AUSTIN - When you walk into the building at 2416 E. 6th St. on this city’s trendy East Side, it’s immediately clear that it’s a tech workplace. Visually, it’s almost a cliche.

Scores of young women and men are glued to computers - many with two or three monitors - in sprawling, open-concept office areas. Coffee and snack bars with free food and drink abound. There’s a rock-climbing wall in the gym and wall-mounted bicycle racks. Conference rooms have red or green lights to signal if they are occupied or availble.

Creature comforts are everywhere. Unisex restrooms have carts loaded with mouthwash, bobby pins, hair ties, moisturizer, even individually wrapped toothbrushes in multiple colors.

Oh, and don’t forget the beer. Look to the right once you’ve cleared security and there’s a bar sprouting multiple taps in front of a neon sign that reads “Beer Friday.” It’s lit up at 4:30 p.m. on the last day of the workweek, when the 400-plus coders, developers and marketers in the building are more than ready to refresh and relax. (There’s a kombucha keg for teetotalers.)

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That all this is found in an Austin technology hub is not surprising. What may come as a shock is that the company that leased this 81,000-square foot former recycling center is H-E-B, Texas’ biggest regional grocer. Here - on a street where its neighbors are software development firms, graphic design houses and trendy restaurants frequented by digital-native millennials - the supermarket chain has drawn a tech line in the sand.

“It’s a no-brainer to set up a presence here,” said Jag Bath, H-E-B’s chief digital officer, pointing out that Austin, a major outpost for Google, Facebook, Apple and others, has a critical mass of technology talent.

“When you have conversations about tech, it’s all about the talent,” he said. In other words, to compete for that talent with the tech giants that lumber around Austin, you need a workplace as cool as theirs.

To be clear, only half of the building is occupied by H-E-B. The rest of its real estate belongs to Favor, an on-demand delivery startup that H-E-B bought in early 2018. Bath was its president and CEO, a title he retains. At the time, it was H-E-B’s first-ever acquisition, and it was a bet that combining a pure technology company with a venerable grocery retailer would jumpstart the latter’s efforts to survive and thrive as its business undergoes digital disruption.

“You can learn a lot from a pure-play technology startup and apply that to the core business,” Bath said. “That’s exactly what we have done.”

Embracing change

The grocery business has long had a reputation of being resistant to change, but that may not be deserved. The industry has adopted technologies that made sense as they came along - think self-checkout kiosks or the computer-managed inventory control pioneered by Walmart. In Europe and Japan, online shopping and on-demand delivery have been popular for a decade, even though startups offering it fizzled in the U.S. in the dot-com bust of the early 2000s.

But nothing sounded a digital clarion call like the $13.4 billion acquisition of Austin-based Whole Foods by online retail goliath Amazon in mid-2017.

“Amazon buying Whole Foods woke a lot of people up,” said Katherine Black, a principle analyst for consumer and retail strategy at KPMG. “Amazon was a big catalyst in the marketplace.”

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With its expertise in online shopping, its emphasis on rock-bottom pricing and its ability to leverage its Prime membership program, Amazon instantly became a force to be reckoned with. While grocery companies had already been dabbling in online initiatives, the acquisition of Whole Foods by the company upending retail created a new sense of urgency.

It was against this landscape that H-E-B bought Favor Delivery in February 2018 for an undisclosed amount. At the time, Favor claimed it was the first on-demand delivery service to become profitable. Founded in 2013 in Austin, it has 80,000 contract “runners” who bring food from restaurants and goods from retail stores to homes in 130 cities across Texas. Favor continues to operate as an independent entity, but it’s also how H-E-B handles deliveries to customers who order online.

And if you want to see just how Favor has impacted H-E-B’s approach to technology, you need only download the grocer’s updated smartphone app released in December. “My H-E-B”, available for both iOS and Android smartphones, is a sleeker, more capable app than the one it replaced.

Previously, if you wanted to order groceries to be delivered via the previous version of the app, you were kicked out to H-E-B’s website to complete the process. Now, you can order groceries and arrange delivery or a pickup with the company’s Curbside service in the app itself. It also lets you manage digital coupons, compile a grocery list and more.

Bath said this is just “the first phase” of the new app, and more features are coming. That might eventually include being able to check out without going through a cashier or even a self-checkout kiosk.

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H-E-B has another smartphone app called H-E-B Go that’s used with a handful of stores testing cashierless checkouts. Its users scan barcodes on items on shelves or from scales used to weigh produce and bulk items. They proceed to a checkout station if a purchase includes alcohol or involves coupons. Payment for the groceries is made on the phone, and the customer shows a receipt on the phone’s screen as they exit the store.

Most of the H-E-B Go trials are at stores in San Antonio and Austin. The closest to Houston is at the Tower Point Market store near College Station.

The focus of work at the Eastside Tech Hub, as the Austin center is called, is on the app and the technology behind. But it also serves as a showcase to attract talent in the hypercompetitive Austin tech job market. The building is designed not just to provide the kind of amenities tech workers have come to expect, but to also do it with a flair that’s distinct to Texas and H-E-B.

For example, there are multiple food bars throughout the building, each one themed around H-E-B’s four grocery brands - the core H-E-B store; Mi Tienda, which targets the Latinx market; Joe V’s Smart Shop, a budget brand; and Central Market, the company’s answer to the higher-end Whole Foods. While the Central Market food bar features locally roasted espresso beans, the Joe V’s has jars full of M&Ms.

Even with these perks, why would a software developer want to work at H-E-B instead of, say, Google or Apple?

“This is an industry that is ripe for disruption,” Bath said. “That’s very appealing to someone like a software engineer who’s interested in e-commerce.”

Shopping ease

What happens when you order groceries through the H-E-B app or website for pickup or delivery involves both internet wizardry and old-fashioned retail logistics.

At the company’s new Buffalo Heights store on Washington Avenue in Houston, online orders appear on a computer screen in an area packed with rows of tall carts. At another end of the room is a cooler with more carts inside. Managers like Shannon Canty monitor the screen. When customers place an order, they can pick a time for pickup or delivery. Canty serves as triage, assigning employees dubbed “personal shoppers” to fulfill orders.

“The busiest times are between 7:30 and 10 a.m., and 3 to 7 p.m.,” Canty said. “We can process up to 60 orders at at a time.”

On a cold, blustery December day, personal shopper Brenda Flores worked the produce section, putting fruits and vegetables into the compartments of a cart she pulled from the cooler. The chilled shelves of the cart - which can hold orders for a dozen customers - help keep the produce fresh.

Elsewhere in the store, other personal shoppers (wearing T-shirts that are the same blue as Favor’s delivery drivers) are fulfilling other parts of customers’ online orders. An order may have three or four shoppers working it, and then its items are bagged and combined for delivery or pickup.

H-E-B now has 200 stores statewide that offer Curbside, its pickup service. Customers drive into a space near the Curbside entrance and send a message via smartphone that they’ve arrived. One of the personal shoppers then brings the shipment to the vehicle. For delivery, the order is whisked away by a Favor runner.

Scott McClelland, now H-E-B’s president, previously managed the grocer’s Houston region. He said the company’s approach has been to use technology to provide convenience to shoppers. And customers are increasingly willing to pay the fees associated with pickup and delivery for online shopping.

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“One of the things we know our customers want is for life to be simpler,” McClelland said. “There are so many pressures on our time. There’s a difference in the way our generations have looked at the value of time. My father would happily spend 10 minutes to drive further to save $5 on cheaper gas. Today, his kids will spend $10 to order food to be delivered rather than driving to pick it up.”

Technology is also used in the store to help H-E-B understand what works to sell groceries.

McClelland said every display and every four feet of shelving in the stores have bar codes. Managers in charge of that department can scan the code with their smartphones and see how many items have been sold from there.

“They can see what they made on that display, and whether things are selling or are just gathering dust,” he said, adding it lets the managers see what’s happening without consulting a computer in a back room.

“We want them on the floor, we don’t want them stuck in the office,” he said.

Delivery innovations

H-E-B, of course, is not the only grocery operation adopting technology at a rapid clip. Kroger, the biggest grocery chain in the country, made a splash in Houston last year when it kicked off a test of driverless delivery vehicles with a company called Nuro. The fleet of Toyota Priuses topped by lidar sensors have become a common site on some area streets.

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H-E-B has its own autonomous delivery trial, though it’s on a much smaller scale than Kroger’s. When you talk to McClelland about autonomous delivery, he doesn’t wax as enthusiastic as other grocery executives. He says the average e-commerce order is twice as big as the average in-store purchase, and that amounts to a logistical challenge.

“What happens when an autonomous delivery vehicle arrives and the customer has to walk out to it and pick up 20 bags?” he asked, adding that apartment and gated-community deliveries further complicate the scenario. “It’s a much better experience if a human brings it to your door, or even better, inside your home.”

H-E-B also lags behind Kroger and Amazon’s Whole Foods when it comes to offering in-store digital payment systems. Whole Foods and Albertson’s-owned Randalls accept phone-based payments such as Apple Pay and Google Pay. Kroger last year launched its own phone payment system using a scannable QR code tied to a credit card in its app.

H-E-B has thus far not gone this route, even though its stores have the phone-scanning hardware to do it. McClelland said it’s a privacy issue, and potentially a competitive one.

“Who is going to own the customer, and the customer’s data?” he asked. “Apple is not in the grocery business today, but Amazon wasn’t in it a few years ago, either.”

H-E-B also doesn’t have a loyalty card as do many of its competitors, even though these are popular with customers. A Kroger spokesperson said 96 percent of all in-store transactions involve its loyalty card, which gives customers discounted gasoline at some of its stores, customized coupons mailed to their homes and an in-store discount on many items.

McClelland says H-E-B “feels everybody deserves to have the same low price, you shouldn’t need a card to get it.”

“Customers feel those are a hassle, and there’s some invasion of privacy. Does big brother need to know everything that I buy?”

However, H-E-B can collect shopper purchase data when customers make a credit-card purchase. In the privacy policy on its website, the compay says it may “supplement” personal information you supply with, among many other sources, “in-store transactions”.

“While it is possible to collect data from credit card usage, a lot of our customers do not use them in our stores for purchases,” said Lisa Helfman, director of H-E-B’s public affairs in Houston. “Therefore we don’t find data sourced through credit card usage in our stores to be very reliable.”

Tech expansion

Back in Austin, Bath said he hoped the experiment of putting the Favor staff in the same building with the technology employees of H-E-B would have an impact on the grocer as a whole.

“We’re already starting to see it,” he said. “We have many instances where people come together and share ideas.”

In fact, H-E-B is planning to build a second technology hub at its existing headquarters campus in San Antonio. Bath said the building, which is expected to be completed in the fall of 2022, will be vertical, rather than the sprawling warehouse style found in East Austin. H-E-B already has hundreds of tech employees who work at its headquarters, and more are being hired all the time. The new building will be 170,000 square feet and be home to 1,000 tech workers.

How technology might change H-E-B stores 10 years from now? Bath paused.

“I don’t know if any of us know the answer to that,” he replied. “What you won’t see is this technology replacing our people. We believe our people make a tremendous difference to the customer experience.”

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