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Inside Kohl’s Plan to Win the Department Store Tech Wars

June 29, 2016, 12:30 PM UTC

Kohl’s (KSS) is best known for being a middle-of-the-road, no-frills shopping place favored by suburban moms. But the discount department store is looking to remake its image as it seeks an edge in the fight for e-commerce dollars. In the not-too-distant future, it hopes shoppers will think of it as a chain that features some of the coolest customer-facing tech .

If the retailer’s top executives have their way, pretty soon Kohl’s stores will boast state-of-the-art features like undocked, mobile cash registers, holograms that show the latest runway collections, and robots that can take full inventory overnight at a 35,000-square-foot store.

Kohl’s is already one of the largest U.S. digital retailers: according to eMarketer, the retailer’s online sales came to $2.5 billion last year, or 13% of total sales. But the company was a latecomer to some aspects of modern day e-commerce. For instance, it was several years behind the likes of Macy’s (M) in offering same-day pick up in store for online orders.

Kohl’s Digital Center in Milpitas, Calif. Photo courtesy of Kohl’s.


And its overall business is struggling. Comparable sales fell 3.9% in the first quarter of the year, ending a five-quarter streak of gains and igniting fears at Kohl’s that its recent turnaround was already sputtering. This has added to the enormous pressure Chief Technology Officer Ratnakar Lavu is under to make sure Kohl’s e-commerce helps the retailer keep current customers in addition to bringing new shoppers.

The pressure is all the more intense given that Kohl’s has told investors to expect 15% to 20% growth in e-commerce per year for the next three years.

“We are really trying to optimize the use of stores in e-commerce,” Lavu said as he gave Fortune a tour of the Kohl’s Digital Center in Milpitas, Calif. “Once we have that, then it’s about driving the right in-store experiences.”

As Lavu escorted us around Kohl’s innovation lab, he showed off some tests that may ultimately end up in stores. Instead of using mannequins to show off some hotter fashion, the store may use holograms that would depict models walking down a runway. (Lavu says Kohl’s CEO Kevin Mansell found this test particularly cool.)

Kohl's Glass Touch Screen
Photo courtesy of Kohl’s
Courtesy of Kohl's


Nearby, Lavu showed us a see-through, interactive glass computer screen that displays things like Levi’s jeans, allowing a customer to watch videos from YouTube or look at pictures on Instagram in order to get more information on its wide array of the clothes Kohl’s sells. In yet another test, Kohl’s has developed a connected clothes hanger that displays product information on a nearby screen and suggests ways to incorporate the item in a complete outfit if a customer activates the sensor by picking the garment up.

The most recent earnings season was a bloodbath for Kohl’s and other retailers, especially those that are heavy on apparel: Macy’s saw its sales slump deepen, while Gap Inc (GPS) hasn’t yet found its footing after many quarters of declines. Indeed, Wall Street firm Cowen & Co has forecast that will surpass Macy’s as the top seller of clothes next year in the United States.

Retailers have begun to fight back, understanding that their best defense against online stores like (AMZN) and each other are their actual, physical stores. That has led them to roll out features like overhauled apps that can tell a customer which items a given store is carrying, and to use tech to liven up in-store presentations.

“At the end of the day [Kohl’s is] still a brick-and-mortar retailer and they have to figure out a way to drive more traffic,” says Edward Jones analyst Brian Yarbrough.

Playing catch-up on e-commerce

Kohl’s, which for years simply had to open stores to enjoy breakneck growth, was caught flatfooted by the emergence of e-commerce. It was only five years ago that the Menomonee Falls, Wisconsin-based company opened a small Silicon Valley office near its current space to complement its large tech team (now 800 people) at headquarters. Kohl’s tech team now occupies a 50,000-square-foot facility, Kohl’s Digital Center, with 200 employees, complete with tech industry requisites like ping pong tables and collaborative work spaces, the better for Kohl’s to attract top Valley talent.

But free snacks and pool tables only go so far in recruiting tech experts in a region where Kohl’s has to compete with the likes of Google (GOOG) and Facebook (FB) for the best programmers. So the idea of reinvigorating a classic industry like retail is a key selling point.

“The impact of your tech work is much more tangible than if you work at Google or the other tech giants,” argues Lavu, who earlier in his career helped build up (now the sixth largest e-commerce site in the U.S., with $4 billion in sales).

While many of the experiments underway at the innovation lab are cool, customer-facing inventions, Kohl’s is putting the bulk of its tech efforts into nerdier, but far more essential things.

For instance, it plans to introduce Kohl’s Pay, a mobile payment service, into its shopping app for the crucial holiday season. (Walmart is just about done with the rollout of its own payment app in the U.S.) That will among other things spare customers from having to scan offers, which will already be in their phones, and it could help the retailer get more mileage out of its industry-leading loyalty program.

Kohl’s is testing mobile cash registers at some stores ahead of the mad Christmas rush; the stations will allow customers to check out from anywhere in the store. And while it ramps up in-store pick up of online orders, Kohl’s is testing basic express lanes that allow customers to quickly retrieve a package in the customer service area and not have to wait behind customers there to argue over a return or a billing mistake.

Enhancing online pick-up is no small matter: customers who come in to pick up an online order end up spending another 25%, something they’re less likely to do if they are stuck in line.

Other improvements won’t even be visible to customers. Kohl’s, like many other retailers, wants to make better use of store merchandise to help fill online orders. The challenge is that many chains end up using items from several stores and distribution centers to complete an order, racking up margin-destroying split shipments. Luvo says fixing that problem is “one of the biggest issues we have.”

Lavu has a lot of other stuff on his to-do list: improving the personalization features of the app so you can know what’s in the store of your choice, seeing how same-day delivery tests with partners Deliv and Google Express work out, and so on.

Of course, at a time of plunging profits and increasing pressure, Lavu has to bet on the right things, lest he waste money.

“Yes, there are a lot of flashy things,” he says. “So I focus my team on what the customer needs. If we get that right, we win.”