E-commerce giant needs showrooms for its growing line of private labels—and other retailers are unlikely to help.
Amazon.com’s plan to open its own department stores might not be as crazy as it sounds.
Much depends on the details. The Wall Street Journal reported Wednesday that the e-commerce titan plans to open several large physical retail locations that will carry clothing, household items, electronics and other products.
The stores will be smaller than typical department stores at around 30,000 square feet, but much larger than the company’s previous attempts at its own retail outlets. Its Go convenience stores typically have ranged between 450 square feet and 2,300 square feet, though a grocery store the company opened last year in Seattle was just over the 10,000 square foot mark.
Other Amazon stores specializing in books and kitchen gadgets have averaged around 4,000 square feet. Still, physical stores make up just 4% of Amazon’s annual revenue, mostly from its ownership of the Whole Foods grocery chain.
The company might understandably shy away from the department store label, which hasn’t been a popular format lately. Competition not only with Amazon but other so-called big-box retailers has hit the sector hard, and closures from the pandemic certainly didn’t help. The four largest U.S. department store operators by annual sales—Kohl's, Nordstrom, Dillard's Capital Trust I and Macy's—have seen their revenue fall by an average of 6% annually over the last five years, according to data from S&P Global Market Intelligence. Amazon has averaged annual revenue growth of 29% in that time.
But as Amazon grows its own roster of private label and exclusive third-party products, the company finds itself in more direct competition with brands long familiar to shoppers and easily found on store shelves. That is especially the case with Amazon’s expansion into apparel; a study by market research firm Gartner in 2019 found that fashion made up 48% of its 433 private label and exclusive brands found on Amazon.
A physical presence for such products can help raise visibility and improve sales, both on and offline. Amazon discovered this with its Kindle e-readers, introduced in late 2007. The product proved popular enough to spark an array of competitors that could easily be found and tried in stores. Amazon then struck a dealwithTargetin 2010 to carry the device, marking the first time the Kindle could be purchased in an actual store. A similar deal withWalmartsoon followed.
But the fate of those arrangements also showed why Amazon would eventually have to find its own ways to get its products in front of shoppers. Walmart and Target stopped selling Kindles in 2012, reportedly out of unhappiness with serving as a showroom for a powerful online rival often undercutting them on prices.
Setting up its own showrooms won’t be cheap, but private-label products generally carry superior profit margins for retailers that could prove an important offset. The irony of Amazon’s dominance of online shopping is that it also seems to have sparked the need for some good old fashion foot traffic.