Jon Nordmark is the CEO at Iterate Studio, argues retailers need to invest in labs to help them predict and shape the future of their digital markets.

Amazon.com Inc.’s relentless pursuit of digital innovation has led many other retailers to respond by establishing their own innovation labs to discover and incubate the ideas and technologies that will help direct their futures. Some of the most intriguing retail technology products we’ve seen enter the market were conceived in these retail innovation labs, including Amazon’s Fire Phone and Flow augmented reality app, Target Corp.’s Cartwheel couponing technology, and Sears Holdings Corp.’s Shop Your Way site.

Large retailers may operate several labs, relying on these separate and secretive divisions as their incubators of innovation. Gartner Inc. analyst Jeff Roster calls this movement the “Era of Intentional Innovation,” with proactive companies seeking to predict and drive technologies and trends. Labs are one way they accomplish this, and we are seeing both large retailers with massive research and development budgets and smaller e-commerce outfits finding ways to access the value that innovation labs provide. In the competitive digital retail innovation arms race, being left too far behind can be catastrophic.

Just one of Amazon’s many innovation labs—LAB 126 in Silicon Valley—has created the Fire Phone, Fire TV streaming device, the Dash handheld device that consumers can use to replenish items via the AmazonFresh grocery delivery service, and the just-launched Amazon Local Register, a Square-like point-of-sale payment system that works with tablets and smartphones. Rumored products under development include wireless speakers controlled by voice commands, and the Kindle Paperwhite 3 code named “Ice Wine.” Although this last one does not seem to have panned out.

Amazon also operates Weblab, which works to improve the 300-some (!) web services that feed into the standard Amazon.com web site page. Weblab’s experiments increased more than threefold from 2011 to 2013, when it ran 1,976 experiments on Amazon web sites, according to Amazon’s latest annual letter to shareholders. Amazon has quadrupled its research and development spending in the last four years, investing $6.5 billion in 2013 alone. That trend continues—in the second quarter of 2014 it invested 40% more than it did in the same period in 2013—making its R&D investment now roughly on par with Google Inc., and significantly ahead of Apple Inc. What’s more, the retail giant does more than simply invent: Amazon also buys up to a half dozen startups each year: past acquisitions include well-known names like Kiva, Zappos, Shelfari and Goodreads.

To compete, many other major retailers are investing in labs to help them predict and shape the futures of their digital markets. For example, with a $300 million investment, Wal-Mart Stores Inc. purchased Kosmix in 2011 to act as the cornerstone of @WalmartLabs, and the company has continued adding e-commerce capabilities with a string of acquisitions every year since. Wal-Mart’s digital efforts, which represent about 2% of the company’s total revenues, push emerging technologies, invent and promote new open-source tools like their Polaris semantic search engine for products, and build features leveraging social and mobile.

advertisement

We’re also seeing West Coast-based technology companies—ones that have always considered R&D an essential line item on their profit-loss statements—becoming retailers. Apple, once just a computer maker, helped bankrupt Tower Records as it transformed the music industry. Google changed the retail marketing landscape with the advent of AdWords and is now trying to push the industry even further by improving its same-day delivery service and rolling out Google X Lab’s Glass. And Amazon, the obvious elephant in the digital room, seems to focus its entire R&D spend on retail and retail-adjacent inventions, like drones, augmented reality and Amazon Web Services (AWS), which is basically online retail real estate. These tech giants are forcing other retailers to invest in lab experimentation and invention activities, and many retailers might soon include R&D on their P&Ls as tech companies do.

Make no mistake: Amazon and Wal-Mart are retail’s titans. And their innovation lab practices have influenced merchants across the sector. For example, American Eagle Outfitters Inc. has plans for a 100-employee lab that will seek new ways to leverage the clothing retailer’s 1,100 stores. Staples Inc.’s Velocity Lab now operates out of three locations, the first founded at the end of 2012 in Cambridge, Mass. And The Home Depot Inc. founded Home Depot Lab in Austin, Texas, after acquiring BlackLocus, a price comparison engine that helped retailers make data-driven pricing decisions. The retailer also owns another digital innovation center that focuses on testing in-store technologies.

Nordstrom Inc. is rumored to be spending many millions per year on its own innovation lab, and is rapidly pursuing a store designed for the “digital native” generation of consumers who have grown up with the Internet. Not much is known about The Walgreen Co.’s innovation lab, which operates out of Carmel, Ind., which may speak to intentional secrecy. Sears Holdings Corp.s’ iRLabs in Chicago created Shop Your Way, a modern e-commerce web site and mobile coupon service. The sparsely promoted JCPenney Innovation Lab teams designers, technologists and usability experts to create, in their words, “the shopping experience of the future.”

Kohl’s Corp. has a fairly large innovation team that has grown quickly and operates out of Silicon Valley. Lowes Cos. Inc.’s Innovation Lab currently has facilities in Los Angeles and San Francisco, and later this year will open its Innovation Headquarters in Boulder, Colo. Apparel manufacturer VF Corp. and even McDonalds Corp. have labs running (some still relatively under the radar) and are actively competing for talent against Amazon, Facebook Inc. and Google in the Bay Area. As mall foot traffic continues to decline, and as the “digital native” becomes an important shopping cohort, this list figures to grow.

The retail industry trend of investing in innovation goes beyond just these major companies. Retail players too small for eight to 10-figure R&D budgets (and even behemoth retailers that do) are turning to labs to stay ahead of competition, experiment at high volume and high velocity, plus validate new technologies. No retailer can afford to ignore the technical forces that are changing shopping behaviors, from augmented reality to visual search to iBeacons, 3-D printing and wireless payments. In the retail sector, innovation is a race, and companies of every shape and size can ill afford to lag behind.

advertisement

Historically, retailers lived or died by their ability to create, predict and respond to fashion trends. In the future, beyond responding to fashion trends, retailers will live or die by their abilities to create, predict and respond to digital trends that quickly become mainstream and to power a giant force of digitally enabled shoppers.

Jon Nordmark is the CEO at Iterate Studio, a digital proof-of-concept lab that discovers and curates emerging technologies, then implements proof-tests for a members-only group of non-competing retailers. Jon co-founded eBags.com in 1998, served as its CEO for 10 years and is chairman of its board of directors.

Favorite