This story was updated on March 4, 2022.
The lavish financial success and enormous influence Amazon exerts in the online world has hardly dulled the giant's ambitions to replicate that success in the physical world, as it continues to experiment with brick-and-mortar store models.
In recent years, the company has established an array of Amazon stores, through both acquisitions and its own startups, that attempt to reach consumers in more targeted and personal ways to win their hearts and, as importantly, their wallets.
"Jeff Bezos [Amazon CEO] realized he needed to push his distribution strategy further down the stack with physical stores in locations where he can attract a lot of foot traffic," said Guy Courtin, a former vice president of industry strategy at Infor. "These physical locations not only allow more direct contact with his customers, but they work hand in glove with their highly automated warehouses. These warehouses, another type of physical location, are used like inventory dispensaries, or what I call 'dark stores'," he said.
Since 2017, Amazon has launched Amazon Books stores; Amazon 4-star stores; Amazon Go cashierless convenience stores and pop-up stores throughout the country.
However, in March 2022, Amazon announced the closure of some 68 stores, including all of its Amazon Books stores, its Amazon 4-Star stores which sell a range of products from toys to household goods to electronics that are all best-selling products and Amazon Pop Up stores, smaller outlets focused on rotating themed products.
The decision doesn’t mean an end to Amazon’s strategy of establishing physical locations. The company will double down on its existing grocery store delivery services and plans to add fashion department stores, Amazon Style, in greater Los Angeles. Amazon Style uses machine learning algorithms to produce tailored recommendations in real time as customers shop, according to the company's website.
The company did not disclose a timetable for when it would begin the store closures.
Amazon maintains grocery business
The beneficiaries of the closures will be Whole Foods and Amazon Fresh grocery stores and its Amazon Go stores, the latter featuring a cashier-less approach to customer checkout.
It acquired Whole Foods Market for $13.4 billion with plans to expand its chain of grocery stores. Amazon also signed a deal with Kohl's to handle returns from Amazon online customers free of charge and has moved into the delivery business where, even now, it delivers more of its own products to customers than its distribution partners.
In its financial report for the fourth quarter 2021, Amazon reported that sales for its online stores were $66 billion, down 1% from 2020's Q4. Sales from its physical stores were $4.69 billion, up 17% % compared with the same period in 2020, amid pandemic shutdowns.
Whether Amazon eventually dominates the physical retail world as completely as it has the e-commerce world remains very much an open question for some analysts. Most of the Amazon stores launched so far are very much works in progress, still being fine-tuned in terms of the products and services they offer, their market positioning and even their business model.
"Amazon is doing a lot of testing to find out what the next big bucket piece is for them," said Thomas O'Connor, principal research analyst at Gartner in Sydney, Australia. "Whole Foods gave them some insights into what it's like to operate a large-scale store operation. But the bigger challenge remains, what is the right next step and where does the best profitability lie for them," he said.
So far, Amazon's aggressive push into the physical world hasn't caused competitors to lose much sleep. In the opinion of some industry analysts, a few of its major competitors have responded smartly to Amazon's moves.
"Walmart and Target have figured out it costs less to ship from their own stores, which is something Amazon can't really do yet," said Bob Phibbs, CEO of The Retail Doctor, a consultancy in New York. "Most online brands realize they need brick-and-mortar stores to make money, but the fear of Amazon being in physical spaces is much lower than the fear of their domination in the e-commerce."
Amazon 4-Stars, Bookstores to close
When this story published in 2019, analysts were split, for instance, on exactly what the strategic purpose the Amazon Books stores served, which, like the Amazon 4-star and Amazon Go stores, contributed very little to the top or bottom lines. Ironically, selling books online was Amazon's first business back in 1994, which put many physical bookstores out of business.
Gartner's O'Connor noted the dozen or so Amazon Books stores in operation today are located in high-traffic areas and serve as a way to increase Amazon's overall brand awareness in those areas.
"We see [Amazon Books] being used almost as an advertising point for their broader businesses," O'Connor said. "They can also take a more targeted approach to an assortment of products within those stores for things like Alexa-styled devices," he said.
Amazon 4-star stores, O'Connor said, experiment with business models to run such stores, including bringing some capabilities and methods from Amazon's online operations to the physical stores.
The 4-star stores only offer a subset of best-selling products from across Amazon's portfolio from consumer electronics, to books, to toys. Amazon decides what products to stock in each store based on surveys conducted among regular Amazon customers who reside within a five-mile radius of a given store.
"This increases the chances of people seeing something in the store they like and buying it," Courtin said. "Essentially, Amazon is taking a subsegment of its warehouse and pushing it out to touch consumers in yet another way."
Amazon stores serve multiple purposes
Amazon's biggest investment in physical locations was the $13.4 billion it spent acquiring Whole Foods. The acquisition gave Amazon over 505 physical stores in the U.S., Canada and England, and is by far the most profitable among all of its physical stores. One of the benefits Amazon gained through the acquisition was a new and huge audience to sell its Prime membership service to.
The acquisition also neatly complements the company's aggressive expansion of its warehouses by bringing Amazon in closer proximity to its shoppers. Many Whole Foods locations now process returns from Amazon online customers, simplifying the returns process and drawing more foot traffic to Whole Foods stores.
Kohl's has a similar deal to partner with Amazon on processing the returns of online purchases across its 1,100 stores. Kohl's reported that since the program started in July 2019, foot traffic across its stores increased 24%.
But even with the Whole Foods acquisition and plans to significantly expand its fledgling grocery chain of stores, Amazon may find its stiffest competition in the market. Since Amazon began its concerted push into the retail grocery market, well-resourced competitors, including Walmart and Target, have stepped up their game to match some of Amazon's offerings, such as curbside pickup of online orders.
"Walmart and Target have found a bit more of their footing in the last 12 months in their competition with Amazon," O'Connor said. "But the big challenge for Walmart will be what happens to their online growth when they finish their rollouts of curbside pickup across their stores in North America. Can they maintain that growth rate once the curbside service is fully rolled out?"
One advantage Amazon holds over competitors like Walmart is the data it can collect on customers coming in and out of their physical locations, especially in its grocery stores.
"Amazon owns their own data, so they can mine it anyway they want. This is why the grocery business is a big deal to them," Phibbs said. "Once [they] get into someone's shopping cart, they know how many kids you have, they know who is sick or old -- the more [they] can segment those shoppers into targeted offerings. Ultimately, data is their real strength."
Amazon is not the first successful web-only company to make a concerted push to establish physical locations to further its financial fortunes. Companies Warby Parker and Casper have also established physical stores and/or signed deals with large brick-and-mortar retailers to either put pop-up stores within the retailer's stores or install drop boxes for customer returns.
But giving Amazon due credit as a visionary, Courtin recalled a 1999 briefing with Jeff Bezos when Bezos reportedly said he was in the process of working out a deal with Starbucks to put Amazon return lockers in their stores.
"With research he realized the majority of Amazon customers were also Starbucks customers," Courtin said. "He wasn't so much interested in investing in physical locations then, but he knew he had to make it easier for customers to return items. He was a couple of decades ahead of everyone."
Amazon fulfillment centers, robotics and labor practices
Whatever success physical locations might have will be tied to the increasing number of mammoth warehouses Amazon continues to build in both thickly settled urban areas such as New York City and sparsely populated rural areas. Such facilities, especially in the inner city, allow the company to quickly deliver goods to tens of thousands of Amazon Prime customers in one to two hours, bolstering an already lucrative business that some analyst believe is worth $20 billion.
"Fulfillment centers such as the one in Staten Island allow Amazon to guarantee quick delivery because they know many Prime customers are only a few blocks away," Courtin said. "That's an important competitive advantage to have in a massive market like New York City."
In 2012, Amazon bought warehouse robot maker Kiva Systems, now called Amazon Robotics, which the company deployed across many of its warehouses. These robots can swiftly transport up to 1,500 pounds of goods on pallets from one location to another, where eventually they are placed on chutes to conveyer belts. Very few, if any, humans are involved across the entire process.
Still, even with AI- driven robots and other sophisticated automated warehouse processes, employees are still being overworked with reports of health issues; one 48-year-old production line worker reportedly collapsed and died of a heart attack. He laid on the warehouse floor for 20 minutes before fellow workers assisted him for fear of slowing production. Six workers died at Amazon facilities between November 2018 and the end of 2019, according to the National Council for Occupational Safety and Health. In June 2021, Amazon and the National Safety Council (NSC) announced a five-year partnership to "invent new ways to prevent the largest category of workplace injuries in the U.S."
The high profit margins derived from Amazon's AWS cloud division and being plowed into Amazon stores will give the company added time to experiment and refine its various ventures, but ultimately it will come down to basic blocking and tackling.
"At the end of the day it's brutal to be profitable and to execute brilliantly in the brick-and-mortar business," Phibbs said. "Right now, I can't give [Amazon] the same grade for their brick-and-mortar prowess as their online prowess."
An Amazon spokesperson did not respond to request for comment.
This story was originally published in 2019.