Under the leadership of new CEO Andy Jassy, Amazon is entering the department store arena, having lagged competitors in physical and omnichannel retail.
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Andy Jassy took the helm in July after Jeff Bezos stepped down, though the ecommerce behemoth’s founder remains hands-on as Executive Chairman. The company that reshuffled American retail has been pushing the boundaries of ecommerce for decades. Now it appears to be confronting the industry’s limits as its chief rivals, Walmart and Target, continue to gain ground in its virtual territory.
Amazon reportedly plans to open 30,000-square foot (2,800-square metre) department stores, starting in California and Ohio. Mark Shmulik of Bernstein is unsurprised by this expansion into what many decry as a dying industry. He believes the future of retail is an omnichannel combination of online and physical shopping. Walmart has been onto this trend for some time, and has performed very well with its same-day pickup service, especially during the pandemic.
Amazon’s first forays into physical retail started in 2015, when it opened its first Amazon Books store in Seattle. It now has 24 bookstores in the U.S. The company added more bricks and mortar in 2017, when it purchased grocery store chain Whole Foods – a move believed to have been prompted by Walmart’s massive success in grocery, which accounts for over half its U.S. sales. Amazon now has more than 500 Whole Foods locations, a number dwarfed by Walmart and Target.
In 2018 Amazon started experimenting with different retail models, opening its first “4-Star” shop, which stocks items rated four or more stars online. There are now 31 Amazon 4-Star stores. That same year the company launched its cashierless “smart” grocery and convenience store concept, Amazon Go. Yet another physical grocery store chain, Amazon Fresh, launched in 2020 and now has locations in both the U.S. and U.K. Like Amazon Go, Amazon Fresh follows the tech-enabled “just walk out” model. Amazon also runs a handful of pop-up stores as physical extensions of Amazon.com.
Amazon’s brick-and-mortar sales rebounded in the second quarter this year – from a double-digit drop to a double-digit gain, according to Supermarket News, most coming from Whole Foods. It is growing its Amazon Fresh chain, and transitioning some of its Amazon Go Grocery stores to the Amazon Fresh banner. The relatively small successes of its grocery stores may have played a role in the company’s decision to literally go big in the next phase of its physical retail development.
Another factor is slower growth in Amazon’s online sales. While COVID-19 was a bonanza for Amazon’s platforms, the annual growth rate of its online sales slowed prior to the crisis, from nearly 30% to less than 20%. “The trend reasserts itself as people return to shops,” The Economist reports. “In the past quarter Amazon’s own online sales grew by only 16%, short of investors’ (muted) expectations.”
There will be challenges to adopting an omnichannel identity, and Amazon’s performance in bricks and mortar has been mixed. Despite last quarter’s gains, physical-store revenues remain low. It is also unclear how shareholders will react. With plenty of vacant retail space, buying or renting the real estate will not be an issue. But devoting more resources to retail will be inevitable, and many prefer its faster-growing, more profitable technology businesses. Amazon has warned that the investments will drive its costs up, at least in the short term. Investors will need to be patient and see how the next retail era plays out.