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Target turns to tech to bust out of its big-box image

As part of Road Trip 2015, CNET finds that the Minneapolis-based retailer has created a team tasked with supercharging sales of connected technology. Its first major project: a futuristic retail space called Open House.

Check out all the places we've been on CNET's Road Trip 2015.

MINNEAPOLIS -- High above this midwestern city, engineers and designers huddle over laptops, debating how to sell smart thermostats, connected baby monitors and programmable coffeemakers. The room here, dotted with whiteboards, buzzes with energy.

The team is part of cheap-but-chic retailer Target's ambitious effort to redefine the brick-and-mortar shopping experience. In May, the nearly year-old team delivered its first major product, a 3,500-square-foot prototype showroom in San Francisco known as Open House. Target hopes this will be the centerpiece of its gadget sales in the future.

The company, which has earmarked $1 billion for its technology efforts, is also expanding an app that touts discounts, experimenting with home delivery and introducing in-store pick-up options for online sales.

"We're looking at new ways to sell products and create new revenue streams beyond our store shelves," Casey Carl, Target's chief strategy and innovation officer, said at the company's Minneapolis headquarters. In addition to Open House, Target is scouting locations for a concept store that could open in about 18 months and feature robots and digital displays, Carl said at a national sales meeting in Minneapolis last week.

Target's attempt to carve out a spot in the connected future comes as the nation's sixth-largest retailer wrestles to break out of the big box it's trapped in. Once an icon of innovative design, Target has struggled to reach a new generation of shoppers that increasingly prefers to buy on Amazon rather than schlep out to the suburbs.

Target hopes innovative concepts like its Open House retail store in San Francisco can lure in new shoppers. James Martin/CNET

The company is reinventing itself in the wake of a spectacular IT failure, a massive hack in 2013 of its payments systems that resulted in the theft of more than 40 million credit card numbers. Target has paid more than $200 million in legal fees and lawsuit settlements that resulted from the hack.

The shift in consumer tastes is evident in Target's financial performance. Over the past three years, revenue has stalled at around $72 billion. Profit fell 9 percent in 2014, the company's last full fiscal year, and nearly 19 percent in 2013.

Target said its digital sales grew 30 percent in its most recent quarter, but below the company's projection of 40 percent. Like other big retailers, e-commerce accounts for about 3 percent of Target's overall sales.

Amy Koo, an analyst at Kantar Retail, said Target needs to push forward on its tech initiatives if it wants to keep up with its competitors.

"They have to take risks," Koo said of Target. "Let the customer buy how, when and where they want."

Two years ago, Target rolled out a coupon app called Cartwheel. The popular app, which features more than 500 items, is credited with helping to drive $1 billion in store sales, according to Target spokesman Eddie Baeb.

Target's digital product teams in Minneapolis work on the retailer's apps and website. Terry Collins/CNET

Now, the 53-year-old retailer is trying to recapture that lightning-in-a-bottle magic. Part of that strategy is the Enterprise Growth Initiatives group, the same team responsible for designing Open House. The company has also recruited entrepreneurs-in-residence who will lead small teams looking for growth opportunities under the Target brand.

The EGI team is expected to work with Techstars, a mentorship-driven accelerator, on a retail startup project in Minneapolis next year. Techstars has worked with Sprint and Nike on startup programs.

Target also hopes a new pilot program with online grocery-delivery service Instacart in Minneapolis will go nationwide.

Open House is perhaps Target's most ambitious effort yet to foster innovation.

The San Francisco prototype features acrylic decor that evoke scenes from a sci-fi movie. Gadgets, such as a Nest thermostat and a Mimo smart baby monitor, are displayed on tables. Sleek touchscreens are nearby, giving customers specs, prices and other information.

The goal of Open House is to demystify technology and encourage consumers to adopt it in their homes, said Carl. The project was inspired by conversations with Silicon Valley entrepreneurs, who were frustrated they couldn't make customers understand why they should buy their products.

Carl envisions some Open House features showing up inside Target's 1,800 stores.

"This is an opportunity to create more service and that's what we're excited about exploring," he said.