Amazon + stores – a bridge too far?
This week’s Retail Note analyses the implications – superficial and far deeper – of Amazon’s decision to close its non-food physical store network.
6 minutes to read
Key Messages
- Amazon to close all non-food physical stores
- Amazon Books and 4-Star format affected
- Some 66 stores in US, 2 in UK
- Negligible impact on global revenues
- But both a surprise and a U-turn
- Highlights challenges of multi-channel retailing
- Amazon remains committed to physical foodstores (Whole Foods/Fresh/Go)
- Plus new Amazon Style fashion concept
- Commitment to physical sites in sectors where it is a small player, as opposed to ones in which it dominates.
One of the largest retailers on the planet closing all its physical stores is worthy of front page headlines in itself. When said retailer is Amazon, the plot thickens dramatically.
Of course, the headline that Amazon is to shutter all its physical stores is slightly disingenuous in that the food side of the business (Wholefoods/Amazon Go/Amazon Fresh) is unaffected and it will also continue to press ahead with its Amazon Style fashion format. Also, the scale of closures will be fairly limited – just 68 stores. But for both these caveats, the move is still highly significant.
What it means in practice
The two formats that are being axed are the Amazon Bookstores and Amazon 4-Star shops. The former all trade in the US, while the latter has also been rolled out to the UK at two sites (Bluewater and Westfield London).
Amazon opened its first bricks-and-mortar bookstore in 2015, two decades after it began selling books online. The move raised eyebrows at the time as it marked the first time Amazon ventured away from online pure-play to enter the multi-channel arena. For some, it was also controversial as they viewed it as Amazon reclaiming the wasteland of its own creation, having supposedly driven the likes of Borders and many other store-based operators out of business.
4-Star is (was?) a more experimental format still. Launched in 2018, the stores average around 5k sq ft and sell a range of goods trending on Amazon’s website, covering categories such as books, games and toys. The common denominator is that all goods had a minimum of a 4-Star rating (hence the fascia). Customers could also buy goods online and collect orders at the store as soon as the next day, while the stores would also process returns. For many, a potential key hub in Amazon’s wider ecosystem.
But not to be, based on this week’s news.
The superficial implications
The financial implications of the move are actually miniscule for Amazon. Never the most transparent in its reporting to say the least, Amazon’s revenue from physical stores totalled $17.2 billion in 2021. Seemingly a huge figure, this actually equates to only around 6.1% of Amazon’s global sales. Clearly, Whole Foods will account for the lion’s share of physical store sales and this remains intact.
Amazon has never put a number on Books or 4-Star but excluding Whole Foods and the other grocery operations, we are probably looking at an impact of less than 0.5% of revenue – even then some of this may well double-back to the online business.
While the financial impact may be negligible, this still represents a major strategic U-turn. Did 4-Star convince as a format? Not wholly. In a consumer world driving by entitlement and aspiration, why settle for 4-Star and not 5-Star? And for all Amazon’s prowess in data analytics and algorithms, how can you do justice to an inventory that must run into billions of SKUs in such a small physical space? And while the stores are well curated and presented, it’s difficult to understand what they really stand for and what their purpose is.
Put bluntly, if they didn’t carry the Amazon brand, no one would really have cared less.
The bigger picture
"Above all, the closure of the non-food stores flies in the face of most narrative on retail – that Amazon is omnipotent, infallible and everything it touches turns to gold."
This week’s news again proves that this is not necessarily the case by any means.
It’s also fair to say that it’s possible to read too much into what were, for all intents and purposes, still experimental ventures. And this remains one of Amazon’s enduring strengths – a willingness and ability to innovate and constantly try new things. This sets it apart, nay above, many of its far more risk-averse peers. So, a case of two experiments that ran their course rather than outright failures.
But there are wider connotations too. A fellow analyst (who shall remain nameless) dined out for many years on their prediction that by 2020 online pure-play would cease to exist and that all retail would be multi-channel. A crude extrapolation of a trend that has proved to be woefully incorrect – in the UK alone, AO World, ASOS and Boohoo still sit resolutely in the pure-play camp, the latter two despite have acquired huge store-based businesses in the shape of Arcadia and Debenhams respectively.
Amazon organically venturing into store-based retailing was the exception that proved the rule, a standard-bearing move of online pure-play morphing into multi-channel. For now, this has been reversed.
But of course, Amazon does still have other store-based operations in the shape of its food business and it’s much-hyped-soon-to-be-launched Amazon Style fashion concept. And this is clearly where its priorities now lie: “we remain committed to building great, long-term physical retail experiences and technologies and we’re working closely with our affected employees to help them find new roles within Amazon,” the company said in a statement.
But there are still question marks over these formats too. How has Amazon in any way changed or improved Whole Foods since it acquired the business back in 2017? Despite accelerated roll-out of Amazon Go and Amazon Fresh, does it wholly convince as a format? Cashier-less stores - a triumph of technology or a solution to a problem that didn’t really exist in the first place? And above all else, would anyone really give them the time of day if they didn’t bear the Amazon brand? And the million trillion dollar question:
"what chance does Amazon have in succeeding in the food and fashion physical space (where it is currently a minnow) if it apparently can’t do so in sectors such as books and general merchandise (where it is an undisputed titan)?"
As I wrote a few weeks ago in analysing Tesco’s decision to close its Jack’s discount business, the end game of experiments may actually be more nuanced than it may appear. For Tesco, the learnings from Jack’s have been cascaded through the wider mainstream business. Conversely,
"it is difficult to see what Amazon may have learned from its physical bookstores and 4-Star format, other than running stores is both a costly and highly skilled undertaking and the transition from being a single channel operator is a perilous journey."
Something its store-based peers could have told it a long time ago. Some are even still alive to tell the tale.