Engagement by the European retail sector in innovation is a pre-requisite to the deepening of the Innovation Union. To this end, the European Retail Action Plan established a high-level expert group to recommend possible short- and medium-term priority actions to help increase the sector’s competitiveness through innovation. The increased awareness of the potential of the retail sector to contribute in this way derives from the sector’s scale and role: European retailing generated €2.6tn in sales in 2011 from 3.7mn businesses (15% of all European businesses) and €451bn in value added. It employs 18.6mn people: the largest employment sector in the region. Retailing is also the closest sector to the citizen and consumer in the value chain. This not only permits but requires retail firms to achieve effective co-ordination and development of customer-centric innovation. However, the external perception by many of the retail sector is that firms of all sizes are poor innovators by comparison with other sectors, and are poorly represented in terms of traditional markers of innovation intensity. This perception largely arises because retailers innovate differently. Whilst retail businesses can be product and process innovators, as well as engaging successfully with both technological and non-technological innovation, many larger retail firms are also marketing, organizational and open innovators, as they seek to co-ordinate not just product and process innovation, but innovation in their value propositions across the value networks in which they operate. The nature of competitive retail markets means that retail firms often exhibit more incremental than radical innovation practices. The geographical and enterprise structure of the retail sector are also important considerations in understanding differential propensity to innovate. Some European markets are at different stages in their retail development. And whilst the European retail sector is the largest private economic sector within the EU28 in terms of enterprises and employment, it is still highly fragmented, with integrated national chains only accounting for 0.1% of all enterprises, although 45% of the sector’s value added. The sector is intensely entrepreneurial, with over 5.3mn self-employed individuals engaged in retailing. The customer-centric nature of retail innovation demands that the process is not just about incrementally improving efficiency in the sector but is also concerned with achieving greater effectiveness in the customer’s experience of the retail offer. Retail innovation is as much an art as a science. At its heart, retail innovation will only be successful if it can substantially increase customers’ quality of life throughout the shopping experience. The future trajectory of innovation within the retail sector is influenced by a number of external and internal drivers of change. The first, and by far the most important, external driver of innovation is the consumer. European consumers are exhibiting several components of change that, in combination, are creating new opportunities for firms. Highly competitive and challenging economic conditions stimulate the development of innovations that lead to cost efficiency, low prices and a higher level of consumer welfare in both the short- and long-run. Digital technologies are acting as transformational drivers of the sector, with consumers at their heart. Regulatory drivers serve to shape the sector’s scale, growth and characteristics, but also influence the kinds of innovations that can be profitably brought forward. Within the sector, organizational drivers stimulate the development of a culture supportive of creativity, and a lean, flexible organizational structure within which such ideas can be implemented. Finally, the broader value networks within which retailers operate are allowing the larger retailers to play the role of an ‘innovation hub’ pulling together partners’ expertise and allowing them to share the risk and cost of innovation. We identify five barriers to innovation of particular significance to the retail sector: a lack of awareness (both amongst retailers of the existence of and ways of participating in existing EU innovation initiatives, as well as the relative lack of visibility of the sector’s contribution amongst policymakers and society), costs (meaning that it can be hard to secure the finance required to support radical innovation projects given the tight margins within which even the largest firms operate), availability of human resources (notably the scarcity of appropriately skilled labour), risks (particularly for retail SMEs) and regulatory constraints (notably those that presently hinder the completion of the Single Market for services). Our recommendations are narrowly retail innovation-specific. They are generated from a clearer understanding of the characteristics of the phenomenon within retailing and are made not just to the Commission, but to other stakeholders - who have the capacity to influence the future nature, pace and incidence of innovation within European retail firms. Four recommendations seek to build better awareness amongst policymakers of the potential contribution of retail innovation to competitiveness, as well as encouraging the development of mechanisms that might help retail firms identify specific opportunities to engage in innovation. These include ways of stimulating greater policymaker engagement with the sector, the auditing of existing initiatives, platforms and programmes, the encouragement of sector participation in European Technology Platforms, and ways of proactively identifying and prioritizing areas of relevance to the sector where harmonization of standards would enhance European retail innovation capability. Six recommendations are designed to prompt greater participation by retail firms of all sizes and sectors in European innovation funding and projects. These include ensuring calls for the Horizon 2020 programme are more relevant to the needs and interest of the sector (including consideration of the funding formulae) and the development of a network of retail laboratories. There is particular consideration given here to the specific needs of retail SMEs, including ways of delivering greater awareness of COSME funding and facilitation, a proposed fast-track route to funding, and asking the existing SME Helpdesk (Your Europe – Business) to make provision for retail SMEs which, after all, make up 20% of all European SMEs. Four recommendations work to identify, stimulate and support relevant investment in retail skills and education that will increase the potential for innovation and growth in the sector. Here, the Group encourages the work of the Committee for Retail Sector Social Dialogue and the recently established EU Retail Sectoral Skills Council places a priority on co-ordination of support for innovation-related skills training and recruitment activity. It urges the development of ways of exposing senior retail managers to customer-centric innovation through mechanisms such as design thinking and encourages universities, research institutes and member state research councils to engage in more innovationrelevant knowledge exchange activity. In addition, it proposes the establishment of more widespread R&D voucher schemes and support for social networks for information sharing amongst retail SMEs in respect of innovation. Finally, three recommendations in relation to regulatory issues seek to ensure that policymakers use a ‘retail reflex’ in their thinking. This is in particular recognition of the fact that innovation in retailing spans firms, geographies and value chains - including consumers - and that unforeseen consequences for can arise from the design of other policies and regulations in respect of their effects on the capacity for retail innovation.