The Wall Street Journal reported that Amazon is looking to open “department stores.” Yes, department stores, those things that have been failing and closing for the last 20 years, leaving malls struggling to survive.
Your gut reaction may be: “What the heck are they thinking? Aren’t department stores dying because of firms like Amazon?”
You have to ask yourself, why in the world would one of the best and most profitable online retail superstores try its hand with brick-and-mortar retail? What do they know about their customers that would give them confidence to try this? And what are they hoping to gain? And is there any tie-in with Amazon’s frequently suspected banking ambitions?
Let’s look at the retail implications and then the banking implications of Amazon having its own stores.
A Cold Look at Amazon Going Physical for Retailing
This strategic move is not really contrarian for Amazon, in spite of appearances.
Putting all paranoia aside, this rumored move is all about meeting consumer needs. Remember, Amazon is built around one thing: customer happiness. This philosophy is most visible in their return policy, which is straightforward and efficient. Returns of physical items are costly challenge for any business, Amazon included.
Opening Amazon-branded department stores could help improve customer happiness and reduce returns. If you can’t wait the one or two days for Amazon to send your order to you, you can run into the store and pick it up same day. If you can try an item on before purchasing, you might not return it later. In either case, Amazon creates a better customer experience. But there’s more to it.
What Amazon Hopes to Gain from this Strategy
According to press reports, Amazon says its plan is to help the company “extend its reach in sales of clothing, household items, electronics and other areas.”
Let’s put this remark into context. Given that Amazon is the world’s second-largest retailer, behind only Walmart, with nearly $300 billion in revenue, that is a pretty bold statement. I suspect they must realize that some customers still want see and handle household items or electronics in person and still want to try on clothing.
The other reason could be to try to reduce return volume. Forrester Research estimates that 25% of items bought online are returned, with $207 billion in returned commerce goods expected this year from all retailers.
Amazon return volume ranges between 5% and 15%, according to Zentail, an ecommerce automation firm. But the return rate for some categories, such as consumer electronics, clothing and fine jewelry, can shoot as high as 40%. Note that the products that are most frequently returned are usually ones you’d test or try on at the store.
Today, Amazon offers returns through UPS, Kohl’s (the second-largest U.S. department store in sales, per Statista), Whole Foods (an Amazon company), Amazon lockers in various locations, and other Amazon retail sites. The deal with Kohl’s drives traffic into Kohl’s department stores. It’s likely Amazon would prefer driving return traffic into more Amazon-owned sites.
Like Trader Joe’s, Amazon is likely to place a heavy emphasis on its own private-label Amazon Basics products in its department stores. According to press reports, Amazon plans to feature private-label products front and center in the new locations, alongside wares from other top consumer brands.
Grocery store margins are historically narrow at around 2%, according to Forbes. The industry is built for volume. Trader Joe’s margins are some 40% better than the industry average, driven by the high percentage of sales (85%) of their private-label brand. Trader Joe’s has some of the highest sales revenue per square foot in the industry. Amazon department stores will surely emphasize the Amazon Basic brand for these reasons.
Beyond Retail, Amazon Knows the ‘Data Oil’ Business
Keep in mind that Amazon knows what sells and what doesn’t for every place in the world. You can count on the company stocking goods in each store based on what has been ordered from those communities historically.
Perhaps the most valuable asset Amazon has is its database on customer purchases. Surely they will leverage it.
The first stores are reportedly planned for Ohio and California and will be approximately 30,000-square-feet, about one-sixth the size of a Walmart, and one third of most big box stores.
It takes a lot of inventory to stock the shelves in a 100,000-200,000 square-foot store. Building smaller stores allows Amazon to maximize sales per square foot by carrying only the most popular items.
Amazon will also be able to collect additional data regarding potential customers, even if no purchases are made. Based on Amazon’s previous experiments with smaller retail sites, the company will be able to track the aisles consumers are browsing, what is picked up from a shelf, and whether purchases were influenced by an ad seen on the Amazon website.
When you are a data-driven company, data mining is critical to your success. Today, Amazon knows every item viewed on its website and how many viewings led to purchases. The data from in-store product interactions will be fed into Amazon’s models and likely lead to swift store changes should certain products viewed not make it through the checkout.
Considering the Implications for Retail Banking
People who follow me know I’m all about retail financial services. So why would I write about Amazon opening department stores?
First, consider this move in terms of channels. In an increasingly digital world, one of the largest ecommerce firms is adding more physical sites to its inventory. Keep in mind Amazon operates nearly 600 retail stores today (includes Whole Foods). The company realizes they can grow faster by combining physical retail with eCommerce.
Follow the Leader?
Banks and credit unions could take a lesson from Amazon’s expected move. It’s not digital or physical, it’s digital and physical.
Frequently Amazon makes moves that suggest strongly that the company plans to make a move in retail banking and perhaps in small business banking, beyond the efforts already in place.
Would “supermarket banking” at an Amazon store have a better shot at success? Probably not, especially at department stores. You’d have a better chance of success at a Whole Foods, but the limiting factor remains that no grocer is likely to rent you enough space to have a large enough in-store presence to make the financials work. Grocery store space is very expensive and measured on sale per square foot. That’s in the context of an outside provider, of course.
Just how Amazon might approach in-store banking, if at all, remains to be seen. Over the years Walmart has rented space to outside financial providers, partnered with other providers and periodically tries to expand its own reach. Just what Amazon has brewing within its expected physical retail strategy will likely have its own special twist.