Inside Target’s Tech Funhouse and Search for Its Next Billion-Dollar Business

San Francisco is home to technology. Now it’s home to perhaps the most technologically-advanced house, too.

Inside a new store on Fourth Street stands a mockup of a Victorian-style house, complete with gingerbread trim and a three-panel bay window — but made entirely out of acrylic.

There’s a nursery, in which visitors can trigger a morning routine that’s homey and alien all at once. A projected silhouette of a baby in an acrylic crib awakes. A onesie outfitted with sensors, from the startup Mimo, detects the movement and alerts a mother’s phone in the adjacent room. A shimmering white stream of data visualizes the connection.

Another stream starts the coffee maker in the kitchen, with sound piped in to confirm the brew. A Sonos speaker releases a musical mix, the Hue lightbulb brightens and the humidifier connected to a WeMo Internet-connected switch turns off. A silhouette of a father enters the room and lifts the baby from the crib. The infant coos.

Rachel Bracker for Re/code

This scene and others come to life inside a new tech wonderland created by Target, designed to show off the 35 Internet-connected home devices studded throughout. There’s an August smart door lock, a Ring smart doorbell, a Nest thermostat and a Sonos music player.

This is the house of the future, but its existence shows that it’s also possible in the present. The acrylic abode, dubbed Open House, opens on Friday on the street level below the Metreon City Target store, and it’s the first major manifestation of a big entrepreneurial bet by Target CEO Brian Cornell to re-energize the retailer’s brand and create a new billion-dollar business outside of its comfort zone.

Target could use a home run. Revenue grew just 1.9 percent to $72.6 billion in 2014 as the company continued to dig out from the massive payment information hack of the 2013 holidays.

“We’ve been reliant on products and services and market expansion as our means of growth,” Casey Carl, Target’s chief strategy and innovation officer, told Re/code last month inside Target’s Minneapolis headquarters. “Although those are great, we also have to be playing on other fronts to diversify our portfolio and make it far more defensible as a business model. Otherwise you can just get picked off from any and all competition over time.”

Attacking a new market

In the world of retail, competition starts with Amazon. It’s no coincidence, then, that it’s the standard bearer for diversification for a retail company. It has a $5 billion business in Amazon Web Services, its cloud computing and data storage business, and it has also created other large businesses outside of retail, such as the Kindle and Amazon Instant Video, driven by its Prime subscription business.

Target wants to create entrepreneurial magic of its own. In December, Cornell elevated Carl, an 18-year veteran of Target, to chief strategy and innovation officer. Under Carl’s watch, Target has hired three “entrepreneurs in residence” — positions common at venture capital firms, but unusual in retail. Each is working on new business ideas — some core to Target’s current business and others “perpendicular” to it, as Casey described it.

Those hires are part of a larger initiative to centralize the incubation of new ideas at Target under a team dubbed Enterprise Growth Initiatives. Previously, pockets of innovation bubbled up at the company, but were rarely coordinated. Not surprisingly, big new success stories are few and far between. When Target executives are asked about successful new businesses, most mention the same one: A coupon app called CartWheel, which has generated more than $1 billion in sales since it launched two years ago.

Open House is designed to attack a new, giant market.

“The Internet of Things is this impending megatrend — a multi-trillion-dollar opportunity,” Carl said, referring to Internet-connected devices. “So when we talk about where growth is going to come from, here’s a horse I would bet on.”

With the new 3,500-square-foot Open House space in San Francisco, Target is attempting to accomplish a few things. It already sells roughly a third of the 35 Open House products in its retail stores, and ideally would like to sell more of the most promising ones in the future. Establishing an early relationship with these companies, the thinking goes, may give Target an edge when new ones are ready for brick-and-mortar retail.

The facility will also serve as a “welcome” sign to the Internet of Things industry as a whole, with the company hoping the space becomes a popular events spot for entrepreneurs.

Target believes it is getting in on the ground floor. Fewer than 16 percent of U.S. households with broadband had any smart home devices in 2014, according to research firm Parks Associates. More than 60 percent of households were totally unfamiliar with the category.

“The space is still largely B2G: Business to geek,” joked David Newman, who runs Target’s EGI team in San Francisco and who was referring to the Internet of Things market. “It needs to be humanized.”

Rachel Bracker for Re/code

Target’s bet is that the way to push the smart home past the realm of the mostly-male, early-adopter set and into its more mainstream demographic is to highlight real-world scenarios rather than recite features and tech specs.

“Other retailers are thinking about it, but not with as elegant a deployment,” said Carlos Herrera, founder and CEO of Petnet, the maker of a pet food dispenser that can be controlled from a smartphone and that is on display in the new space.

But the Open House display is also designed to welcome those who want the features and specs or who are already familiar with these devices. The right wall of every room in the model house is a rear-projected display that glows when someone walks by and introduces the devices when someone lingers. Target has also rewritten the way the startups explain their own devices, and loaded that information with the help of its design partner Local Projects onto touchscreen tables that look like giant rectangular iPads. Each table is fitted with infrared cameras so they wake up when customers approach.

Not exactly Silicon Valley

In interviews, several Target executives noted that what also made Open House stand out was that no other retailer had attempted a similar approach. It turns out Sears was up to something similar. The struggling retailer recently announced a “Connected Solutions” showroom at its store just south of San Francisco. But while Sears has built what looks like a massive CES booth, Target’s Open House is more like a museum installation — or maybe a Jetsons-era Ikea showroom.

“We don’t want to be a dumb box full of smart products. That’s the risk,” said Newman. “We can’t be viewed as a commodity purveyor of these items.”

The initiative will face challenges, as well as doubters. Target convinced some of the startups to give it backend access to the smart devices so they could connect with other devices in ways their makers hadn’t intended. As a result, shoppers will have to download a separate app called Yonomi to replicate some of the interactions on display in Open House’s vignettes. Target doesn’t have control over the Yonomi experience, which could lead to disappointed customers if they run into any trouble with the app.

Rachel Bracker for Re/code

At the same time, some people will surely say that this entire innovation initiative is bound to fail inside a corporate monolith — let alone one headquartered in the Midwest. Or that the hiring of entrepreneurs in residence is a charade. One has to look no further than the elevator banks teeming with employees heading home from Target headquarters at 5 pm to know this isn’t Silicon Valley.

Others will call the grand smart-home experiment a one-off indulgence for the retailer, made to make it feel cool by attracting techie conference-goers from down the street at Moscone Center, and not to really be Target’s next big business line.

Newman insists that’s not the case. Open House is a store, and every device is for sale. The mandate from Target is for Newman’s group to create businesses with at least $200 million annual run rates within four years, he said. Open House is expected to contribute.

But Newman admitted that even if Target’s connected home does not become the next big thing, the results would still inform a new Target playbook for “experiential retail.” That means, while Target has no plans to replicate Open House in other cities, Carl imagines exporting the best parts into the chain’s nearly 1,800 stores. That might include the touchscreen tutorial tables with product information or another aspect it currently isn’t even considering.

“For us to move the needle, we do have to find small wins and take hundred-million-dollar ones, but we have to also be looking for where are the billion-dollar opportunities,” CEO Cornell said in an interview last month. “Walk around our stores and it’s no secret that there are a few categories that are slipping away. We’ll probably sell a few less books five years from now than we do now, for example. What do we do to reinvent and repurpose that space?”