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Jeff Bezo’s Secret Retail Plan

By Linda McDonough on September 13, 2017

Who says brick and mortar is dead? There is no doubt the past ten years have been what may be called the Retail Dark Ages, but new bricks are being laid in surprising ways.

The success of Amazon has sucked dry foot traffic that used to cram malls. Anyone remember when you had to dodge swarms of bag laden shoppers to get from one end of the mall to the other? Now you could drive a golf cart through most malls with nary a human obstacle.

The demise of brick and mortar stores has been widely publicized. A “Death By Amazon” list was created by one brokerage firm and has been eerily accurate. Just this year, Rue21, Gymboree, Radio Shack and Payless Stores have all filed for bankruptcy. And even those still breathing are trimming store counts to become more nimble.

Retail think tank Fung Global Retail & Technology, counts 5,300 store closings announced this year, triple the level of last year and the highest number since 2008 when more than 6.000 retail stores closed.

So imagine my surprise to see a brick and mortar Amazon bookstore at a new outdoor “lifestyle” shopping center near me. I wanted to hate it. After all, Amazon started the online revolution that eventually forced more than one-third of the nation’s bookstores out of business.

As a book lover, perusing local bookstores is one of my favorite past times. Sadly I saw many quirky independents close, one by one, as customers shifted a portion of their book buying online.

Amazon’s CEO Bezos didn’t choose books because he wanted to sell more of them to the masses. After quitting his Wall Street job in 1994, he made a list of the easiest products to sell online. Books made the top of the list with their ease of shipping and a distribution system that allowed Amazon to be the middleman without a gigantic upfront investment.

Amazon has just eleven bookstores in the U.S. right now with two more slated to open soon in California.

Like most of Amazon’s decisions, the one to enter brick and mortar retailing was painstakingly analyzed. Jeff Bezos is certainly aware of the challenges facing physical retailers today. Despite these obstacles he’s made the following decisions:

Open Amazon bookstores
Buy Whole Foods, a retail chain of 470 grocery stores
Open ten Amazon Smart Home Experience shops in Kohl’s stores

If every dime of retail spending were migrating online, Bezos would not be making these decisions. Albeit, the number of new brick and mortar locations being opened by Amazon is small- less than twenty of its own bookstores and a handful of experimental shops in Kohl’s stores. Nevertheless, it’s critical to watch what the leaders in any industry are doing on the margin. Anyone who noticed Amazon creeping into product categories outside of books in 1998 would have had a long runway to start betting against many of the retail stocks that have collapsed under the weight of its success.

The Whole Foods purchase is obviously a much bigger bet on physical stores but is perhaps necessary as Amazon embarks on grocery selling, a market fraught with the complications of perishable goods.

How exactly does Amazon expect to succeed in the brick and mortar world when so many consumers prefer online shopping?

Data of course. Amazon has a treasure trove of data regarding consumers purchasing habits. Take its bookstore for example. Like a traditional bookstore, titles are organized via genre. Yet shelves and shelves of different titles don’t exist. Instead, the top mystery seller Redemption Road by John Hart is highlighted. Beside that book is a sign, “If you like this….” and on that next shelf are all the books that Amazon readers who have purchased that same title recommend.

The gadgets, calendars, and toys offered are only those that have earned a top seller rating on Amazon’s website. Gone are the days of a retail store trying out some merchandise to see what might sell. Amazon will only offer goods that have proven to be bestsellers.

I agree with Bezos that brick and mortar isn’t dead, it’s just in need of the severe surgery and critical care that’s been happening for the past decade. The U.S. in particular has been over-stored and massive pruning is necessary.

Only those stores still standing that can harness critical online data and purchasing trends will be successful. The ability to instantly compare prices has led to a new normal of price competition that leaves little room in retailers operating budgets for inventory risks.

In my Profit Catalyst Alert service, I’ve been dipping my toes into buying some brick and mortar retailers and been working on more bearish bets for those that have further pain to endure as the industry morphs.

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