The rise of innovation labs in retail

Retailers pushed to innovate to satisfy demand of customers

Karina van den Oever

By: Karina van den Oever
Blog

Retailers feel the need to innovate

As customers, our behaviour is changing fast. And the retailers we know and love are finding it very hard to stay ahead of the game when it comes to pleasing us. We’re more demanding than ever: we want lots of choice, good value, great service – all tailored to our individual preferences… and we want it now.

Furthermore, the emergence of the sharing economy, on demand services, and the internet of things, are changing the way consumption, production, and delivery are done. Companies are being forced to consider how these innovations affect their businesses. Disruptors are challenging incumbents to rethink their business models.

Retailers agree that innovation is going to be fundamental to future success, and are trying to find ways to tap into and harness innovation. But how are retailers setting themselves up to enable innovation and react to disruption, which is increasingly required across multiple functions within an organisation?

The rise of Innovation Labs

UK retailers, such as Argos, M&S, Tesco and John Lewis have all set up innovation labs in the last 2 years, with Sainsbury’s joining the fray this year. In the US, Asda-owner, Walmart, and department store Nordstrom, both set up their labs in 2011. In fact, Nordstrom has recently downsized its Innovation Lab as employees return to the business stating that “Rather than just a team focused on innovation, it’s now everyone’s job”.

Some results from Innovation Labs:

  • Argos Digital Hub held a hackathon in November 2014 to enhance its digital offering. The winning idea was for an Argos Christmas Wish List app for kids. Its download numbers passed five figures during Christmas and its click rates are at 50-60 per cent.
  • M&S Venture Labs created the Cook with M&S digital recipe app in April 2014. It achieved 150,000 downloads within the first 10 days and reached number one app in Food & Drink.

What are in these labs and what do they do?

Currently, we see 5 types of innovation models or sources of innovation, and they vary based on whether they are internally or externally focused, the level of involvement, and the amount of financial commitment required.

  1. Hackathons – timed events of 24 to 48 hours. They are open to internal and external individuals or teams of programmers and software developers who create a product or service, typically an app, which meets pre-specified requirements. There is typically a cash price for the winner, and some Hackathons are run by third parties. The Tesco Discover app (borne out of a Hackathon) allows shoppers to buy ingredients for recipes featured in the grocer’s Real Food magazine. The app is one of Tesco’s most popular. So far it has had more than 150,000 downloads and a good engagement rate, with an average session length of 3.5 minutes.
  2. Startup Accelerator Sponsorship – accelerators, such as Truestart and Startupbootcamp, offer a lifeline to startups by providing them with work space, training, mentorship, seed funding, and access to corporates. River Island, who sponsors TrueStart, as well as Ocado and Booths, who sponsor Grocery Accelerator, have first-hand access to the startups being accelerated.
  3. In-house Startup Accelerator – as an alternative to sponsoring external accelerators, some retailers run internal programmes. They select startups to accelerate internally with the intention of bringing them to market in their stores.  In 2014, JLabs, John Lewis’ accelerator, selected 10 startups who were given access to a 12-week programme and £10,000 to £20,000 of initial funding. The winner received £100,000 in investment and is being trialled in Peter Jones.
  4. Internal Innovation Team – a team of programmers and developers, typically separated from corporate offices, hired to develop, trial and test new products and services, usually apps, in a startup environment. The Argos Hub, M&S Venture Labs, Sainsbury’s Digital Labs and the Sephora Innovation Labs are all examples of internal innovation teams. However, these labs usually also host hackathons to access external ideas and skills.
  5. Scouting and Acquisition – at the other end of the spectrum, some companies scout the startup community looking to acquire startups. They seek those that have great future potential or those that will solve problems they are currently experiencing. WalmartLabs has acquired 15 startups since it was first set up in 2011.

These sources of innovation are by no means mutually exclusive and often retailers combine two or more of these activities. The one common theme across these models is that they all practice ‘open innovation’, which is looking beyond company walls for ideas.

Innovation labs require commitment. Walmart reportedly spent 300 million dollars to set up WalmartLabs, which was an acquisition of a company called Kosmix, whilst Sainsbury’s new innovation lab, we estimate, could cost somewhere in the range of £10-£15 million to run per year. Careful consideration of the right model is key.

There is no one-size-fits-all model for innovation. It depends on a variety of factors, such as your capital commitment, company structure and culture, innovation objectives, and current capabilities. However, whatever model you choose, there are some pre-requisites to delivering real innovation.

Must-do’s before innovation pays off

Companies across all sectors have struggled to monetise on innovation, even when committed to it. However, there are those like Amazon, Apple and Burberry, who have done so successfully time and time again and we can learn valuable lessons from Silicon Valley.

Innovation will only deliver value if:

  1. there is a clear vision of the company’s value proposition – Amazon’s innovations are all focused on delivering on their mission “to be the Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.”
  2. there is commitment to a trial fast, fail fast, learn fast culture with a long term view. This Silicon Valley mantra creates an environment where ideas can truly flourish and real innovation can happen.
  3. there is a clear direction as to where the innovation should be focused – front, middle or back end e.g. Apple’s obsession with design and user experience clearly focuses on the front end, while Burberry relentlessly focuses on digital brand inspiration and creating a seamless user experience.
  4. open innovation is leveraged. Another Silicon Valley belief – internal and external openness means access to the most ideas and the best ideas.
  5. back-end systems don’t pose a bottleneck – legacy infrastructure and core systems give established retailers a disadvantage compared with their younger technology-led peers.

Only when these things are in order can real innovation push the company’s boundaries towards long term success. Otherwise, everything will just be incremental, and returns won’t ever be fully realised.

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