Investing Millions in Tech Labs Is Trending Now

Joe Skorupa
Editor at Large
By Joe Skorupa

"I don’t know of a major retailer that isn't already buying or trying to buy a software company. They are realizing they can't do this on their own, they need the advanced technology," observed Bob Willett, former CEO of Best Buy International and CIO of Best Buy at the RIS Retail Executive Summit in June. Recent blockbuster news from Walmart, Target and other leading retailers proves his point.

This week brought news of a tech acquisition of Torbit by @Walmartlabs (one of many in a long string) and an announcement by American Eagle Outfitters that it is opening a tech lab in San Francisco.

These developments follow similar news from a growing list of retailers that demonstrate retail tech lab are trending now in the industry. The list includes: the Target Technology Innovation Center in San Francisco, Staples Velocity Lab in Cambridge, MA, the Home Depot Innovation Lab in Austin, TX, and the Sears MetaScale division, which is focused on Big Data and Hadoop with an office in San Jose, CA.

Nordstrom has also announced it is creating a retail tech lab and Walgreens is currently posting a job opening for a tech lab manager in Lincolnshire, IL.

Retailers that open tech labs typically start by acquiring a hot startup company with a strong team at the helm that includes a combination of business entrepreneurs and innovative technologists. In many ways, a primary purpose of the purchase is for talent acquisition.

Retailers then usually keep the tech labs intact in their original location and operate them as separate divisions. The intent is to preserve a fast-moving, Silicon Valley-style culture without crushing it beneath the weight and legacy culture of the parent company.

For most retailers the labs are new and few lessons can be drawn. However, @Walmartlabs has two years of history to review and its record of startup acquisitions is remarkably aggressive:

Kosmix in April 2011
OneRiot in September 2011
Grabble in November 2011
Small Society in January 2012
OneOps in May 2013
Tasty Labs in May 2013
Inkiru in June 2013
Torbit in July 2013

What Do You Get for Millions in Tech Lab Investment?

So, what has Walmart gotten for its tech-lab acquisitions? Output from @Walmartlabs includes numerous mobile apps for the Apple and Android App Stores, social apps like Shopycat on Facebook, a crowd-sourcing project called Get On The Shelf (GOTS), and a Social Genome project that collects unstructured public data from social networks and subjects it to deep semantic analysis.
Many of these projects have already produced positive results, especially Shopycat and GOTS, which are now in their second iterations. And the Social Genome project is a big, first-mover initiative of immense potential since technology that curates and parses the entire social Web cannot be gotten anywhere else. @Walmartlabs literally had no choice but to create this ambitious technology of immense potential.
No doubt, the other retailers who are starting tech labs have equally high expectations. Hiring brainy tech nerds right out of college or hackers right out of high school comes with risks that most tier-one retailers want to avoid. Acquiring semi-proven startups is a much safer approach and one that makes business sense in a world where building new stores is not a realistic option. Retailers must invest to grow and with cash moving out of physical stores it makes sense to invest in a startup that can tap into the booming e-commerce channel.
However, it is worth noting that not all forays into Silicon Valley-style investment pay off. Best Buy launched an early VC-style effort in 2009. To date, it has not reported a return on investment and the retailer has actually gone radio silent about the effort.
Barnes & Noble jumped into Silicon Valley-style tech investment with the Nook e-reader in a desperate effort to match Amazon's Kindle. Despite hundreds of millions of dollars in investment Nook has been slow to match Kindle’s pace of innovation and, worse, it has been plagued by design elements that caused reader rage to make its way into the social media universe.
As a result, Barnes & Noble recently reported a loss of $450 million due to problems with Nook and announced it would spin off the division. It is also worth noting that the CEO, an outspoken champion of Silicon Valley-style tech innovation, was removed at the same time.
Clearly, the lure of opening a retail tech lab makes sense in a disruptive age. Today, retailers must create innovation and become first movers who invest in smart experiments on the leading edge. They can’t wait for innovation to happen and jump on the bandwagon with everyone else.
On the other hand, they shouldn't sink hundreds of millions of dollars in a winner-take-all passion projec tcould disrupt the core business and risk leaving the company vulnerable if it fails. Investment in retail tech labs should occur on the periphery of the enterprise, aimed at highly targeted functions, and the labs should be allowed to operate independently as a separate division. This will allow them to maintain productive Silicon Valley cultures of creativity and deliver results by failing forward faster.  

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