims to improve the environmental and social sustainability of the UK freight transport industry (of which retail logistics is a significant component), while maintaining or improving its economic sustainability. The research involves a consortium of universities lead by the University of Leeds and supported by Cardiff, Heriot-Watt, Westminster, Southampton and Lancaster Universities. The project started in June 2006 and will lasts for 4 years. For example, one of the areas of interest is in determining the most sustainable channel through
which to sell different products (such as digital games versus loaves of bread). In relation to low-carbon technology, Government investment in commercialising such technologies in the UK will exceed 370 million from 2008-2010, with an increase of 170 million for the cross-Government Environmental Transformation Fund (ETF). The retail sector could potentially benefit from the schemes interest in low carbon buildings. An Energy Technologies Institute will raise up to 1.1 billion to spend on low carbon energy technologies over the next ten years. In relation to energy efficiency and the financing of sustainable innovation, 25% of the UKs carbon output is emitted from non-domestic buildings, with 10-15% of carbon output incurred during construction and 10% during decommissioning. For retailing, this means working more closely with the development and construction sectors and highlights the potential of mixed use developments. For small and medium-sized retail businesses, interest-free energy efficiency loans are available. SMEs in England and Scotland, and all businesses in Wales that have been trading for at least 12 months, can borrow from 5,000 to 100,000 in the form of a loan repayable over a period of up to 4 years.
26 http://www.balicommunique.com/index.html.
Other retail and retail-related signatories include: the Body Shop, eBay, Gap Inc., Lend Lease, Marks & Spencer, Nike, Sainsburys and the Warehouse.

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In terms of packaging and waste, data from the Environment Agency show that in the UK the amount of retail waste increased from around 8.5 million tonnes in 1998/99 to 12.5 million tonnes in 2002/03. WRAP suggests that as much as 50% of household waste, which ultimately ends up in landfill, has originated from a purchase from the top 5 retail supermarket chains. Packaging and waste is a very visible aspect of sustainable consumption and one over which consumers express most concern (70% of global consumers expressed similar levels of concern about packaging waste)27. This is one area in which innovative solutions by the retail sector have abounded. For example, in relation to plastic carrier bag use, Waitrose has trialled carrier bag free stores and checkouts; Tesco has pledged to reduce packaging by 25% and provide on-pack information on recyclability; Asda has committed to reducing own label packaging by 25% over the next year, but only Netto have moved beyond trials to charge for bags everywhere. Yet the evidence in relation to, for example, in relation to plastic bag levies is still unclear (Lamb, 2005), tensions still exist between commercial and environmental objectives and there is a lack of good practice in non-foods where 1mn tons of textiles are thrown away each year. In relation to standards, BSI and the Carbon Trusts draft product carbon footprinting standard, just out for technical consultation, is hoped to provide a reliable and consistent framework for sustainable product innovation by retail firms, although product carbon footprinting is not without its challenges. Recently, Tesco announced that it would work with the Trust to assess the carbon footprint of 30 own-brand products. In relation to skills, research by the Australian Greenhouse Office identified several years ago that training of retail staff on the awareness of environmental issues so that they were equipped and motivated to handle customer questions is key, for example, to the development of innovative environmental systems that promote cocreated recycling solutions. Work by the Resource Efficiency KTN has supported this finding in the UK and the KTN has been working with SkillSmart Retail and the Basingstoke College of Technology to develop a 1-day basic level environmental awareness skills programme. Finally, the horizontalisation of policy (to create an appropriate infrastructure for
sustainable innovation) is illustrated by the Department for Transports recent consultation paper on a new low carbon transport infrastructure (Department for Transport, 2007). 8.23 This is just a small snapshot of the widespread consultations, initiatives and projects in relation to sustainability, all of which have complex and interlocking implications for the retail sector. But what should be the priorities for retailers attention? Care must be taken to avoid initiative-itis, which can risk adding to the uncertainty of retail firms, rather than providing the kind of integrated, authoritative guidance that will provide the retail sector with a framework within which it can pursue innovation with confidence. It is important that the retail sector can have confidence in the long-term direction and integration of Government policies on sustainability in order to secure the sectors willing participation in both projects and consultations.
27 AC
Nielsen, 2007.

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8.24 With a few notable, widely publicised, exceptions, retailers innovation in relation to sustainability has tended to be somewhat piecemeal. In part, again, this reflects a lack of resource both financial and human within the sector; but it also reflects the difficulty in positioning this kind of innovation in relation to more explicitly commercial demands on the business, alongside a relatively low awareness and - even when aware - a degree of uncertainty in relation to the relevance of Government policy and initiatives in this area. It will be critical to identify the most important priorities not just for large, higher profile, retail businesses but also for SMEs. 8.25 Much of this uncertainty has to do with the absence of appropriate standards. For example, one of the chief barriers cited to innovation in relation to environmental objectives was the persistence of an accounting methodology that fails to recognise the triple bottom line: which accounts for the costs but fails to distinguish the environmental benefits that lead to carbon footprint reduction. Standards in relation to accounting practices are needed to permit the correct attribution of spending towards environmental goals. There remain inconsistencies in accounting practices in relation to environmental outlays, which are primarily due to lack of sufficient and uniform authoritative accounting standards and ever-changing public policy and regulatory standards.28 8.26 The SIGMA Project (a collaborative exercise between BSI Global, BERR and the notforprofit organization AccountAbility) launched guidelines in 2003 to assist firms in developing a standards-based framework for managing sustainability. Alliance Boots and Marks & Spencer have been the only retail partners in this initiative: The Boots Group has a long standing commitment to incorporate sustainable development principles into its business operations. Collaboration with the Sigma project is a natural progression of this philosophy. Using the latest thinking, Sigma has provided the stimulus to develop new processes, enabling us to remain a leading edge sustainable business and reinforce the trust our customers place in the Boots name. But there are still significant challenges, as AccountAbility comments: There are now over 300 standards aimed at assisting businesses in meeting the goal of sustainability. Convergence towards a global architecture of standards that are not just compliance or risk management mechanisms is crucial. (AccountAbility)
28 Razaee,
Z. et. al., (1995), Corporate governance and accountability for environmental concerns, Managerial Auditing Journal, 10(8), 27-33.
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Recommendation 3: Promote innovation in sustainability.

Desired outcomes: The reduction of risk for retailers innovating in sustainability through the application of a meaningful sustainability framework, hard measures of performance against this framework, and prioritisation of funding support and advice to the retail sector to stimulate appropriate innovation. Background: A small number of very large retailers, together with a number of smaller speciality businesses with strong ethical values, have developed relatively clear strategies in relation to sustainability which have resulted in innovative products, processes as well as wider, more intangible innovation. However, the remainder of the sector struggles to come to terms with the challenge largely because of the cacophony of conflicting advice and guidance from a wide variety of sources. Evidence: The lack of widespread retail support for the work of organisations as varied as the Carbon Trust and the Resource Efficiency KTN, alongside disjointed, often populist (and potentially ineffective) innovation in sustainability. Analysis: Eight specific measures which might act as stimuli for innovation in sustainability have been identified by the sector: Support mechanisms 3.1 VAT reductions to stimulate green product innovation (work at the European level required to reduce VAT in relation to such products as energy efficient light bulbs & DIY materials) 3.2 Business rate relief on energy efficient buildings (There is disagreement on the extent to which rates relief might stimulate innovation. This should be further investigated for retailers in the context of the business requirement to display Energy Performance Certificates) 3.3 Encourage development of shared waste facilities by SMEs (Most attention has focused on the largest retail firms. Innovative solutions are required to ensure higher recycling rates amongst the UKs 167,000 smaller retail enterprises) Reduction of barriers 3.4 Faster and easier planning regimes for sustainable technologies relevant to retailing (for example, the need to distinguish between applications for microwind projects and large scale wind turbine schemes) 3.5 Foster a standards-based framework to manage sustainability and reduce uncertainty and risk (for example, in relation to accounting standards) 3.6 Work towards identifying sustainability metrics and require retailers to publicly report on their achievement of these (for example within Social Responsibility paragraphs of annual reports) Foster skills 3.7 Build environmental awareness amongst retail staff (through incentivising or providing appropriate training and development) 3.8 Low carbon technology skills to support growth in retail initiatives (for example, increasing the number of trained technicians available to work on low-carbon technology projects)
Page 69 The creative and entrepreneurial zeal of the retail sector is perfectly capable of adapting its talents to innovation in sustainability, given well-structured, consistent and carefully targeted advice and support from Government and related agencies and partners, which include the Resource Efficiency KTN, the Carbon Trust, WRAP and the Forum for the Future. The risks of inaction include the perpetuation of isolated, piecemeal and
potentially ineffective actions by firms which hampers the sectors progress towards sustainability targets. Conclusion/Next Steps: Government should work with the retail sector in identifying and disseminating priorities for innovation in sustainability. This should occur through the development of a meaningful framework for action, including the provision of evidence for the effectiveness of funding incentives, priorities for barrier reduction and any skills shortages or gaps which can be addressed at the national or regional level.

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c. Fostering skills and organizational innovation 8.27 The third broad area for our recommendations is in relation to the fostering of skills and organizational innovation relevant to retail innovation. The Government has already played an extensive role in the broader skills arena for retailing, through Skillsmart Retail, via the Regional Development Agencies and through brokerage services administered by Business Link. However, we are particularly interested in the extent to which innovationrelated skills are identified and supported. Skills issues in relation to retail innovation arise in relation to four particular areas: the specialist or technical skills, often cross-sectoral in nature, required to deliver specialised products or processes; the skills needed to fostering a culture of innovation, the skills related to the management of innovation or of innovation projects, as well as the somewhat particular needs in relation to innovation skills of the SME sector. 8.28 In its sponsoring of Skillsmart Retail as one of the first Retail Sector Skills Councils in 2002, the Government demonstrated the importance of the sector in terms of job creation as a gateway employer and in developing a skilled workforce in the UK. SkillSmart Retail has since developed National Occupational Standards, specialised Diplomas and foundation degree programmes. 28 UK universities now deliver 42 retailspecific degree courses (Figure 8.2) Figure 8.2. Retail skills training and qualifications available in England
Source: Skillsmart Retail, 2007.
8.29 The Retail Sector Skills Agreement is the largest collaborative research project of its kind, and is designed to identify and address the sectors skills needs. The Council has a responsibility to retail firms of all sizes and a concern not just for core retail skills, but also in relation to future skills needs. A National Skills Academy for Retail will be established in April 2008 to give access to world class skills and business support for retailers whatever their size and wherever they are located. Core skills and store management training and qualifications necessarily lie at the heart of this support, rather than such areas as innovation, creativity and new product and process development per se. Nor is the Innovation in the UK Retail Sector
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Academy likely to prioritise specialised ICT or technical development in-post, nor especially strategic leadership issues. These are important gaps, since out respondents observed that innovation in retailing is often hindered by: on occasion a lack of technical skills, but often a lack of leadership skills to drive/demand innovation and tie everything together. 8.30 On the ground locally, wider activity is currently taking place on the skills agenda, but only part of this activity is relevant to innovation-specific skills. This includes the integration of the Train to Gain skills broking service with Business Links Information,
Diagnosis and Brokerage (IDB) service, managed by the Regional Development Agencies; the Qualification and Curriculum Authoritys current consultation on the accreditation of employers own in-house training; and specific work around innovation being undertaken in the regions by the Regional Development Agencies and Higher Education Institutions (although the relationships and clusters established here have again been mainly in respect of the science & technology base29). However, feedback from retailers suggests a degree of dissatisfaction with the priority accorded to the sector by Business Link amongst its many responsibilities. 8.31 Many of the kinds of specialist skills required to support retail innovation are as likely to come from other sector skills councils as from Skillsmart. These include: e-skills UK (ICT and telecoms skills); Skills for Logistics (freight logistics and wholesaling industry); Skillset (broadcast, film, video, interactive media and photo imaging); SummitSkills (building services engineering); and Skillfast UK (fashion and textiles) 8.32 During 2007, the 25 Sector Skills Councils established the Alliance of Sector Skills Councils (TASSC), whose purpose is to support the SSCs in achieving their collective agenda, including taking greater responsibility for their own collective action and performance. The Alliance sees the link between innovation and the expressed shortage in technical skills as shared in common by a number of sectors and is encouraging the SSCs, where appropriate, to work collaboratively to address these needs. 8.33 The Leitch Review of Skills made some helpful observations in this area. It noted the increasing specialisation of skills as new ways of producing goods and services (such as ecommerce) evolved. It pointed to retailing as being a sector where specialisation was accelerating. For example, e-skills UK has drawn attention to the lack of e-business skills (rather than just professional ICT skills) which are needed to address the longer term development needs of firms. In many ways these are cross-disciplinary skills: comprising business, creative and technical skills partially learned in: business studies, commerce, multimedia, multimedia, information systems, fine art, librarianship, journalism, film studies, photography (Expert Group on Future Skills Needs 2001). As the retail sector grapples with a multi-channel future, innovation will increasingly be driven by a range of overlapping skill sets. This is particularly the case given that innovation within the service sector is as likely to span firms and whole value chains as well as channels to market. But outsourcing the problem or relying upon the expertise within supplier
29 See
for example the discussion of the creation of science cities in RDA National Secretariat, (2006), Bringing Regional Prosperity, Regional Insight, Sept/Oct.

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companies as some firms have done simply transfers the problem (and in some cases the innovation potential) to those firms. 8.34 It is difficult if not impossible to train to deliver an innovation culture, but it is possible to train for management of the innovation process, or for the management of organizational change. Project management skills (required to implement innovative ideas within the sector) also appear sought after. In relation to strategic leadership skills, the Leitch Review suggested that the highest level of skills drive and facilitate innovation, leadership and management and urged Government to provide employers with clearer incentives and mechanisms to engage and invest in Higher Education, through lifelong learning. Reinforcing this, the Lambert Review of the UKs HE system stressed the need to ensure that courses put on by Universities in particular areas were relevant to the needs of
business. 8.35 Finally, for retail SMEs, attitudes towards innovation and preferences for exposure to innovation-related skills development may be rather different from those of larger firms. For example, the general reluctance to engage in formal training has been noted by a number of commentators and forms of peer-to-peer mentoring appear to offer better results, but good practice is isolated30. Different kinds of innovation may also be important to smaller firms to allow them to think differently about their businesses for example, new approaches to product buying and presentation can provide for a distinctive form of innovation. 8.36 Support for innovation by retail SMEs has tended to be provided at a regional or local level. The RDAs have conventionally been seen as the home for such involvement and investment, alongside work by Business Link and Job Centres Plus. Skillsmart Retail has also identified the importance of local context in assisting retail SMEs. The councils location model, developed by its in-house research team, has proved a useful vehicle for focusing awareness relation to skills and personal development at the local level when it has been conducted. For example, following a mystery shopper exercise and local market review in Colchester, 35 independent retail businesses attended a discussion of opportunities to improve their performance. A significant proportion of these firms subsequently engaged in training initiatives. Skillsmart Retails Location Wise and Skill Shops initiatives outlined in its most recent Sector Skills Agreement report seeks to consolidate the learning from the location model as a mechanism for providing practical advice and best practice for those wishing to design interventions that are relevant for their locations (Skillsmart Retail, 2007b). 8.37 The skills councils proposed Coaches and Mentors 4 Retail scheme seeks to build upon the preference for mentoring amongst SMEs by coaching smaller retailers in bite-size chunks to match the phasing of the retail year. This complements its online RetailDetail toolkit, launched in 200531. However, replicating skills support and mentoring activity at the local level nationwide presents a number of resourcing challenges and it would seem sensible for a further degree of integration and collaboration between providers to be encouraged, to improve the clarity and accessibility of support on the ground. Moves in this direction would also be consistent with the principles of BERRs Business Support Simplification Programme.
30 See
for example http://www.dormen.org.uk/main.asp and Kent, T., C. Dennis, and S. Tanton, (2003), An evaluation of mentoring for SME retailers, International Journal of Retail & Distribution Management, p. 440. 31 http://www.skillsmartretail.com/retaildetail/features.htm

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Recommendation 4: Identify and support the complex sets of skills required for retail innovation.
Desired outcome: Development of appropriate mechanisms to identify and support in a more integrated way the skills required within retail businesses to stimulate, manage and sustain innovation - within both large and small retail firms. Background: Strategic innovation within retailing requires increasingly complex and varied sets of skills. Retail employers, in common with many other service sectors, are in the market for a number of scarce skill-sets, such as those in relation to project management, ebusiness, logistics, building services engineering and fashion and textile design. SMEs have less complex but nonetheless still challenging skills needs in relation to innovation. Evidence: Expressed technical skills shortages, gaps and mismatches reported in the sector. Shortage of skills in innovation and project management for SMEs. Analysis: Five specific actions flow from this desired outcome: 4.1 Provision of innovation awareness training amongst employees
(promoting a culture of retail innovation) 4.2 Provision of management of innovation skills training (leadership and project management of innovation often lacking) 4.3 Provision of cross-sector technical skills training capability (sharing employer needs across sector boundaries); and for SMEs 4.4 Development of innovative approaches to areas such as product buying and presentation for SMEs (SMEs lack skills to source and market new products) 4.5 Provision of an integrated support structure for retail SME skills and mentoring at the local level which further reduces present duplication. The risks of inaction in this area include wasteful duplication of investment and business support activity, and resultant confusion amongst retail business, especially SMEs at the local level. The absence of required skills may work to stifle innovation. Conclusion/Next Steps: Identify the lead co-ordinating agency on retail skills at the local level. Take steps to better integrate the work of the existing relevant agencies to meet both large and small retail business requirements in relation to retail innovation skills.

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References
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Skillsmart Retail, (2007a), Retail Qualifications and Job Roles, Skills for Business. Skillsmart Retail, (2007b), Analysis of the gaps and weaknesses in current workforce development activity in England, Sector Skills Agreement for the Retail Sector, Stage Three Report for England, October. Solow, R. M., B. Bosworth, et al. (2001), US Productivity Growth 1995-2000: Understanding the Contribution of Information Technology Relative to Other Factors, McKinsey Global Institute. Spriggs, M. T. (1994), A framework of more valid measures of channel member performance, Journal of Retailing, 70(4): 327-343. Teece, D. J. (1986), Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy, Research Policy 15: pp. 285-306. Tether, B. (2005), Do Services Innovate (Differently)? Insights from the European Innobarometer, Industry and Innovation, Jun 2005, 12(2): pp. 153-184. The Economist (2007), Something New Under the Sun: a special report on innovation, The Economist 13th October.

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0 5000 10000 15000 20000 25000 30000 35000 Innovation Technological Innovation Service Innovation Retail Innovation Innovation 27601 31339 32861 Technological Innovation 11858 12920 13916 Service Innovation 127 136 155 Retail Innovation 13 12 13 2005 2006 2007
Appendix 1 Research Methodology Apart from being difficult to measure only with traditional input and output measures or may be because of that innovation in retailing is also vastly under-researched in academic terms. For example, whilst the title keyword innovation generated some 32,861 peer reviewed academic publications within a leading journal aggregator, and technological innovation 13,916, only 155 featured service innovation and a mere 12 explored retail innovation32 Figure 1. Under-researched nature of innovation in retailing The report draws on extensive secondary and primary research in order to establish a more coherent, sectorspecific characterization of innovation. It analyses for the first time the retailspecific responses to the most recent Community Innovation Survey. It brings together a wide range of secondary material dealing with innovation (examining its relevance through a retail lens) and with Government activity and policy potentially appropriate to the stimulation and support of retail innovation. The primary research draws upon selected insights from a series of indepth interviews and discussions
conducted by one of the authors as part of his doctoral research. with over 50 senior retail executives and other industry experts from over 30 retail businesses, consulting firms and industry associations within the UK and elsewhere on how they define, encourage and manage innovation33. The mixed purposive sample was selected in a way ensure adequate representation of both largeand medium-sized firms from 12 different retail sub-sectors, thus the sample included retailers with a turnover of between 15bn and 15m from 12 different retail sectors 34. Qualitative interviews and the case study approach are established methodologies in management science for exploring novel or complex social phenomena such as innovation and for understanding behaviours, values and believes and their context (Calori, Johnson et al., 1992; Boiral, 2003; Adams, 2004; Bryman, 2004; Hristov and Reynolds, 2005). The degree of generalisability which is a consideration in qualitative research, because of its tendency to employ case studies or smaller samples has been minimised to some extent through the use of a larger mixed purposive sample of interviews and the triangulation of primary with secondary data.
32 EBSCOs 33 Hristov
Business Source Premier (01.08. 2007) (2007) 34 Hristov (2007)

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Appendix 2 Glossary of Abbreviations BERR Department for Business, Enterprise & Regulatory Reform BRC British Retail Consortium BSSA British Shops and Stores Association CIS Community Innovation Survey CSR Corporate social responsibility DEFRA Department for the Environment, Food and Rural Affairs DIUS Department for Innovation, Universities and Skills EDLP Every Day Low Price EPSRC Engineering and Physical Sciences Research Council ETF Environmental Transformation Fund FCO Foreign & Commonwealth Office ICT Information & Communications Technology IGD Institute for Grocery Distribution IP Intellectual Property IRS Internal Revenue Service ISO International Standards Organization KIBS Knowledge Intensive Business Services KPI Key performance indicator KTN Knowledge Transfer Network NAICS North American Industry Classification System NESTA National Endowment for Science, Technology and the Arts NMW National Minimum Wage NPD New product development OXIRM Oxford Institute of Retail Management RFID Radio Frequency Identification ROI Return on investment ROIC Return on investment capital ROS Return on sales
SKU Stock-keeping unit UKTI United Kingdom Trade & Investment VCN Venture Capital Network WRAP Waste & Resources Action Programme WWF World Wildlife Fund

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In 2009, UK retail sales were over 285billion and are growing, despite the economic downturn in 2007.

What kind of work can I do?

Whats it like working in this sector?

How big is this sector?

NESTA December 2007

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

2. The nature and contribution of retailing

UK companies (DTI, 2005; DTI, 2006).

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Figure 2.1: Anti-competitive regulations in retail distribution, 1998-2003

Innovation in the UK Retail Sector

3. What are the distinctive characteristics of retail innovation?

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Figure 3.2. The extent of reported wider innovation within retailing

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

4. How do retailers think about innovation?

(26.03.2007) Strategy Offerrelated innovations Supportrelated innovations Organisationrelated innovations

Innovation in the UK Retail Sector

Source: Hristov, 2007

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

5. What drives retail innovation?

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

6. What are the barriers to retail innovation?

Innovation in the UK Retail Sector

Figure 6.2. Nature of protection of innovation employed: retail trade

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

7. What are the measures of retail innovation?

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

return on investment, ROIC return on investment capital, ROS return on sales

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Figure 7.3. Key non-financial measures of innovation

Innovation in the UK Retail Sector

8. Recommendations to stimulate and support innovation in retailing

Not used Low Medium High

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Innovation in the UK Retail Sector

Recommendation 1: Improve the effectiveness of innovation-related support activity within Government.