After helping decimate department stores, Amazon plans to open its own

Amazon has experimented with physical retail for years, including this pop-up store inside a Whole Foods in Chicago, Illinois.
Enlarge / Amazon has experimented with physical retail for years, including this pop-up store inside a Whole Foods in Chicago, Illinois.

Amazon is looking for its next conquest. After years of growth, most recently fueled in no small part by the COVID-19 pandemic that also has decimated physical retailers across the country, the company is reportedly planning to open its own department stores.

The move would represent a subtle shift in strategy for the e-commerce giant. Though it has experimented with its own brick-and-mortar locations, Amazon’s few-dozen currently branded stores tend to be small affairs that offer a selection of goods. Its largest customer-facing real estate, Whole Foods, came through an acquisition. If Amazon follows through on its department store plans, as reported by The Wall Street Journal, it would represent the company’s biggest ground-up push into physical retail, a flagging but still massive sector of the economy.

Don’t expect Amazon to follow in the footsteps of JC Penney or Macy’s, however. Rather, Amazon appears to be following a playbook similar to the one embraced by grocers Aldi and Trader Joe’s. Where most existing department stores are on the order of 100,000 square feet, Amazon’s stores will be about a third the size, with the first set to appear in California and Ohio. And like Aldi and Trader Joe’s, expect Amazon’s department stores to heavily feature Amazon’s private-label goods.

Previous experiments

Amazon has experimented with brick-and-mortar retail stores for years, though it’s been slow to expand. Its first, a bookstore, opened in Seattle in 2015 and offered the usual books and magazines alongside Fire tablets, Echos, and plenty of advertisements for various Amazon products and services. Today, there are just 24 Amazon Books physical locations.

The company’s other ventures in physical retailing have been similarly cautious. Amazon opened its first Amazon Go convenience store in 2018. The sites, which are partially automated, allow customers to check out without cashiers or self-checkout kiosks. Perhaps because of the complex technology behind it, there are only 23 in the US, including the new Amazon Go Grocery format. The other Amazon-branded grocery concept, Amazon Fresh, first opened in August 2020. Today, Amazon has just 15 of those smaller grocery stores in total.

Outside of groceries, Amazon has dabbled in selling consumer products in person at its Amazon four-star stores, which first opened in 2018. The locations sell a limited selection of products that are rated four stars and higher on the site. These spaces tend to be quite small—around 4,000 square feet.

As Amazon seeks new customers and makes new efforts to dominate additional categories, its executives have embraced physical stores as a way to accomplish many goals at once, WSJ reports.. By capturing passers-by, it can introduce itself to people who haven’t embraced its e-commerce site. Physical locations also allow people to touch, feel, and try out products—perhaps a benefit in certain categories where Amazon has struggled, like fashion. Further, a brick-and-mortar store allows the company to curate a selection of items, winnowing down the 350 million or so available on its website to a few thousand, while also facilitating returns from its e-commerce operations. Lastly, Amazon executives hope the stores provide a trove of new data to mine for insights into customer browsing and purchasing behavior.

Department stores have been hollowed out by a slew of competitors, including fast-fashion retailers, discount stores, and e-commerce sites like Amazon. Their market share in retail has fallen from about 8 percent in 1990 to less than 1 percent today.

Regulatory scrutiny?

Though Amazon remains a bit player in physical retailing, its forays into the sector could draw additional antitrust scrutiny. Lina Khan, the head of the Federal Trade Commission, has pushed to apply a new lens on anticompetitive behavior, focusing on the growing power of online platforms. It’s a change from previous antitrust considerations, which heavily weighed market power. Companies with significant market power can set higher prices and seek fatter margins without losing sales.

Khan noticed that platforms like Amazon, though, have bucked the trend. “First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible,” Khan wrote in an influential 2017 journal article. “Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend.”

Whether Amazon’s latest mooted foray into physical retailing constitutes anticompetitive behavior remains to be seen. Apart from a brush with the FTC over its Whole Foods acquisition, the company’s slow pace of expansion in brick and mortar has kept regulators off its back.

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