Innovation Labs: Innovate or Die

Are retail innovation labs here to stay or are they just a fad passing through the industry? The largest internet-based retailer in the United States, Amazon.com, serves as an enduring example of what retailers should be doing to maintain longevity. Amazon's relentless pursuit of disruptive innovation has resulted in some of the more intriguing retail technology products, including augmented reality and the Fire Phone, in addition to securing Amazon's longstanding success. Beyond that, innovation labs invest in a company's culture, processes, supply chain and noncustomer aspects of the business. 


Retail executives understand the need for innovation all too well. Formats like shopping malls and big-box stores were at one point innovations in response to the introduction of automobiles and resulting suburbs. Today's connected consumer is the new automobile. As they become increasingly digital-oriented, retailers must keep up, identifying new ways to find, engage and support consumers along their path to purchase.

Until recently, only a select few retail heavy hitters have been able to successfully grow with technological changes and gain strategic advantage. In order to stay relevant, major retailers today are investing in labs and other research-and-development (R&D) efforts to help them predict the shape of their markets. For retailers, as Jeff Roster of Gartner Research says, "the era of intentional innovation and agility has arrived."

Cost of an Innovation Lab
One of the major roadblocks for many retailers is the cost of an in-house innovation lab. Amazon spent $9.5 billion on R&D in 2014, up from $6.5 billion in 2013, significantly beyond what most other retailers apply to new technologies. Amazon understands where the long-term advantage will come from. It's constantly coming up with creative ways to introduce new items and ideas into the market and finds out quickly if they matter to consumers. While this is clearly a large amount of money to apply toward innovation, it's been proven to differentiate the digital giants from the rest. 


Innovation is a commitment, culture and organizational mind-set. Amazon has 19 development centers across the globe dedicated to improving the online customer experience. Wal-Mart now has five R&D centers and over 3,000 employees in service of digital invention, continuously improving both the online and in-store shopping experience. The primary focus of @WalmartLabs is to promote growth of the retailer's digital business through now commonplace capabilities like cloud technology, shopping apps and e-coupons.

Most retailers, either online or brick-and-mortar, aren't able to spend enough of their marketing budget on R&D on a consistent basis to make a difference to their business. This puts them behind the curve, and makes it nearly impossible for them to compete with digital giants long term.

Partnering With a Third Party for Innovation
While the exorbitant R&D budgets of these retailers may seem daunting and unattainable, more nimble and modern retailers have been able to stay relevant in the R&D space using other means. Rather than invent, they buy, or in today's software-as-a-service (SaaS) world, they rent. It's faster. It's cheaper. It uses no mindshare to maintain. It can be executed with less overhead and allows them to remain focused on what they were born to do — serve the shopper and sell merchandise. They become customers of startup technology companies, which are inventing for them and solving digital problems in a very focused way.

To start a new technology company costs less than 10 percent of what it did just 10 years ago. The cloud, easier platforms to write software and a deeper bench of technical talent graduating college have significantly increased the velocity of new startups emerging to serve the digital landscape. Beyond that, companies in the venture community are spending billions and billions every year funding these explorations. Some companies succeed and many of them fail. 


The new technology barriers to entry — and exit — have come down considerably over the last 10 years. What used to take a retailer six months of engineering effort and hundreds of thousands of dollars to implement 10 years ago can now take just 20 minutes. And just as quickly, it can be uninstalled if it doesn't work. They are simple tools to test and measure if something is working and how it's impacting the business. With the low barrier to uninstall along with subscription-based SaaS models, vendors are forced to continue to innovate on the behalf of customers. 


Therefore, the biggest lab on earth is actually the startup community. It's driven with a passion to invent, to get closer to the edge, to transform and to win in their category. And best of all, it's funded by other peoples money. 


Furthermore, the amount of options available is dizzying. With thousands of solutions available to retailers, solving in hundreds of digital categories, there's ample opportunity to outsource R&D with great results. The problem is vetting the sheer number of available technologies. Where do you start? How do you know where to aim your effort? How would a retailer know which solution is better than another? How would a company test and analyze the results before implementing a solution?


The primary struggle in outsourcing R&D is being able to separate the worthwhile technologies from the shiny new objects that don't produce sustainable benefits. In-house R&D labs provide testing in real time, which minimizes the need to search and analyze existing technologies. Smaller companies without such assets face significant challenges in that regard. Fortunately, there are numerous resources available to retailers that are looking to navigate the chaotic startup space on their own. 


So are innovation labs just the first phase of the digital transformation of the retail industry? Can they survive without company commitment to the enabling processes and culture for being inventive? Only time will tell. What is without question is that science has crept its way into the retail curriculum.
John Grech is the co-founder of Iterate Studio, a digital proof-of-concept lab that discovers and curates disruptive technologies for retailers and brands. John can be reached at john@iteratestudio.com.