Calvin McDonald has put his fellow retailers on notice: Innovate or fall behind and whither.

That was the choice that the president and chief executive officer of Sephora Americas mapped out while giving the keynote dinner speech on June 9 at the WWD Beauty Summit held at The Conrad hotel in downtown Manhattan.

Working under the conference’s theme of Pathfinders, McDonald warned of “a growing innovation gap in retail” between what he called “haves and have-nots.”

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Despite its importance, there is a shortage of  innovation in retail today, and few retailers “have the capacity or the will to truly inject their organizations with it,” McDonald said. “More often than not, retailers are content to depend on promotion in the hopes that it will create demand. The reliance on promotion simply kills innovation,” McDonald asserted, describing the resultant demand as “artificial.”

In comparing retailers with brand manufacturers, he sees a dichotomy, particularly in the upscale market. “Prestige is notable for having a highly engaged client, very imaginative brand founders and storytellers, and a comparatively low cost of entry. When put together, these factors result in a healthy flow of new and exciting products to market every year,” he said.

McDonald used a financial analysis to dramatize the result of the gap between those who innovate and those who don’t.

“There is an incredible amount of product churn that takes place, with something like 50 percent of total beauty sales generated from new items introduced within the previous two years. Despite this impressive product turnover,  prestige was up only 5 percent,” McDonald said. “The industry is not getting the credit or full benefit for all the effort that goes into creating these new items.  The numbers also point to a growing gap between the ‘haves’ and the ‘have-nots’ in beauty retail,” he continued.  “In most other industries, price is an effective weapon used to neutralize this gap,  but in prestige — with its lower penetration of promotional sales — the approach does not work. Rather, it is real innovation that separates the competition. The prestige client is voting with his or her wallet and creating real demand.”

McDonald drove home the point that the ability to innovate is “a pathway to unlocking growth and profitability,” as well as a tool of competitive differentiation and building vendor relationships.

So why are there a lot of retailers, across many categories, which are “pretty bad at it?” Some are not “hard-wired” to innovate, he answered, then pointed to three factors. First, there is the temptation to promote. “The harsh reality is the when you rely on promotions you inevitably erode your margins and put your long-term viability in jeopardy,” McDonald said. “There are very few retailers who can operate successfully on price alone.”

On the other hand, “the best retailers are the ones that effectively harness technology to accommodate and entice consumers while improving and personalizing the individual shopping experience, and more often than not, the younger, nimbler and more technologically savvy teams are the ones that are able to achieve this,” McDonald continued.

Secondly, a lack of testing in the retail business means  merchants go by what worked — or didn’t— in the past. “They spend 80 percent of their time managing through the rearview mirror, and when they do try something new, they give up before it has a chance to evolve.”

He asserted that “a patient, methodical approach to new initiatives is the only way a retailer will truly know if something is right.”  And companies must be quick to catch trends “on the fly.”

Thirdly, there is too much reliance on knowledge and not enough faith put into imagination because the latter poses “too much risk, too much uncertainty.”

“It is up to the leaders in retail to create an environment that frees their teams to imagine and test the bounds of what is possible without short-term time constraints,” McDonald declared.

He contrasted the “have-not” environment with the flourishing innovation culture he found on joining Sephora in 2013, where creativity and craftsmanship are valued as “performance-drivers” and “their business model is centered on making long-term investments that support innovation and on giving these investments time to succeed.”

He cited the March introduction of Pocket Contour, a virtual makeup artist application designed to make facial contouring easier, one of the biggest trends of the year. Sephora  also opened its Innovation Lab, which is devoted to forecasting the future shape of retail and developing young innovators through the Think Tank program.

McDonald  singled out the organization’s obsession with action — spotting, testing and getting things quickly. One of the first acronyms he heard around the office after joining the company was GSD [Get S—t Done].

He predicted that  the innovation gap will continue to expand, and retailers will fall deeper into “the have-not camp.” But natural evolution will take over as consumers decide what they want to buy, driving the changes needed to bring the innovation debate to more retailers “by either forcing transformation or eventually allowing new entrants to break through.”

“Innovative brands will continue to work with innovative retailers,” who “after all, are the ones that have been able to create new demand,” he said.