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GUEST COMMENT Big retailers may need to turn to innovative startups to survive

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As tech giants like Amazon threaten to dominate the retail space, traditional retailers need to develop their technology to compete in a contemporary marketplace.

Partnering with tech-savvy startups can be a smart way of doing this. Smaller innovators can help retailers build solutions, while the startups themselves benefit from the scale, brand and infrastructure of the bigger company.

Recent research by Bond Dickinson into collaborations between corporates and UK SMEs has found that large organisations have invested £21bn in collaborative deals with SMEs in the UK over the last 12 months.

Although collaborative innovation is becoming a key corporate strategy, it seems that the retail sector hasn’t embraced it as readily as other industries. Since April 2013 £5.2bn has been invested in 296 deals between large retail organisations and UK SMEs. By way of comparison, there have been 452 deals in the financial services sector with investments totalling £31bn.

Why do retailers seem reluctant to exploit these opportunities, and how do they stand to benefit from collaboration?

Fresh-faced collaboration

Collaborative innovation can help retailers to evolve their offerings and provide shopping experiences that fit with modern lifestyles. Tech startups can become symbiotic partners rather than potential threats.

Unilever Ventures’ purchase of a minority stake in True Botanicals, announced earlier this year, is a good example of how this can work.

The venture capital and private equity arm of Unilever invests in young companies to accelerate their growth, and has ploughed millions of dollars into digital and beauty startups since it started in 2002. Unilever Ventures was interested in the high growth trajectory and strong brand of luxury skincare company True Botanicals, and was also impressed with the digitally native business model.

True Botanicals sells directly to customers online, and has developed an online quiz to provide consumers with tailored product suggestions. Although the products are now available at some stores, the company confidently predicts that it will always make the vast majority of its money via online sales.

This intelligent approach to selling online, which includes personalised diagnostics and smart information delivery, appealed to Unilever and other investors. For True Botanicals, the advantages of the collaboration are also clear. CEO Christina Mace-Turner has said that the company’s goal is not just to grow big, but to change an industry. And she recognises that if you want to change an industry, you have to work with the companies that control it.

New ways to work together

Where formal collaborations are taking place, it seems clear that there’s great potential. Our report also shows evidence of cross-sector collaboration, indicating innovative approaches when deals do take place. Of the deals in the last four years, 62 per cent were between two retail companies, while 19 per cent were between a retail corporate and a manufacturing SME, and 7 per cent were between a retail corporate and a financial services SME.

Although online retailers are more reluctant to invest heavily in startup acquisition, they are dipping their toes into innovation. While our study focused on formal deals like M&As and minority stake purchases, more flexible forms of collaboration are underway in the retail sector.

John Lewis, for example, runs a 12 week incubation programme for tech-focused startups. Now in its fourth year, the programme gives participants access to mentorship and free office space in the company’s HQ. Participants can also seek a more formal collaboration by applying for funding of up to £100k in return for a share in their company.

Its accelerator programme JLab asks for applications in a number of different categories, looking for technology that could improve the in-store experience as well as technology to enhance online shopping. They also consider innovative products that could actually be sold by John Lewis. Past participants have included Link Big, a tool that allows people to buy products directly from their Instagram feed, and digital home security device Peeple.

With disruption to retailers happening almost overnight, retail technology developing at a staggering pace and increasingly demanding customer expectations, partnering with these disruptors can lead to the sustainable innovation needed to remain competitive.

The challenge of bringing innovation onboard

Although JLab boasts plenty of successes and John Lewis has continued to develop the scheme, there have been significant challenges. In particular, how do you progress from running an accelerator to actually embedding this innovation in your company?

Some past JLab participants have said that the engagement and assistance they received during the incubation period was excellent, but that working out an ongoing relationship once the scheme ended was more of a challenge. True success means finding a way to bring these external ideas into the day-to-day activity of John Lewis. The scheme has been changed as a result; the startups now work in the John Lewis HQ during the programme rather than in a separate office space.

The difficulty of making the transition from external innovation to internal innovation should not be underestimated, and this could help to explain the low number of formal deals in the sector.

While large retailers are keen to collaborate with small companies on new technology, actually weaving these ways of working into the fabric of their organisations is much more of a challenge. If large retailers are going to compete in today’s marketplace, they may have to find a way of doing this, and fast.

Gavin Matthews is head of retail at national law firm Bond Dickinson

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