Comment: How store-based retailers can solve the innovation dilemma

The retail industry is in crisis. The businesses of many traditional store-based retailers have stagnated. Growth has given way to shrinking margins and many have seen their market share evaporate. To survive, retailers ultimately need to rethink their purpose and perform brilliantly at delivering what others cannot. Those that create distinct propositions, uncover new ways to fit into consumers’ lives and master digital technologies will be able to cut a new path to success. To do so, retailers need to look beyond organic innovation and instead embrace openness, partnerships and acquisitions as key drivers of strategic innovation, and stay true to their core purpose.

The innovation dilemma

The good news is that retailers are aware of the challenge that is facing them. In a recent study, the majority of store-based retailers cited innovation as the most important factor in their transformation journey. However, these same retailers also cited innovation as the single most difficult transformation to realise. Why is this?

The reason why retailers are struggling with innovation is the pace of technological evolution. The new technologies that are driving change – artificial intelligence (AI), robotics, Internet of Things (IoT) and big data, for example – are capabilities not found in abundance within legacy retailers. These are highly complex technologies that require expert skills and understanding to implement with any sort of success. Gaining access to this understanding and realigning their operations to exploit it is a major step for any organisation. It certainly requires much more than the organic innovation retailers have relied on in the past.

Openness drives innovation

So how can retailers adapt to the digital world and build an innovation capability that has the potential to win back market share? The answer is simple: by being open. Traditionally, retailers have looked to protect innovation. The standard process was to build walls – to protect IP from competitors to give the brand a differentiator. This way of thinking needs to change. Increasingly, the strength of a retailer’s innovation capability will come down to the strength of its strategic partnerships.

Some retailers are already waking up to the possibilities of this approach. In the U.S., for example, supermarket chain Sprouts has teamed up with Amazon to enable home delivery. Importantly, competitors are partnering with each other: in the UK, for instance, grocery eCommerce firm Ocado is partnering with its competitor, UK supermarket retailer Morrisons. Strategic partnerships therefore offer retailers a way to rapidly digitise, enabling them to enhance their innovative capabilities without having to invest time and resources in their own R&D.

The M&A opportunity

For retailers that are really committed to innovation, this credo of openness can be taken to its fullest extent through Mergers & Acquisitions. M&A provides retailers with the opportunity to enable step changes in their operations – buying their way to an innovation leadership position.

Dixons’ merger with Carphone Warehouse is a case in point. The UK’s market-leading retailer of large domestic appliances acquired the country’s leading mobile phone retailer, to exploit the growing ‘networked home’ opportunity and build a service- and-subscriptions business to complement – and even replace – the increasingly competitive hardware retail business.

Innovation-driven, strategic M&A allows retailers to enter new markets, build new channels, or acquire new skills rapidly, without the slow and complex processes that come with organic innovation. Of course, such activity brings with it a level of risk – especially when pursued at scale – and should therefore only be undertaken judiciously by retailers with sound finances. However, the risks involved in taking such bold steps are far less than those associated with doing nothing.

Over the next decade there will be much change within the retailer sector. We can expect to see many legacy brands fall by the wayside while digital competitors with distinct customer propositions and open approaches to strategic innovation stride ahead. Every store-based retailer today needs to review their innovation capabilities in this light, and look at ways in which a more open and bold approach to partnerships and M&A can drive new opportunities for their businesses. 

Tony Stockil is MD at Javelin Group, part of Accenture Strategy

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