Amazon Set to Muscle in On Physical Retailing

Amazon

Amazon is seen as a big enough threat to brick and mortar retailers with their huge online presence, but should they make a major move to physical stores, the threat will get bigger.

Large physical retailers are already feeling the pressure from online retailing giant Amazon, scrambling to adjust their business model to better compete from this online threat, which is changing the way a lot of people buy things.

Just when they might have thought that they are starting to adapt to Amazon’s immense selection, convenience, and cheap delivery options, the online retailer is getting ready to fight them on another front as well, their own.

Amazon has been considering venturing out into the brick and mortar realm for some time now, and their purchase of Whole Foods appears to just be the start of things to come. They’ve gone from simply the desire to compete in the grocery business by opening stores to some concrete plans to have some opened very soon, by the end of the year in fact.

Amazon does sell a great number of things online, including groceries, and while other forms of merchandise may be things that people can stand to be more patient with, trading in the speed that physical merchants deliver for benefits like better selection, prices, and the convenience of home delivery, the grocery business is a different animal of sorts, where timeliness matters more.

This is not to say that Amazon’s grocery business doesn’t have a lot of potential for growth, and some types of groceries like non-perishables can be treated like other types of merchandise for the most part, but for some things and for some shoppers, there just isn’t anything that beats the immediacy of getting your order without having to wait for shipping.

Even though shipping has been cheaper and faster, especially with Amazon leveraging their vast economies of scale, it still takes time for something to travel from their warehouses to your door.

Traditional Retailers Respond to the Online Threat

Brick and mortar grocery stores haven’t been just sitting by idly and watching Amazon take their business away from them, and have made strides toward modernizing their shopping experiences by offering things like online ordering and home delivery, which also allows them to leverage their advantage of proximity and deliver orders the same day.

Retailing giant Walmart and grocery leader Kroger, among others, have both made huge investments at the expense of profits to look to both reorganize the way they do business and to also get more involved in offering answers to the business they are losing to Amazon, and just when you think you are starting to lick them or at least reduce the amount that they are licking you, they come at you from another angle.

This and other measures have come at a cost of lower margins to the brick and mortar stores, margins that were already thin due to the high level of competition in the industry, but they did enjoy this natural advantage of being local. Then Amazon announces this plan, and now the online monster is coming to town and ready to set up shop right alongside them.

This also comes at a time where revenues in the industry may be slowing, at least if we believe the latest government report. While that may end up being revised, we do know that the economy is showing signs of tiring, and even grocery stores feel some heat when this happens, as while people still need to eat, a lot of the spending that is done in these stores is fairly elastic.

We may be seeing this in the reduction of new stores that we’re seeing, not just with the grocery stores but with retailing in general. Walmart has announced that it will only be opening 10 new stores this year, which is a very small amount for them, and this is a trend that we see across the retail industry generally.

This isn’t just all about business slowing down though, it’s also about diverting funds away from building new stores to making their existing stores more like Amazon. Walmart, for instance, is looking to double the number of their stores offering home delivery this year. CEO Doug McMillon tells us that “we’re meeting the changing needs of customers and delivering solutions that are increasing customer engagement.”

This is more like delivering solutions that are looking to keep customers from engaging elsewhere, notably through Amazon. Amazon has certainly changed what solutions a lot of customers seek, and one of them is not having to visit a store to buy what they want.

Kroger, the country’s largest supermarket chain, is also being transformed, spending tens of millions of dollars on automated warehouses that are optimized to serve online ordering. In their words, they are “transforming from grocer to growth company,” indicating how serious they see this need.

Enter Amazon’s physical store plans, and after this was announced on Friday, Kroger’s shares, who are the grocery business and therefore may be seen to be more at risk, dropped 4%. Walmart stock dipped by 1.1%, and Walgreens, who were planning on something similar to what Amazon is planning, lost 6%.

There is a lot of money that changes hands in physical stores, and while online shopping has really taken off lately, it still only represents about 5% of the $6 trillion a year food and consumer services industry. Amazon both wants to grow the 5% and tap into the other 95% more.

Amazon’s Plans for its Initial Wave of Stores

While Amazon’s long-term plan for its foray into physical stores involves opening up 2,000 new stores across the country in various formats, the plan is to start with small grocery stores in urban areas, smaller than a supermarket but larger than convenience stores and look to tap into that market in this fashion first.

At a predicted average of only 35,000 square feet per store, their presence will be pretty modest, and if the company behind them wasn’t Amazon, this probably wouldn’t warrant much concern at all from large retailers, who operate on a bigger scale. Companies who normally operate this size of store do not have anything approaching Amazon’s infrastructure, logistics, or know how though.

Infrastructure and logistics advantages are what built Walmart and every other very large retailer, and this is the main reason why smaller ones just can’t compete. Amazon at least brings the threat to negate this, which is what makes this project so interesting.

What is worrying grocers the most here with these smaller stores popping up isn’t the fact that Amazon will be selling groceries in these stores, it’s Amazon’s inclusion of health and personal care products in them. Grocers don’t sell a lot of health and personal care items, but the markup on them is much higher than with food, and having this revenue diluted is being seen as somewhat of a threat.

This is also an area that supermarkets simply will not be able to compete that well with Amazon with, and while groceries may be their strength, health and personal care items is Amazon’s strength, and they already sell $5 billion worth of these items a year.

We might want to think that even with Amazon behind it, this new venture is too small and the stores are also too small to be all that big of a concern to the retail giants that already rule this kingdom. While that may be true, this could be more about just Amazon testing the waters with this first wave. The real concern is about what may be coming next if this works, something on a much bigger scale, the kind that will and ought to be feared.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.