nurturing a Store No. 8

March 5, 2020

In a marketplace largely disrupted—and now hegemonized—by the digital revolution, is it the end of the road for traditional retailers? The authors make a case that organizations that focus on where the sector is headed in the future, and accordingly dedicate strategic resources, will not just sustain but also emerge winners in the long run.

How Walmart confronted the ‘retail apocalypse’ through better innovation governance, narrate Omar Abbosh, Paul Nunes, and Larry Downes.

Ecommerce has been brutal for brick-and-mortar stores—so brutal, in fact, that the term ‘retail apocalypse’ now has its own Wikipedia entry. How bad could it get? If recent history is guide, a whole lot worse.

Traditional brick-and-mortar retailers, which long claimed immunity to disruption from relatively tiny web-based competitors, are giving up the fight one by one. Bankruptcies are setting records, with brands like Sears, Radio Shack, and Toys “R” Us disappearing by the day.

For these businesses—many of them one time ‘category killers’—it was not that consumers had lost interest in shopping. They had simply gone elsewhere.

Omar Abbosh is group chief executive of Communications, Media, and Technology for Accenture and co-author of Pivot to the Future.

A great many went to Amazon. The ecommerce pioneer now sells about five times as much as the now bankrupt Sears, which by 2018 had lost as much revenue since 2007 as Amazon had gained.

Amazon and digital natives understood something traditional retailers did not: the falling cost of technology and the spread of the internet was creating new opportunities to serve customers more efficiently and more personally. They built state-of-the-art warehouses and distribution networks, and invested in robotics, drones, and powerful data analysis that taught them what customers wanted and when. They made products can reorder themselves through voice-activated, smart-home hubs such as Amazon’s Echo and Google Home. They added free shipping, easy returns, same-day delivery, targeted promotions, customer reviews, and mobile interfaces, all of which transformed online shopping into a richer experience than getting in the car, driving to the mall, looking for parking, and hoping that the product you want is in stock and that someone is available to ring you up. In short, they became better and cheaper than brick-and-mortar stores.

Incumbent retailers first denied the risk online channels presented to their businesses, then tried to mimic them by adding ‘me-too’ websites. They offered limited or clearance merchandise or required in-store pick-up and return. And prices rarely reflected the lower cost of online service. For many, it was too little, too late.

The challenge for management is to provide direction in the hope of keeping innovation focused, on the one hand, without quashing creativity and the potential for inspiration and serendipity on the other.

But traditional retailers are hardly doomed. Just ask Walmart. The company has greatly expanded its digital offerings and integrated them into its physical locations, turning expensive real estate back into an asset. It was not just Walmart’s enthusiastic embrace of technology that led to its success. They also developed both a portfolio of innovation and a process for managing it, establishing new tolerances for freedom, control, and risk management suitable for a future in digital retailing.

a new approach to innovation management

Targeting a healthy balance of centralization and decentralization of innovation is the vital, first step. The next step is figuring out how to balance control against autonomy. The challenge for management is to provide direction in the hope of keeping innovation focused, on the one hand, without quashing creativity and the potential for inspiration and serendipity on the other.

Paul Nunes is the global managing director of thought leadership at Accenture Research and co-author of Big Bang Disruption and Pivot to the Future.

At the extremes, too much or too little control can yield less than optimal results. Leaders can be highly directive, for example, instructing their employees, especially scientists, engineers, and researchers, on what to innovate and for what purpose. That approach maximizes the strategic alignment of the innovation portfolio, but unless your CEO has a crystal ball into the future, it would almost certainly undervalue the creativity and domain expertise of your developers.

An alternative might be to simply let a thousand flowers bloom, encouraging and incentivizing innovation throughout the organization. On that model, all employees and even external stakeholders become inventors. Senior management’s job is simply to choose from among the most promising experiments and accelerate and nurture them.

That model is not likely to work well, either. Innovating without direction or alignment is no more likely to lead to useful new product or service offerings at any stage of business maturity than throwing darts while blindfolded. Employees might have good instincts, but without mentorship and direction, even good ideas may not realize their potential, and may prove distractions from the day-to-day business of serving customers.

How, then, do you establish the right level of innovation directedness without constraining it?

Control must be applied carefully—even lovingly. That is the model being followed by Walmart with the 2017 launch of its new Silicon Valley-based incubator, known as Store No 8. (The name is a nod to Walmart founder Sam Walton, who used the real Store No. 8 in Arkansas as a place to experiment with new retail innovations). Store No. 8’s charter, according Lori Flees, the company’s head of corporate strategy, is to get ahead of the curve on retail innovation and disruption before anyone else.

The internal incubator is creating an environment where testing is encouraged, and where Walmart is placing some of the highest-risk bets in its overall innovation portfolio. Current efforts at Store No. 8 include experiments in many emerging technologies like robotics, virtual and augmented reality, machine learning, and artificial intelligence. These include a personal shopping service, called Jetblack, that will give shoppers recommendations and allow purchases via text messages. Another effort, Project Kepler, will reimagine the in-store experience using technologies such as computer vision.

Store No. 8 fits into Walmart’s broader innovation portfolio, which the company continues to expand and rebalance in rapid iteration. Walmart Labs, for example, addresses the ‘now’ stage of Walmart’s innovation change, focused on improvements in customer experience technology that can be implemented between six and twelve months. With over 2,000 employees in Silicon Valley, Walmart Labs recently piloted a new delivery service connecting independent drivers to demand in real time.

Store No. 8’s charter is to look for innovations that are at least three years out. While Walmart has set up its incubator as a separate company, startups launched from it will be wholly-owned by Walmart. And rather than use the typical venture capitalist models for evaluating the potential and progress of their portfolio companies, Walmart measures Store No. 8 efforts using what it calls ‘operational and strategic returns’—in other words, how its innovations may generate value, specifically, for a future retail customer experience.

Store No. 8 “will be ring-fenced by the rest of the organization and backed by the largest retailer in the world.”  It will have the financial resources of a giant corporation, but the freedom of a startup

With the development of Store No. 8, Walmart is acknowledging both the need for more visionary thinking and the difficulty of integrating it into an organization famously focused on operational efficiency in today’s retail ecosystem. Its creation follows the 2016 acquisition of online retailing innovator for $3 billion, widely seen as a catch-up effort to make Walmart an ecommerce powerhouse and, not far behind, to infuse digital culture into an analog corporate fabric. Though the company has made more strategic acquisitions since then, the size of the buy continues to turn heads both inside and outside the company.

Larry Downes is a senior fellow at Accenture Research and co-author of Big Bang Disruption and Pivot to the Future.

Store No. 8, not coincidentally, is run by founder Marc Lore, who runs US ecommerce operations. Lore has spearheaded expanded inventory on the company’s website, and free two-day shipping on orders of $35 or more. As a result, Walmart’s ecommerce sales are soaring, though belatedly.

According to Lore, Store No. 8 “will be ring-fenced by the rest of the organization and backed by the largest retailer in the world.”  It will have the financial resources of a giant corporation, but the freedom of a startup—precisely what an organization of Walmart’s size and industry dynamics will need to survive the “retail apocalypse.”

Store No. 8 also plans to facilitate collaborations with outside startups, venture capitalists, and academics to develop a line of proprietary disruptors. So far, it has a wide-open mandate to do so.

As with all our growth leaders, however, the courage to devote strategic resources to chasing the technology value frontier came from the very top. It came down to senior leadership asking, where retail is going over the next 20 years? And which areas does the company need to lead in so we can be the disruptor rather than be disrupted? And it took a change to how innovation is managed.