The rise in retail inventories in midweek on August 19, after two large department store chains announced that exceptional results saw a brief decline after the the Wall Street newspaper revealed Amazon‘s (NASDAQ: AMZN) disclosed plans to open department store-style brick-and-mortar stores in several US cities. The store openings, which may foreshadow Amazon’s much broader entry into physical retailing, couldn’t keep the stock market’s bubbly vibe for long, but they do raise some questions.
If Amazon tries to position itself in retail, will it be successful and will it end up putting other traditional retailers out of business? A closer look at the situation suggests that there is nothing to sweat, at least for the time being.
What we know so far about Amazon’s plans
After supplanting and shutting down many previously successful department store chains such as Sears with its e-commerce model, ushering in the era of the âretail apocalypse,â Amazon is now planning its own retail outlets. Sources told the the Wall Street newspaper that California and Ohio are targeted for some of the top stores. Apparently, stores will be stocked with private label products from Amazon.
At 30,000 square feet each, according to insiders, stores will be one-third the size of typical department stores. They will, however, be much larger than Amazon’s existing Whole Foods stores. They are said to be organized on the same model as the department stores. However, stores are also likely to be tightly integrated with Amazon’s delivery, returns, and e-commerce services.
The plan may have been in incubation since long before the COVID-19 pandemic, raising the possibility that it was suspended by the 2020 retail closings. In May 2019, the the Wall Street newspaper posted a YouTube video recounting how Amazon bought several older malls in Ohio, including the Randall Park Mall in North Randall and the Euclid Square Mall in Euclid.
However, these commercial spaces are significantly larger than the rumored 30,000 square foot facility mentioned now, with Euclid Square encompassing 642,528 square feet and Randall Park at 2.2 million square feet, making it better candidates for distribution centers. However, these facts show that Amazon has had an interest in purchasing closed retail space in Ohio for at least several years.
Some outlets such as The Verge have said that Amazon first bankrupted department stores and malls with its successful e-commerce model, and now appears to be trying to replace them in physical retail. .
What this means for retail competitors
The stock market reacted briefly but strongly to news of Amazon’s new foray into brick and mortar, even offering today’s retail winners Macy’s (NYSE: M) and Kohl’s (NYSE: KSS) into negative territory, although the two quickly became explosive again. Dozens of other retail stocks also plunged simultaneously on the news. Investors clearly believe that Amazon going into physical retail is a potentially big factor, not just for the e-commerce titan, but for a whole slew of its potential competitors.
Past experience, however, suggests that there may not be too much cause for concern in the short to medium term. Amazon bought Whole Foods Markets for $ 13.7 billion in 2017, but the grocer remains relatively weak compared to other parts of the business and has failed to dominate the traditional grocery arena. . Of Amazon’s $ 115.1 billion in revenue in Q2 2021, only about $ 4.2 billion, or 3.65%, came from its brick-and-mortar stores, which are mostly made up of around 500 Whole Foods stores. .
In the past six quarters, four reports have shown negative growth for physical stores. Even with positive growth, the range is only 8% to 10%, compared to 13% to 49% growth for Amazon online stores or the 31% to 60% growth in revenue from Amazon services. third-party sellers.
Physical retail is clearly Amazon’s weakest point, despite the e-commerce giant’s multiple attempts to break into this market. With the company’s relative lack of success in space and the small size of the stores compared to other department stores limiting the selection of products likely to be displayed in a future “Amazon department store”, it is difficult to see. the idea as a serious threat either to department stores like Macy’s and Kohl’s, or to more specialized retailers like Nordstrom (NYSE: JWN) Where Ross Stores (NASDAQ: ROST). Stores also don’t seem likely to significantly improve Amazon’s delivery or return services, given the speed and efficiency of those services.
Brewing a storm in a cup of tea?
At this point, the idea of ââanother set of physical Amazon stores seems unlikely to have a major impact on the other retailers who have managed to survive the retail apocalypse so far. It’s probably slightly accretive at best for Amazon itself, given the dominance and efficiency of its ecommerce operations.
Until and unless the new “department stores” turn out to be something new and revolutionary, investors interested in retail stocks may want to view this latest experiment as neutral for both Amazon and the various big box stores, department stores and clothing. This is true even if the stock market is temporarily reacting (or perhaps overreacting) to new information on the subject.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.