Amazon is making waves as usual, but this time its silence could turn out to be literally golden. The company could be readying to open up hundreds of brick and mortar stories, if you believe what General Growth Properties CEO, Sandeep Mathrani, said during his company’s earnings call this week, and the additional stores could even go beyond books. Mathrani later backtracked, but the fact that Amazon hasn’t countered the claim suggests it may indeed have big plans in place.
If Amazon is really increasing its bet on brick and mortars exponentially after its opening of a bookstore in Seattle last fall, then it must have seen a good payoff from that test store. As the site that 44% of shoppers head to before any other when considering a purchase, it wouldn’t be jumping into the brick and mortar mix for no reason.
Even if its stock dropped 10% overnight due to missed Q4 2015 expectations, Amazon is still the clear online retail winner when it comes to market share and revenue. Opening more stores would take many in the industry by surprise, as Walmart, Macy’s, and other prominent retailers permanently shut down numerous stores mere weeks ago. In this context, Amazon is catapulting its risk-taking to the next level, and this move could produce results that would appease investors. It is bucking all trends and showing that it is in a class of its own — if it pulls this off, that is.
The company has historically shrugged off criticism about its nonexistent or miniscule profits for the retail side of its business, but these stores could be a chance to increase margins quite a bit. One of the main downfalls in Amazon’s Q4 2015 results was much higher shipping overhead than expected. The company spent $1.85 billion for the quarter and over $5 billion for all of 2015 on shipping, but physical stores could cut down on that. Granted, the pilot store gives customers the option to have items sent to their home so they don’t have to carry everything out in bags, so shipping still presents a cost. But the opportunity to increase in-store sales through impulse buys and personalized, data-driven upselling could more than make up for that. Amazon has sacrificed short-term margins and built up impressive market share. Now it is in a prime position to capture the margin it has been losing out on.
And if books turn out to be the main products in the suspected stores, that’s interesting for two reasons. First, it would mean Amazon is capitalizing on its roots. Second, it would mean Amazon knows it can do what fallen book behemoths couldn’t by offering a great shopping experience on multiple channels — known as omnichannel retail. Of course, with all of its one-time competitors either out of business or much reduced, Amazon would enjoy a less competitive market. This means meeting consumers on every channel they shop on and, if speculations are correct, even shoppers outside of the Seattle area will be able to chat with employees, browse products, and try out Amazon devices soon. This might even lead to fulfilling online orders in-store, further decreasing shipping costs.
Shoppers already want access to Amazon stores. TimeTrade found last year that over 70% of shoppers would rather shop at a physical Amazon store instead of online. Why wouldn’t Amazon give shoppers what they want? Adding stores simply makes sense because it would cancel out many of the costs that have historically kept profits slim.
From fulfillment to shipping costs to returns, brick and mortar could be the answer to some of the issues that eCommerce has introduced to the retail world. John Idol, CEO of Michael Kors, said this week that “e-commerce generates a lower operating profit for us than four-wall brick-and-mortar … when the consumer requires free delivery, free return, wonderful packaging.”
Taking it a step further, a report last month from L2 found that pure play (online only) retail shops simply aren’t as successful as multichannel retailers with stores. Numerous pure play retailers have had their valuations slashed, and experimentation with pop-up shops leading to the establishment of permanent retail locations is becoming more common.
At the very least, Amazon’s stores could be a lesson to pure-play retailers that brick and mortar is a profitable endeavor. Smaller retailers, like Warby Parker, have found success with physical stores. While a large company like Amazon has a lot to lose with aggressive expansion, it also has the most to win due to its strong price perception, brand awareness, and loyalty. Maybe online stores will prove to be a gateway to brick and mortar locations.