Retailers turning to Silicon Valley tactics

SAN FRANCISCO -- Software engineers wearing jeans and flip flops test the latest smartphone apps. Walls and windows double as whiteboards where ideas are jotted down. And a mini basketball net is in the center of it all.

At first glance, this workplace resembles any Silicon Valley startup. There's just one exception: Target's trademark red bull's-eye at the entrance.

Target, Kohl's and home-shopping network QVC are among a half-dozen retailers opening technology test labs in the San Francisco area to do things like improve their websites and create mobile shopping apps. They're setting up shop in modern spaces and competing for top Silicon Valley talent to replicate the creativity, culture and nimbleness of online startups.

The goal is to stay on top of tech trends and better compete with online rivals like Amazon.com that attract shoppers with convenient ordering and cheap prices. The labs are a shift for retailers, which, like many older industries, have been slow to adapt to rapidly changing technology. But retailers say the labs are essential to satisfy shoppers who more often are buying on their tablets and mobile devices.

"Consumers expect immediate gratification," says Lori Schafer, executive adviser at SAS Institute, which creates software for retailers. As a result, she says retailers need to develop technology in weeks, instead of months or years.

Retailers are playing catch-up after several years of watching shoppers gradually move from physical stores to the Web. Online sales have grown from 5.9 percent of $2.64 trillion in total retail sales in 2009 to 7.6 percent of the $3.1 trillion in revenue last year, according to Forrester Research.

The explosion of people using smartphones to shop has pushed stores to move faster. U.S. consumers are now spending more than half of their time on retailers' websites using their smartphones and tablets, according to the National Retail Federation.

Retailers began looking to the Silicon Valley, where they can tap the talent, culture and creativity that comes from tech giants like Facebook and Apple.

Wal-Mart, the world's largest retailer, was the first to open a tech lab in Silicon Valley. Since opening Wal-MartLabs in San Bruno in 2011, the company has rolled out a number of technologies that it developed there.

One of the biggest projects? Wal-Mart rebuilt its website's search engine, which launched in 2012. It can guess a customer's intent when he or she types a term rather than just returning specific search results. A search for "denim" yields results for "jeans" instead of products with denim, for example.

Wal-Mart's mobile app also has been a big focus at Wal-MartLabs, which has 1,200 workers and all the trappings of a Silicon Valley startup including treadmill desks and Ping-Pong tables. For instance, Wal-MartLabs developed technology that enables Wal-Mart's mobile app to show products and give discount offers to customers based on the aisle they're in.

Target's focus at its 5,000-square-foot office in San Francisco's historic Folgers Coffee Co. building is more futuristic. The lab, which opened with 20 workers in May, is looking at how wearable gadgets like smart watches -- computerized watches that communicate with smartphones -- can be used in its stores.

Target is also experimenting with a mobile app feature that would allow customers to call up information like whether certain cereal is gluten-free by taking a photo of the box with their cellphone camera.

None of the projects at Target's lab have made it to shoppers yet, but David Newman, director of the center, says the goal is to test "the unexplored and underexplored."