Barriers to Innovation – Why it’s so Difficult to Innovate in Retail

As I referenced in my last blog, innovation isn’t always about the latest shiny new object or technology. That said, customers are dragging retail (and restaurant) operators into some very unfamiliar and uncomfortable business scenarios that we either need to adapt to or risk obsolescence. Whoa, I had to go there – eh – obsolescence?

I’m sure most of you have seen the graphic floating around LinkedIn and other social media sites on the valuations of many of the major brick&mortar retailers vs. Amazon over the last decade. It’s not pretty. In case you haven’t, here it is for your viewing pleasure:

Source: Business Insider

One could argue that valuations do not always have a direct correlation on whether or not a company is innovating but the inability for a company to change to new market conditions will always create a scenario where performance will suffer and, of course, valuations will suffer.

Why is it so difficult for a retailer to innovate? There really are several ‘chicken & egg’ scenarios that create these vicious cycles that make innovation (i.e. progress to a better state of performance) so challenging. I’m sure any retailer or restaurant executive reading this will have experienced a minimum of two of these barriers before:

Business Financial Structure: Private-Equity vs. Public vs. Private – all can wreak havoc on the ability to innovate. Private equity needs to maximize returns in 3-5 years and as the holding nears sale, mindset becomes short-term and budgets evaporate. The short-term, quarterly thinking of the Public markets becomes a real problem if leadership doesn’t hold strong. Privately held retailers theoretically don’t have the ties of external shareholders and hence can experiment and innovate. However, the margins of retail often keep privately held companies on the sidelines for anything but running the business.

Industry Factors: I’ve had more than one retailer say to me – ‘I’d love to work on next gen projects but I’ve got EMV to worry about’. Regulatory mandates and protocols throw wrenches into medium to long-term strategies and have caused retailers to have to prioritize their efforts outside of building business value.

Resource Factors: A perfect ‘chicken & egg’ scenario. If the financial health of a retailer is not strong, efforts are usually focused on cutting costs and maximizing short-term sales. Strategic projects like innovation become non-existent.

Corporate Structure: This is getting better as the concept of ‘omnichannel’ has taken hold. However, the silo’d nature of many retailers becomes a deterrent to the ‘right’ types of innovation – the ones that create business value. In addition, the pendulum continues to vacillate between IT as a strategic driver of value to a service desk that inhibits the business from their strategic initiatives. Cross-functional collaboration is the only way to ensure innovation drives value.

Corporate Culture: As I referenced in my last blog – nothing really happens on the innovation front without a culture of innovation that comes from leadership. Retailers must look outside their four walls to see where innovative technology and new processes can help them to win. We’ve all heard the ‘fail fast’ mantra but it is true, a culture of iteration and experimentation can uncover concepts and models that can keep a retailer from obsolescence.

The Retail Mindset: C’mon, admit it – retailers are more often than not a risk-adverse bunch. Historically, leadership has come up through operations, merchandising, or perhaps finance and improving performance has come from increasing store count and keeping a tight lid on expenses. With the recent rash of store closing announcements and the recent CoStar report that U.S. retailers will need to rationalize 1 billion sq. feet of space in the coming years, this is clearly not a long-term recipe for success.

The environment is changed forever and no doubt – retail and restaurant executives are a tough bunch. What has to happen, however, is that the industry needs to realize, and admit, the barriers to innovation they are facing and make tangible moves to get further out in front so that they accomplish the most important ROI there is – Relevance.

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