The pandemic supercharged e-commerce as even more consumers discovered its convenience. That led research firm FTI Consulting, for one, to move up its timeline by three years, to this year, for online sales to handily top $1 trillion.
The vast majority of shoppers still favor stores, however. About three-quarters of consumers prefer them even for ordinary household items, according to consultancy Big Village. Yet in a year when retailers drastically eased up on store closures and Amazon itself saw a 3% decline in its Q1 online retail sales, the e-commerce giant closed all of its bookstores, 4-star stores and pop-ups. The nearly 70 locations — 66 in the U.S., two in the U.K.— were almost the entirety of its non-food fleet. At press time all that remains in that category is a lone, newly opened Amazon Style apparel store.
Amazon said by email it closed these stores so it could focus on its other physical retail and tech offerings, and preserve its ability to innovate and scale its business for the long run. But by doing so, it may have lost an opportunity to take full advantage of its own pricing and tech prowess, and could be forfeiting sales in some categories, according to Big Village General Manager David Albert. Bigger picture, the company is withdrawing from a major part of the retail landscape, according to Kelly Goetsch, chief strategy officer at headless commerce platform Commercetools.
“Even as e-commerce continues to boom, brick-and-mortar locations play a significant role in enabling customers to have an immersive, in-person shopping experience,” Goetsch said by email. “I believe Amazon’s decision to close its physical locations failed to take this into account, and could possibly impact their business going forward as shoppers move back to physical retail post-pandemic.”
Not a retailer?
Then again, Amazon’s business is centered around logistics, technology and, increasingly, advertising, and not retail, some experts say. For years now, its third-party marketplace sellers have been responsible for the bulk of the merchandise sold on its site.
“Their ability to fulfill the way they do is a pretty amazing feat. That's well understood,” Nick Egelanian, president of retail development firm SiteWorks, said by phone. “I don't think anybody would say they’ve run phenomenal stores. We know that they don't think those stores were so great, because they closed them.”
Several observers including Egelanian have described Amazon’s non-grocery stores as unfocused. This was especially true of its 4-star stores, which were merchandised with items selling well on its website, leading to a jumbled assortment of random stuff. And — unlike the many independent booksellers that have survived the price-based disruption unleashed by Amazon a quarter century ago — Amazon’s bookstores were not curated in ways that invited browsing or discovery, but instead mainly featured bestsellers.
“Warehouse fulfillment is a lot easier than running a retail store because, in retail, you’ve got to be good at the logistics and technology — plus 10 other things,” Egelanian said. “They haven't proven they know how to merchandise, they haven't proven they know how to operate, they haven’t proven they know how to brand, they haven't proven they know how to assort. It’s a lot of ‘not provens.’”
GlobalData Managing Director Neil Saunders in emailed comments noted a dearth of omnichannel options. “Other than some payment technologies, Amazon never really connected its stores and online in the way that many retailers have done,” he said. “Options to order online and pickup from stores, or check stock levels before heading out, were non-existent. This, in our view, was a lost opportunity.”
Location choice has also been haphazard, suggesting a lack of understanding of site selection, Egelanian said. Amazon said that a lot goes into deciding where to open a store but declined to elaborate.
"It’s not at all clear to me that Amazon has a competitive advantage operating in brick-and-mortar retail.”
Professor and Executive Director, Retail Management Institute at Santa Clara University’s Leavey School of Business
“Every physical store has to have a store model,” Egelanian said. “There's a financial model, but it also needs a demographic model and a physical model — how big is the store? How far does it reach? What is the optimal type of real estate it goes into? What's the optimal number per market? What does it take to make money per market and per management structure? None of those things appeared to be present.”
Kirthi Kalyanam, professor and executive director of the Retail Management Institute at Santa Clara University’s Leavey School of Business, agrees that Amazon’s core capabilities don’t extend to running brick-and-mortar stores, and isn’t sure the e-commerce giant wants to develop them.
”Everything they're good at seems to be very well suited for e-commerce — for running the marketplace, providing fulfillment and delivery for marketplace vendors, providing advertising for marketplace vendors,” Kalyanam said by phone. “It's not at all clear to me that Amazon has a competitive advantage operating in brick-and-mortar retail.”
Amazon said by email that physical retail remains an important part of its business, citing one of the most common reasons that other retailers give for getting into e-commerce — to give customers more choices in when, where and how they shop — and that it will continue to open new stores. However, its experiment with brick and mortar is largely over, at least when it comes to most non-grocery goods, because the company sees little reason for it, according to Russ Dieringer, founder of e-commerce research firm Stratably.
“They’re satisfied with a pure digital experience in general merchandise categories so long as they can deliver quickly and offer easy return locations,” Dieringer said.
While it has nearly wiped out its non-food locations and exited the offline bookselling business, Amazon does run grocery stores and, as of a few months ago, an apparel store.
Whole Foods, which the company acquired in 2017, constitutes the bulk of Amazon’s grocery operations, with more than 500 locations, and it’s expanding its value-priced Amazon Fresh chain. Aside from Whole Foods, and including locations opening this month, the company runs 85 grocery-oriented stores: 58 Amazon Fresh in the U.S. and U.K. and 27 Amazon Go convenience stores. Each banner, which Amazon said is run independently of the others, increasingly includes technology that collects payment via a mobile app as customers walk out of the store.
Why is Amazon so ambitious when it comes to brick and mortar in this segment of retail?
Its grocery stores benefit from the retailing talent established at Whole Foods years ago, Egelanian notes. Kalyanam believes that to some extent Amazon is stuck with what was an expensive acquisition. But its grocery, along with its new GrubHub partnership, also helps Amazon hone its walk-out payment tech, and delivery beyond its distribution center-based logistics, Kalyanam said. Those could eventually become lucrative in their own right, the way its logistics, advertising and, most dramatically, AWS cloud services have, he said.
”They have the e-commerce part of home delivery extremely well nailed,” he said. “They still have to nail high-frequency home delivery — where I order something and get it within an hour. That's typically restaurant, food and all these delivery apps. And at the end of the day, home delivery of groceries is going to be a large delivery business.”
What about apparel?
In May, Amazon unveiled its first apparel store at The Americana at Brand mall in Los Angeles, and has plans for a second in Columbus, Ohio’s Easton Town Center mall. Most of the reasons to expand in grocery probably don’t apply to apparel sales, so it’s not entirely clear why Amazon would venture into brick and mortar in that category after giving up on stores dedicated to books and other merchandise.
As with books, the company has grabbed significant share in apparel. Amazon is now the No. 1 seller of clothing in the U.S., exceeding $65 billion, almost double No. 2 Walmart and some 15% of the entire U.S. market, according to a June report from Wells Fargo analysts led by Ike Boruchow. Those analysts expect Amazon to surpass $73 billion in apparel sales this year.
The store features technology that provides customers with suggestions based on their preferences, so perhaps that’s in focus. But running a specialty clothing store is even more complicated than other segments due to the vagaries of fashion, according to Egelanian.
“Every fashion retailer has to have some kind of a statement,” he said. “What does the Amazon brand do? ‘Amazon Fresh, Amazon Style’? If the idea is to make money in brick-and-mortar retail, they haven’t shown the competency to do that yet. That doesn’t mean they can’t get good at it. But if it's like their other stores, it's going to confuse the customer.”
Correction: A previous version of this story incorrectly referred to the Amazon Style store as having fit technology. The machine learning at the store has a recommendation engine based on details shared by customers, but doesn't provide assistance with fit beyond such details. This story has also been updated to clarify that, while Amazon has closed all of its stand-alone bookstores and 4-star stores, it sells some non-food items in its grocery and convenience stores.