Is Amazon the Next Great Brick & Mortar Retailer? 5 Reasons It’s Opening Stores
If you had to guess which of these retailers: lululemon, Trader Joe’s, Costco or Amazon has the most stores which one would you guess? The answer is Costco. Costco has 782 stores but Amazon is not far behind with 578. Yes that’s right Amazon has close to 600 stores. Trader Joe’s and lululemon have 488 and 460 stores respectively. When you think of some of the best brick and mortar retail chains surely Trader Joe’s and lululemon come to mind but what about Amazon?
Is it the best kept or worst kept secret that Amazon is slowly but surely becoming a large brick and mortar retailer? Amazon made its push into physical retail when it launched Amazon bookstores in 2015. In 2017 Amazon made an even bigger jump offline when it purchased Whole Foods. It also has three other store concepts: Amazon Go, Amazon 4-Star and Amazon Pop ups.
Amazon’s store footprint will get even bigger as it rolls out its new grocery chain. The chain which is separate from Whole Foot is set to launch this year in California.
So what’s the deal? Why is Amazon expanding its physical retail presence? Aren’t eCommerce sales enough? In one word, no. Online sales as a percentage of total retail sales in the United States are close to the single digits. If Amazon wants a bigger piece of the retail pie then it also has to be a brick and mortar retailer.
Expanding into brick and mortar will give Amazon a much better shot at making a dent in the huge grocery sector. And going online will help Amazon to provide a better customer experience by offering more convenient options for picking up and returning orders. As you contemplate Amazon’s future as a brick and mortar retailer consider these reasons for why it’s going down that path.
1. Grocery is a huge opportunity that Amazon has to get right
The third largest category of consumer spending behind housing and transportation is food. With sales of $900 billion in the U.S. the grocery industry is a big opportunity for Amazon. To give you a sense of how big, Walmart is the largest retailer in the U.S. with more than three times the retail sales of Amazon’s and 56% of Walmart’s sales are from grocery.
But with only 3% of U.S. food and beverage sales taking place online grocery is one of the least penetrated eCommerce categories. If Amazon wants to pass Walmart to become the largest retailer in the U.S. it has to conquer food. Unlike categories like books and electronics Amazon has not been able to work its magic on the grocery category. It has struggled for over a decade to sell food online. Most people shy away from ordering groceries online because they like to see and touch produce before buying it. Jeff Bezos has said that for Amazon to become a $200 billion retailer it has to figure out how to sell food.
Focusing on grocery also allows Amazon to capture a share of more frequently purchased items. Grocery shoppers tend to make weekly trips creating a habit. Then while shoppers are making purchases for grocery items they make other purchases. Walmart effectively used this strategy to dominate the retail sector. With the goal of becoming a top 5 grocery retailer by 2025 Amazon has to make a move into physical retail and a big one.
Amazon started along that path with its purchase of 475 Whole Foods stores in 2017. While there was a lot of hoopla around the Whole Foods acquisition Amazon has never had plans to just dip its toe into brick and mortar retail. A former Amazon employee, Brittain Ladd who worked in Amazon’s grocery division until 2017 has said: “people really need to understand — Whole Foods is the beginning, it’s not the end.”
With that in mind Amazon’s most recent move makes sense. In 2020 Amazon is opening a full size grocery store in Woodland Hills, an upscale area, in Los Angeles California. The grocery store will not be under the Whole Foods banner but instead will be part of a new grocery chain. The Wall Street Journal has reported that Amazon is also planning to open more of these grocery stores in Chicago and Philadelphia.
With all of this activity Amazon’s plan of attack in the food sector is starting to take shape. Whole Foods targets primarily high-end consumers, its new grocery chain reportedly will have lower prices thus targeting a different demographic and Amazon Go will capture the grab and go consumer. Despite reports from Bloomberg that there could be as many as 3,000 Amazon Go stores by 2021, Amazon has rolled out these stores slowly and there are only 26 of these stores.
2. Buy online pick up in store enhances the customer experience
Amidst cries of a retail apocalypse stores are emerging as an asset. While some retailers are overstored and need to significantly reduce their foot print Walmart is an example of a retailer that has effectively used its store network to fend off Amazon. A Walmart store is located within 10 miles of 90% of the US population and Walmart has moved aggressively to make the most of its assets. In 2014 Walmart launched grocery pick up and now more than 3,000 Walmart stores offer grocery pick up. In the third quarter of 2019 Walmart’s eCommerce sales grew by 41% and much of that growth is attributed to “strong growth” in online grocery sales.
Other retailers have jumped on the buy online and pick up store bandwagon including Albertsons. Albertsons now has over 500 locations where customers can Drive Up & Go. The retailer plans to increase that number to 1,400 by 2022. In the retailer’s most recent quarter pick up sales were up 34% year over year. Best Buy has also seen the benefits of offering this type of service with more than 40% of its online orders picked up in-store.
Consumers like to buy online and pick up in store to avoid shipping charges, save time and get purchases on the same day.
Speaking about the value of buy online pick up in store (also known as click and collect) Martín Utreras VP of Forecasting at eMarketer said: "consumers get convenience, instant gratification and avoid shipping costs. Retailers reduce operational costs, and it gives them the opportunity to bring customers back to physical stores for additional purchase opportunities.” eMarketer also reported that 50% of shoppers surveyed said that availability of buy online pick up in store factors into the consumer’s decision of which retailer to shop at. Then once they arrive in store 85% make an additional purchase while they are there.
Having a broader store network will allow Amazon to tap into what has become an in demand feature of online shopping, in store pick up. The New York Times has reported that Amazon has been strategizing for some time about building a new store type that combines shopping with eCommerce pick up. Amazon’s new store in California will likely have these features.
Not one to sit still Amazon’s brick and mortar network also includes lockers in over 900 cities in the US where customers can pick up orders. This is an especially good option for customers who are concerned their packages will be stolen if they are left outside in front of their door.
Amazon has also used partnerships with other retailers to make picking up orders easier. Amazon Counter is a service where Amazon’s customers can pick up their orders at various retailers. Last summer Amazon announced that its customers could pick up orders from over 100 Rite Aid locations. Recently Amazon added GNC, Health Mart and Stage Stores as additional partners within its Amazon Counter program. By only showing a barcode to a store associate a customer can retrieve their package. Speaking about the initiative Patrick Supanc, World Director of Amazon Hub said Amazon Counter will "become an extensive network."
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3. Returns create friction, stores reduce it
Returns of online orders is one of the largest costs for a retailer and it is estimated that the return rate for online orders is three times that of orders made in store. Add to that, that the return rate for shoes or clothing can be as high as 30% to 40%. That’s an expensive value proposition.
Not only are returns costly they are often a pain for customers. While Amazon may provide free return labels customers do not always have a convenient place to drop off their returns. To alleviate this friction Amazon has partnered with other retailers to put physical drop off points in areas that are more convenient for its customers.
Khol’s is one of Amazon’s partners. It started accepting returns of Amazon orders as part of a trial in 2017. Pleased with the level of foot traffic generated during the pilot Kohl’s decided to roll the program out to all of its 1,150 U.S. stores.
Not having a physical location to pick up and return orders is one of Amazon’s greatest weaknesses. Having more physical retail locations will help Amazon to reduce some of the friction in the online shopping process.
4. People still like to shop in stores
The vast majority of retail sales still happen in stores and Amazon knows this. If Amazon wants to tap into the nearly 90% of retail sales that happen offline then stores need to be part of the equation. One of the reasons for opening stores is to provide elements of the customer experience that cannot be replicated online. Take bookstores. Any book lover will tell you that they enjoy perusing a bookstore on a Saturday afternoon. Surprisingly, many independent bookstores have been particularly resilient during Amazon’s onslaught of the sector.
An easier and faster option for shopping doesn’t mean it provides the best customer experience. Successful independent bookstores are known for putting on great events and fostering a sense of community two things that cannot be replicated in an online store.
Bookstore operators must have felt the bitter taste of irony when Amazon opened its first bookstore in 2015. Amazon now has 22 of these stores. Amazon also has 18 Amazon 4-Star stores which sell products that have at least a 4-star rating on amazon.com. These stores also allow customers to discover and test Amazon hardware like the Echo. It’s easier to sell a discerning customer a black cylinder called an Echo that speaks to you if you can test it in person.
With stores Amazon can also tap into omni channel shoppers that tend to spend more. Walmart’s CEO Doug McMillon has said that its omnichannel shoppers spend two times as much in total including more in store.
5. Stores provide a new avenue for growth
Despite retail revenues of $121 billion Amazon “only” generates 6% of retail sales in the U.S. That means that Amazon’s retail business has a lot of room for growth but if Amazon only focuses on eCommerce it is going to hold back its growth prospects. Add to that the reality of slowing growth rates in Amazon’s online business. In 2018 Amazon’s total merchandise sales grew at a rate of 19% that’s down from 27% growth in 2016. Bloomberg reported that: “it’s unfair to expect Amazon to grow like a startup forever. But it’s not insignificant that this slowdown has come even as Amazon has attempted to flex more muscle in newer categories [like home furnishing]”.
Amazon’s strategy to move into brick and mortar retail is not a novel one. eCommerce giant Alibaba made the move into physical retail in 2015, two years before Amazon purchased Whole Foods by launching a grocery store chain in China called Hema. Sound familiar? Alibaba currently has more than 150 of Hema stores. Hema stores also double as fulfillment centres for Hema’s online grocery orders. Speaking about Hema stores, Alibaba Group President Michael Evans has said: “consumers don’t think about the world online versus offline.” “Neither should brands and retailers.”
Can Amazon disrupt brick and mortar retail the way it did online shopping? At 6% of revenues, stores currently represent a small part of Amazon’s business. In the stores division which primarily includes Whole Foods sales were down 1.3% in the third quarter of 2019. Stores were the only major segment that did not experience sales growth. Despite fancy tech enabled Amazon Go stores Amazon is not the great disrupter of brick and mortar retail, at least not yet. Amazon plays the long game and you can never count it out especially when it’s really just getting started.