Why Amazon is betting big on brick and mortar

The e-commerce giant has given physical retailers fits since its debut two decades ago. Now it wants to compete on their playing field. And Amazon plays to win.

“Software eats retail.”

So said American entrepreneur, investor and software engineer Marc Andreessen early in 2013 in an interview with startup news site Pando. Andreessen, the creator of Netscape and a partner in Silicon Valley venture capital firm Andreessen Horwitz (tagline: “Software is eating the world”), set off a flurry of think pieces when he proclaimed that brick-and-mortar based retail would die a slow but inevitable and “absolute” death as e-commerce evolved and further dominated.

But despite retail chains like Macy’s, Kohl’s and others collectively shuttering hundreds of stores and at least one prominent retail analyst forecasting a third of U.S. malls will ultimately close, Andreessen’s remarks seem more off-base than ever before. That's not just because pure-play e-commerce darlings like Warby Parker and Bonobos continue expanding their physical footprints, but because none other than Amazon itself — the original Great Disrupter of brick-and-mortar retail — has big plans to broaden the incursion it began last year with the opening of its first bookstore in its native Seattle and continued Monday with the unveiling of Amazon Go, a hometown grocery store that eliminates the checkout process altogether.

Amazon isn’t saying much about its physical retail operations — Retail Dive wasn’t able to get anyone there to expound on them — but we found plenty of expert observers willing to make a few guesses about its ambitions. They say physical stores have become a necessary facet of Amazon’s strategy to nurture and grow its Prime ecosystem, a virtual retail cyclone that includes not just a massive assortment of goods (including a growing number of private-label products in many categories) and multimedia services, but also an expanding series of devices and technologies designed to make shopping at Amazon even more friction-free and accessible.

“To be honest, we are all very curious," Andres Mendoza Pena, a partner in global management consulting firm A.T. Kearney’s retail practice, told Retail Dive. "I would bet they could be leveraging the opportunities to interact directly with consumers to either feature or improve their offerings or learn about consumers. It’s hard to pinpoint just one objective. But the more that they are now starting to become a consumer goods company, the more relevant it is to have a direct relationship and interactions with consumers.”

Why stores make sense

Aside from a pop-up store here and there used to help sell its ill-fated Fire smartphone, Amazon didn’t really mess with physical retail outlets until the unveiling of its first bookstore late last year. Since then, its physical strategy has accelerated rapidly: While Amazon has disclosed few concrete details, it's believed that in addition to bookstores in (or planned for) San Diego, Portland, New York City and Chicago, the company is plotting drive-thru grocery stores (an effort with the internal codename Project X), a series of convenience stores aimed at its Amazon Fresh grocery customers (a.k.a. Project Como), an expansion of its college campus outlets and “hundreds” of pop-ups in U.S. shopping malls to showcase its new range of connected devices, many powered by its Alexa voice-driven virtual assistant technology.

Amazon’s pop-ups are marketing efforts as much as they are retailing initiatives, Mabel McLean, director of Amazon IQ at business intelligence firm L2, told Retail Dive.

“I think pop-up stores completely make sense for Amazon both to differentiate them from the typical retail stores and as advertising — there’s no better form of advertising than controlling your own retail environment,” McLean said. “The bookstores are something in and of themselves. They may be looking at how they can manage these retail formats and trying to expand their interaction with as many consumers as possible.”

None of the experts who spoke to Retail Dive expressed surprise that Amazon is starting with bookstores, because the e-commerce giant remains a major bookseller — and because that’s how it started out in the first place.

"Let me tell you something: Independent bookstores [are thriving]," Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive. "What does that tell you? That people still appreciate that bookstore feeling. It’s a special thing... Amazon is the king of books. And when you’re the king of books, you don’t want to leave a stone unturned." 

But don't expect Amazon to limit its physical aspirations to books, or even just books and grocery, says McLean. “Given their very aggressive category extension, I wouldn’t be surprised if a couple years down the line, it’ll be the 'Amazon Fashion Shop,'" she said. "The bookstore could be a test case for how they balance physical prices with how they price online."

In fact, Amazon has already instituted a new pricing scheme at its physical bookstores, where Prime members now enjoy lower prices than non-members. While items in the stores don’t carry list prices, price checks are available at kiosks that reveal discounts ranging from 6% to 40%. Notably, such discounts don't apply to Amazon's own devices. And that's all part of the plan.

“Everyone was shocked and amazed at Amazon’s [first] bookstore, but the bookstore is a Trojan horse to get devices into consumers’ hands,” retail futurist Doug Stephens, author of the upcoming book "Reengineering Retail: The Future of Selling in a Post-digital World," told Retail Dive earlier this year. “Everything Amazon does is aimed at that — getting their consumer into their ecosystem.”

The advantages of brick and mortar

One thing that Andreessen, for all his genius, drastically underrated is the “see, touch and feel” opportunities that physical retailers offer to shoppers. 

“If you look at the statistics on consumer preferences, consumers actually like going to physical stores. There’s emotion that goes into a purchase, and they want to see an item, feel it, touch it,” Sam Cinquegrani, CEO of digital commerce solutions firm ObjectWave, told Retail Dive. “If I were a retailer, especially a predominantly online retailer like Amazon, I would be concerned about that advantage. Given their success, you might think they wouldn’t be. But Amazon has always proven to be much smarter than everyone else, so it’s not surprising that they’d push into physical retail.”

Indeed, in a survey of more than 2,500 U.S. consumers, A.T. Kearney found that among those who prefer to buy online, fully two-thirds say they still rely on a physical store either before or after their purchase, Pena says. “That means that when you’re buying a dress online, it’s likely that you’re going to be looking at that dress — the feeling, the color — and to do that, you leverage a physical environment prior to the purchase."

Beyond that emotional pull, though, physical stores have also proven to be integral to customer loyalty, returns, fulfillment and — believe it or not — a driver of online sales. “We found 'If I don’t have a store near my house to make an eventual return, I don’t make the purchase,'" Pena said. “So let’s agree that a physical store adds value to consumers, even when they transact online.”

And with retail these days an increasingly omnichannel endeavor, physical retailers are forced to go online just as online retailers are forced to go physical, Cinquegrani said. But he warned that while Amazon has spent two decades as a pure-play online retailer — and while its rivals have, in some cases, centuries of retail experience — it isn’t like Amazon to fear failure.

“Retail is a mix between a digital capability and a physical capability, and, for Amazon, not having a physical ability has become a liability,” Cinquegrani said. “In terms of Amazon and that channel, I think it’s foolish to think that they can’t pull this off. They’ve been masters at understanding what the consumer wants and then delivering that.”

Moreover, the truth is Amazon has long enjoyed the advantages of brick and mortar, Pena adds. Only in the past, it was rival retailers providing those advantages.

“Amazon was able to do well without having their own stores because there were other retailers that were providing them with a showroom where customers would go, for example, look at a TV, and eventually go to Amazon and make the transaction there," Pena said. "The value from the physical space was given by another retailer — and Amazon capitalized on it.”

Is there an Echo in here?

As competitors have fought back via price-matching and efforts to offer merchandise that can’t be found at Amazon, showrooming has declined, presenting fewer real-world opportunities for Amazon to exploit. But there's an even more compelling reason for Amazon to open its own doors to consumers: A line of electronics that rivals may be loathe to sell.

Amazon's arsenal of devices includes the Echo (a high-quality tabletop speaker), the Dot (a smaller smart assistant) and the Tap (a portable Bluetooth speaker). All are powered by Amazon’s Alexa artificial intelligence platform, which allows users to voice-order from Amazon, receive answers to questions, play music and games, and control smart home devices. The hands-free Echo device has been available for about two years; more than 1.6 million have been sold to date.

While Amazon's plans for its grocery and convenience stores remain murky, its bookstores present a clearer picture: They offer consumers access to books but also present opportunities for up-close and personal interactions with the Echo and other Alexa-enabled units. The same logic applies to Amazon's pop-ups.

"When it comes to electronics, you have to see it — remember how much those Apple stores helped Apple?" Davidowitz said. "I applaud them. I think it’s exactly the right thing to do, and it will help grow their business."

Whatever Amazon is doing to promote Echo and its cousins, inside and outside of its physical stores and pop-ups, it appears to be working: Awareness of those devices rose to 69% as of October, up from 20% in March 2015, according to a report from Consumer Intelligence Research Partners released last month. 

“There’s a big impetus to get an Echo in the hands of people, considering that, if you look at the Amazon Echo buyer metrics, we know that the Amazon Echo buyer makes purchases more frequently, and their spend per buyer is twice as much as the average Amazon buyer once they have one,” Andy Mantis, EVP of NPD Group’s Checkout Tracking, told Retail Dive.

Furthermore, owners of the Amazon Echo spent around 10% more on Amazon in the six months after they bought the voice-controlled speaker than before they had it, with purchase frequency also growing 6%, NPD Group's Checkout Tracking found. In addition, Echo owners conduct about half of their total online spending at Amazon after they buy an Echo.

Amazon's devices also help fuel its storied machine learning, which consumes shopper data and helps provide the merchandising, search, content and customer service synonymous with its brand. Its physical stores are poised to serve a similar purpose. Consider how much Amazon stands to learn from the checkout-free Go grocery it's testing in Seattle: Shoppers scan a QR-code based app upon walking into the store, grab the items they want, and the retailer's Just Walk Out technology adds them to their virtual cart and charges the final tally to their Amazon account.

All that customer information coming in from Amazon's site, app, devices and now stores will only help the company continue to disrupt retail — algorithm by algorithm​, contraption by contraption, and brick by brick. It makes Andreessen right, in a sense: Maybe software does "eat retail," but sometimes that meal is served in a physical store.

The question facing Amazon's rivals is how quickly they can meet this ongoing, ever-transforming challenge — or if they can meet it at all.

“The consistent part with Amazon is they create strategies that do evolve over time,” Mantis said. “Getting into stores for Amazon can both neutralize others’ advantage and fuel growth outside of physical stores.”

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Filed Under: E-commerce