Amazon Killed Brick and Mortar, So Why Is It Investing in Stores?

Data, private label sales, Prime subscriptions and more

Buildings that are falling like dominos next to an Amazon store.
It's almost ironic that Amazon is now venturing into the physical retail space.
Illustration: Aanya Gupta, Source: Getty Images

Amazon shot to fame from its rapid growth, incessant innovation and quirky business practices. But more than anything else, the company was credited for the demise of traditional brick-and-mortar retailers. As online sales increase exponentially, Amazon has been credited with single-handedly killing Borders, Toys “R” Us, Sears, J.Crew and countless other stores that have filed for bankruptcy or closed forever.

Yet the company now occupies 20.1 million square feet of brick-and-mortar space after acquiring Whole Foods and growing Amazon Book Stores, 4-star stores and Amazon Go, per its annual report. This week, it opened its first Amazon Go store in New York, and recent reports suggest the retailer is planning to launch an additional 3,000 cashier-less stores by 2021. This may just be the tip of the iceberg; an acquisition of Kohl’s, Sears or another big retailer could really change the landscape forever.

There is a tinge of irony that the company synonymous with the disruption of online retail—indeed, commanding around half of total U.S. ecommerce consumer spend—is now committed to expanding their physical footprint across the U.S. and globally.

What makes it all the more interesting is they are doing so at a loss. Q4 2018 results included a 3% decrease in sales compared to the same quarter in 2017. In Q1 2019, brick-and-mortar sales grew just 1% to $4.3 billion from $4.26 billion the previous year. These numbers are in stark contrast to the 17% sales growth seen across the broader business for Q1. So why is a company that is laser-focused on the online shopper investing in physical space?

Well, it’s not simply to apply Amazon’s operational efficiencies and turn a profit. The reasons are more complex and interesting than that.

Increasing private label sales

Amazon’s private label sales are dominated by Amazon Basics, which offers generic product alternatives to popular name brands. Amazon’s other private label brands, especially those in apparel, are struggling to sell significant volumes.

The inability to touch an item or see how it fits can be a significant barrier to purchase. Physical stores could alleviate those issues by giving shoppers a space to verify the quality and fit of private label products before committing to purchase. Ultimately, this will build trust in Amazon’s private-label brands, and sales will increase once a reputation is established.

Gathering more data

Amazon loves collecting data to ensure they’re selling us anything that might match our current wants and needs. Advertisers also love Amazon data.

It’s likely that Amazon will use Wi-Fi triangulation to map physical store journeys, collecting data about what products shoppers have seen, picked up, put back and ultimately purchased. A lot of current and fresh data can be collected from Whole Foods, for example, as buying groceries is a recurring and habitual shopping behavior.

Appending this physical data will further enhance everything else Amazon knows about consumers on their websites and apps, allowing them to send more targeted ads and promotions.

Creating “mini-warehouses”

Amazon’s various stores all hold stock. These storage locations also house small items, such as electronics, that take up very little space and can be quickly moved from the “mini-warehouses” to consumers faster.

With Amazon committed to one-day delivery, this could provide a huge advantage over other retailers, especially in urban areas. The Wall Street Journal’s financial editor Dennis Berman tweeted, “Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does.”

Making pickups and returns more convenient

Quick delivery and streamlined returns are a key benefit of shopping with Amazon. Adding drop-off locations for returns (including a deal with Kohl’s) could make them even more accessible to consumers by removing the annoyance of re-packing, labeling and shipping the returned item themselves. It’s also added real estate for Amazon lockers, where customers can have items securely delivered for pickup.

Additionally, Amazon can use their physical stores to reduce the cost of items returned via the post by routing returns to local stores, combining them with others and sending everything in bulk back to Amazon warehouses.

Monetizing physical space with ads

Advertisers are looking for new out-of-home placements in high-traffic and high-quality environments, and Amazon stores can provide those. In fact, they’ve already begun introducing brands into their bookstores and 4-star stores. A recent example of this is the signage, product placement and branding for Fox’s The Passage.

Recruiting new Prime subscribers

Amazon’s Prime membership growth in the U.S. has stagnated. Everyone they can recruit has already won through special offers, digital marketing and faster shipping. Investments into non-core services such as music, video entertainment and Alexa provide new doors into the Amazon house. However, even those incentives lose their luster over time.

The next frontier of recruitment is “going to” new audiences via a brick-and-mortar presence, which attracts new consumers and reinforces the overall value of Prime through owned media in stores and special discounts.

While many traditional brick-and-mortar stores are struggling, Amazon continues to grow, leveraging their digital data and customers for their physical stores and vice versa. So don’t be surprised when, after all is said and done, an Amazon store pops up in a shopping center near you.

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