Retailers step up search for next big thing

LONDON Thu Jun 24, 2010 4:25am EDT

LONDON (Reuters) - With little prospect of a pick up in demand, and not much more room to cut costs, retailers are taking a risk by stepping up spending on innovation in the hope of finding the next must-have product to help boost sales.

Executives at the Reuters Consumer and Retail Summit this week said they were investing more in product development and marketing -- areas traditionally cut back when times are tough.

The stakes are high. Retail history is littered with "next big things" that never made it -- from the Sinclair C5 battery-powered tricycle to the Amstrad E-mailer telephone.

But industry leaders feel they have little choice.

"What is quite clear is there is consumer spending available for things that are different. The iPad is the super extreme example of that, but I think that's playing into a broader theme," said Ian Cheshire, chief executive of Kingfisher (KGF.L), Europe's biggest home improvements retailer.

"You will see switching of spend in markets toward new and interesting."

Kingfisher, which runs the B&Q chain in Britain as well as Castorama and Brico Depot in France, is ramping up spending in new products, and rolling out goods like folding plasterboard, click-fit tiles, and a space-saving eco-toilet with a built-in wash basin at the top which uses the sink water for flushing.

Having endured two years of economic downturn, retailers are bracing for themselves for a prolonged period of stagnation as governments take steps, like hiking taxes and cutting public spending, to reduce budget deficits.

Matthew Shay, chief executive of the U.S. National Retail Federation, said consumer spending was unlikely to come back until there had been a sustained improvement in the job market, which could take months.

Richard Hyman, strategic retail advisor to business consultants Deloitte, was even more pessimistic.

"In many ways I don't think we've gone into recession yet. I think the recession is about to come," he said.

Having already slashed costs, many retailers have little choice but to gamble on new products that will help them to stand out from the crowd, particularly at a time when higher fuel and import costs mean they may need to raise prices.

DARING TO BE DIFFERENT

"Unless you are very distinctive, very unique and have got a really strong following, I think it's going to be very difficult for you to put your prices up," Deloitte's Hyman said.

John Clarke, head of consumer healthcare at GlaxoSmithKline (GSK.L), said innovation was at the heart of the strategy of his business, whose brands include Lucozade energy drinks, Aquafresh toothpaste and Panadol for pain relief and fever.

Sales rose 7 percent last year, outperforming industry growth of just 1 percent, and fueled by an approximate 8 percent increase in spending on both R&D (research and development) and A&P (advertising and promotions), he said, adding cost cutting ensured that profit margins did not suffer.

Mark Price, managing director of upmarket British grocer Waitrose, also highlighted the importance of innovation, backed by strong marketing spending.

Waitrose is about to relaunch a premium, organic food range founded by Prince Charles, heir to the British throne, to differentiate itself from rivals and drive growth overseas.

"We think a range that's supported by His Royal Highness the Prince of Wales, is organic, sustainable and top-of-the-range premium will have great resonance outside the UK," he said, adding Waitrose had lifted marketing spend by 40-50 percent.

N Brown (BWNG.L), the British clothing retailer which specializes in larger sizes and is expanding into Germany and the United States, is also putting a premium on exclusivity.

Chief Executive Alan White said that, as well as developing Britain's largest-sized strapless bra, the group had high hopes for Magifit -- a lycra and elastic-based webbing that tucks in bulges to give the wearer "a better silhouette".

(Additional reporting by Martinne Geller in New York; Editing by Hans Peters)