SAN FRANCISCO (Reuters) - Wal-Mart Stores Inc has turned to a small group of technology entrepreneurs to help the world's largest retailer improve its online fortunes.
They run a new unit of the company called @WalmartLabs near Silicon Valley which is crunching mountains of data from social networks and riding a wave of smartphone adoption in hopes of capturing more sales for Wal-Mart online.
@WalmartLabs is aggressively hiring software developers and has started what could turn into a string of global e-commerce acquisitions on behalf of the retailer overseen by former Evercore investment banker Brian Roberts.
"The company is putting a lot of resources behind the e-commerce push and wants it to grow quickly," said Roberts. "To look back 10 or 15 years from now and say you were there when the direction of the whole company changed - that's exciting."
Wal-Mart generates more than $400 billion in annual revenue. Yet it is the sixth-largest Internet retailer, behind Amazon.com Inc, Staples Inc, Apple Inc, Dell Inc and Office Depot Inc, according to industry publication Internet Retailer.
That is a problem because e-commerce revenue in the United States is growing at 10 to 15 percent a year, while revenue of traditional retail stores is growing at about half that rate, according to Van Baker, a retail analyst at Gartner.
Wal-Mart does not disclose online sales, but this part of the company's business likely accounts for less than 1 percent of total sales - or around $4 billion a year, according to Ed Weller, an independent investment and retail analyst. The retailer's online sales are probably growing at a similar rate to e-commerce in general, Weller said.
Annual sales of industry leader Amazon.com, by contrast, are likely to exceed $40 billion this year, according to analysts.
Wal-Mart's e-commerce efforts "are not the best, but they are far from the worst," Baker said. "I give them high marks for understanding the changes they need to make and trying to get them done."
As recently as a year and a half ago, Wal-Mart treated its online operation as a separate business, but the company is now taking a multi-pronged approach, with stores sharing credit for sales when staff encourage in-store customers to order online.
One of the biggest opportunities comes from combining Wal-Mart's data on purchase history with data from social networks like Facebook and micro-blogging site Twitter.
Transaction history tells Wal-Mart what customers have bought in the past. Social data has the potential to tell the retailer what consumers may buy in the future - information that could be even more valuable.
Through tweets and Facebook updates, marketers have the potential ability to glean details of consumers' interests. Knowing what people like and want can help retailers stock more items that will sell better.
According to a recent report in Internet Retailer, "More than half of consumers grant online retailers permission to use their Facebook data, according to a new study from social commerce applications supplier Sociable Labs."
Before the rise of social networking, most of the Internet data that interested retailers was from purchases and other transactions by customers. This was owned by corporations that would not share it.
Facebook updates and tweets are, by definition, more public, which makes the information more accessible for analysis.
"It's a race to see who can use all this data the best," said Anand Rajaraman, who runs @WalmartLabs with Venky Harinarayan, Gibu Thomas and Jeremy King. "This will change the retail industry, as well as most other industries."
For an established, traditional retailer like Wal-Mart, social data is a way to catch up and compete better with Amazon.com and other leading online players.
"Social data is a great leveler," said Rajaraman.
@WalmartLabs is run on the fifth floor of a building opposite YouTube's headquarters in San Bruno, California, about half an hour's drive north from Silicon Valley.
Rajaraman and Harinarayan used to run Kosmix, which organized massive amounts of information from the Internet into more easily digestible categories.
Wal-Mart initially approached the company to help make searching for products on its website easier. But the relationship expanded and Wal-Mart bought Kosmix for about $300 million in May.
Roughly 65 Kosmix employees joined Wal-Mart to form @WalmartLabs. Soon after, the new unit was bolstered by employees of Wal-Mart's mobile business, headed by Thomas, and by workers in Wal-Mart's online platform and services unit, run by King.
Kosmix technology is now being used to trawl Facebook, Twitter, blogs and other sources of data on the Internet for information on the connections between people and their interests, products, events and locations.
One of the first creations from this effort was Shopycat, a shopping app that uses Facebook data to recommend gifts.
Another initiative called the Social Sense Project uses data from Twitter to try to predict hot products. This information can help Wal-Mart buyers pick the best items to order.
For example, the Social Sense team discovered after analyzing data on Twitter that cake pops - a cross between a cake and a lollipop - were becoming very popular. Wal-Mart stores are now stocking up on cake pop makers, according to Rajaraman.
Another idea in the works is to have a "social layer" in Wal-Mart stores, through which shoppers would be able to connect with each other, Harinarayan said. A "mini-Twitter feed," showing updates of customer activity in real time, may be displayed on huge screens, he explained.
Before Kosmix, Rajaraman and Harinarayan founded Junglee, which pioneered comparison shopping online. Amazon bought the business in 1998.
After two years, they left Amazon to start venture capital firm Cambrian Ventures. Amazon CEO Jeff Bezos was one of their biggest investors. Bezos' personal investment firm, Bezos Expeditions, was also an investor in Kosmix.
"They're the real deal - very creative, both in research and in the sort of innovation that goes on in the best start-ups," said Jeff Ullman, professor emeritus of computer science at Stanford University, who was a PhD adviser to Rajaraman and Harinarayan.
Thomas, head of mobile and digital at @WalmartLabs, helped build one of the first mobile Internet browsers called Blazer, and founded start-up Sharpcast in 2004.
Mobile technology is important for Wal-Mart because although some of its customers may not have a computer and broadband connection at home, they are increasingly likely to carry a smartphone.
Mobile technology can also allow shoppers to pay for their goods online, which could mean shorter lines and fewer cash registers. Customers can also find products and specific sections of the store more easily with smartphones, freeing up in-store employees to focus on other tasks, Thomas explained.
During an interview with Reuters, Thomas launched Wal-Mart's iPhone app and spoke into his phone "Eggs, milk, bread, buttermilk, cheese." A list of those items appeared on the phone, along with the price of various brands and where they could be found in the store.
In the future, when shoppers click on one of the products, the app will show coupons that can be used at checkout, Thomas said.
"They could produce something really game-changing," said Theresia Gouw Ranzetta of venture capital firm Accel Partners, which backed Kosmix.
However, @WalmartLabs may struggle to obtain the resources it needs to work on projects that are strategically important but which may not produce noticeable revenue gains for several years.
"The risk is that the weight of the organization will not allow it to flourish - it's a start-up within a large company," she said. "Even if they knock it out of the park, it will be hard to move the needle."
Thomas, Rajaraman and Harinarayan said they have been given a long leash by Wal-Mart's top management and the founding Walton family, who are the company's largest shareholders.
"(Wal-Mart CEO) Mike Duke says he wants what we're doing on the fifth floor to permeate the rest of the company," Thomas said.
Reporting by Alistair Barr, editing by Matthew Lewis