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Amazon could become our leading physical retailer before very long

March 21, 2017 by Mike Shatzkin 7 Comments

More than five years ago in this space we contemplated the likelihood that Amazon would just keep growing and growing its share of the book business without any end. Of course, a book business-centric view of Amazon these days doesn’t really do Amazon justice. Books and ebooks are a really small part of their business (although it is, for many publishers, more than half of theirs!)  It might be unfair to say that Amazon alone has crippled retail stores but the impact of online delivery is changing the landscape in ways that are impossible to ignore.

Living in midtown Manhattan, as I have for my entire adult life, has always presented distinct advantages of convenience. With street-level retail on every inch of the avenues and in many of the buildings that occupy the streets between them, the number of choices of restaurants and stores of all kinds within a 5- or 10-minute walk of my apartment has always exceeded what is available to most people within a half-hour drive, even if they live near a large shopping center.

But things have been changing noticeably. Even in midtown Manhattan, the locale with the most walking traffic in the country, retailers are struggling. The number of empty storefronts in my neighborhood is staggering; there are one or two or more on just about every block. It has never been that way before in my experience.

For most of the 45 years I’ve lived here, there was a supermarket in my building and one immediately across the street. Now the one in my building is a large restaurant in a mini-chain called The Smith and the one across the street has been empty for nearly a year. The closest remaining ones are 2-1/2 blocks away in one direction, 3-1/2 blocks in another. This is a big deal when all your travel is on foot and your normal procedure is to carry your bags home.

And, of course, that just means we start ordering more things online to be delivered.

The supermarkets are being challenged by the new Duane Reade or CVS pharmacy version of retailer. They “80-20” the supermarket: offering a decent selection of things that aren’t perishable (trash can liners, canned beverages), a paltry selection of produce, and no meat. The supermarkets can’t survive without the subsidy of a pharmacy dealing in higher-margin goods with competition selling so much of what they offer, so they thin out as the pharmacy version of food stores grow in number.

And meanwhile, smaller storefronts that used to be occupied by specialty food stores, hardware stores, laundries, clothing stores of various kinds, and even bookstores, often remain vacant for long periods of time and then a Dunkin Donuts or Starbucks set up in them. Twenty years ago there were almost no branches of national chains around here except an occasional McDonald’s. Now they’re the most “bankable” tenants and they can either bear higher rents than most retailers or can make better deals.

We see more and more “temporary” stores. They might be called “pop-up” retailers because they are non-permanent from the moment they move in, but the clothing store like that on 48th Street and 2nd Avenue has had a run of several years. In other words, there are an increasing number of opportunities for retailers that don’t require a long-term lease.

It doesn’t take a genius or a futurist — nor require one to be a contrarian — to see that that we are “over-stored” everywhere, not just in the shopping centers being challenged by the gradually-then-suddenly demise of department store chains like Macy’s and Sears. And when you live where I do, the shift to online purchasing is plain to see in the piles of delivered packages our doormen have to deal with every day which becomes a flood that now overflows the pretty large package room in December. And most of those boxes have an Amazon logo on them.

In the book business, we’ve been focused on the one-at-a-time announcements of the opening of Amazon bookstores which now will number about a dozen. We can see that, at least for now, they display a fairly limited number of titles (apparently selected algorithmically from the wealth of data they have about customers near any geographical location), give price breaks to Amazon Prime customers, and also will introduce you to Amazon hardware.

But the bookstores are only one component of Amazon’s experimentation with physical locations. They have announced plans to open 100 “pop-up” stores in malls (where short-term space is ubiquitously available).

They are fiddling with a concept called “Amazon Go” which would be a retail establishment so thoroughly automated that it hardly needs staff.

In other words, the bookstore idea is just one aspect of Amazon’s experimentation with physical retail.

There has already been some savvy analysis that takes note of the fact that Amazon started out with books to build an online operation that has moved way beyond books. For many reasons, it made sense to start their physical presence with books as well. Books and their purchasers were a good starter demographic for building their online retailing and the logistics behemoth that supports it. Of course, that same logistics behemoth can deliver unmatchable support to a retailing network. Every retail chain selling anything depends on its supply chain, most of which it builds and maintains itself.

Barnes & Noble outlasted Borders primarily because they had a better logistics network supporting their stores. Smart location and inventory selection and merchandising certainly didn’t hurt, but it was the rapid and automated resupply of books as they sold that provided an insuperable advantage.

B&N’s logistics capability pales in relation to Amazon’s. And probably so does the logistics capability of every other retailer. None of them requires the complexity that Amazon does, across not only the widest conceivable range of products but also across millions of retailing “partners” — affilates and Amazon Marketplace sellers — who are integrated into the same supply chain.

In fact, for all the discussion of B&N’s experimentation with “concept stores” and my own suggestion that they should be working on delivering smaller stores, it is Amazon that is doing the most experimentation in the physical store space. Leaving out the “Amazon locker” pick-up locations they’ve established at other retailers and the so-far only-in-Seattle experiment with their “Treasure Truck”, we see the three major headings of experiment: bookstores, pop-ups, and Amazon Go.

But what we don’t see is the experimentation below the surface. What books are they stocking, how are they picking them, and how much does that vary from store to store? How much are they mining personal information about the Amazon local customer base and promoting to those people to boost store traffic? Aside from the merchandise they sell, how successful are these stores in adding Prime customers or Echo customers to their existing base?

Amazon brings an unprecedented set of capabilities to build out store-level retail at exactly the time that their brick-and-mortar competitors are all challenged and the cost of entry — because of an oversupply of locations — is low.

They can put goods in a store for a lower cost than anybody else. And every book in a store is as available for shipment as any book in a warehouse.

They can alert more highly-targeted customers to the existence or features of a new retail location for less expense than anybody else. They can experiment with non-book items — because they’re already carrying them — as complements to their books more efficiently than anybody else (at precisely the time that it is being demonstrated that books alone can’t support a lot of very large locations anymore).

And that’s aside from the fact that they have cash to try things that the shrinking brick-and-mortar incumbents would struggle to match.

What could they do next, or try to do next? Just about anything you can imagine. They could put meat and cheese and produce into a physical location and allow you to shop for everything else (the non-perishable stuff) by automated kiosk. They could 80-20 Walmart the same way that CVS 80-20s Gristede’s. They could create little theaters in their bookstores that would be great for author events but which could also screen Amazon-produced movies. And everything they do would give them more of a presence to recruit Prime members and Alexa users.

And Amazon will carry an advantage into physical retail that they had for a different reason two decades ago when they were building their book business at Amazon.com. They don’t have to make a “profit” to win. Twenty years ago they knew — when no competitor recognized it — that Wall Street would pay them for growing their customer base through book sales. A breakeven or near breakeven store operation would also have a subsidy because it would drive more competitors to reduce their store footprint and thus their sales. When other people’s stores go away, Amazon.com picks up sales.

It is probably fair to call what Amazon is doing in retail now “experiments”. But it is likely that the experimentation is more about determining the shape and nature of the very significant future Amazon presence in our physical world and not about whether there will be one. It will be substantial, and it will be substantial very soon. Don’t be surprised if Amazon becomes the country’s biggest physical retailer over the course of the next decade.

Filed Under: General Trade Publishing, Marketing, New Models, Scale, Supply-Chain Tagged With: Alexa, Amazon, Amazon Go, Barnes & Noble, Borders, CVS, Duane Reade, pop-up stores, Prime, Treasure Truck, Walmart

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Mike Shatzkin

Mike Shatzkin is the Founder & CEO of The Idea Logical Company and a widely-acknowledged thought leader about digital change in the book publishing industry. Read more.

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