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Should Amazon Go into the Brick and Mortar Business?

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Recently, the Wall Street Journal (WSJ) published an article titled, “Amazon Stores: Why All Retailers Should Be Afraid” in which it quoted  a source from one of the Chief Executives of General Growth Operators, who claimed that Amazon will be opening 300 to 400 retail stores in shopping malls all across America.

 

The source later stated that his quote was taken out of context. To clarify the confusion, Amazon will NOT be opening retail stores in shopping malls nationwide. However, the hundreds of articles written based on that one Wall Street Journal article did cause speculators to trade with the Amazon stock, and it did raise an interesting scenario to intellectually debate and think about.

 

First, it does seem to go against logic for Amazon to open physical retail stores since it was the cause of the demise of other major retail chains. Currently, Best Buy and Walmart are struggling due to competition from online retail and will be closing stores. Walmart alone is estimated to close 269 stores across America in 2016. In an ironic outcome, Amazon can now get retail space at a cheaper price due to the abundance of retail real estate from all the stores that closed due to Amazon’s direct or indirect competition.

 

If hypothetically, Amazon does open physical retail stores. What would be the advantages?

  • The physical stores will act as distribution centers
  • Increased sales through impulse shopping
  • Cheaper retail space due to availability

 

When websites experience a large increase of online sales in short periods, the overtime and overhead costs eat at their profits. Physical stores, with their fixed operating costs, can act as a relief and:

  • Lower Variable Costs with each sale
  • Lower inventory handling costs
  • Lower order fulfillment costs
  • Lower overtime costs
  • Lower transportation costs

 

Other conceptual benefits include:

  • Online stores can sell their niche products in the physical Amazon stores, where Amazon rents them shelf space and takes commission
  • Online stores already sell through Amazon’s website and they already pay Amazon sales commission and other fees
  • Online stores can still compete alongside Amazon for the reason that they deliver unique niche products that give the customer EXACTLY what they want.

 

To conclude, a hybrid strategy of online and offline retail combined with advanced warehousing, customer data analysis, stock control and order fulfillment could be a viable option for Amazon in the future.

 

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