Amazon Enters the Real World of Retail

by Matt Klassen on October 22, 2014

Despite its ability to dominate a multitude of markets, e-commerce giant Amazon is entering a space it knows little about: the real world. The company announced it has launched a pilot project centered on establishing brick and mortar retail locations, establishing a physical store located in New York and smaller satellite retail hubs in San Francisco and Sacramento in time for the holiday season.

Amazon’s emergence from the realm of digital commerce is motivated by the two greatest shortcomings the e-commerce giant faces when competing against physical retail outlets: the ability to have a hands-on experience with the product before purchasing and the delay of actually receiving the product purchased. By establishing retail hubs that serve both as shopping locations and distribution centres, Amazon is hoping to get products into customers’ hands more quickly, particularly when it comes to technology.

Beyond that, however, establishing a physical brick and mortar retail location will give Amazon something it’s never had: a physical presence. For many Amazon is nothing more than a website and a name on a box that comes to the door, a faceless digital corporation that is distant and impersonal. There’s no question that by creating retail space Amazon can give itself a human face, but one has to wonder if the cost of creating such an emotional connection is too great, robbing Amazon of the things that has made it successful so far: unrivalled selection at unbeatable prices.

Although establishing retail locations presents Amazon with a new series of growth and marketing opportunities, entrance into the physical world is not without its serious drawbacks as well. The one defining feature of Amazon, the one thing that has always set the company apart from its competition, is its unrivalled selection. As Forbes contributor Denise Lee Yo explains,”It’s relatively easy deliver on the brand tagline, Earth’s Biggest Selection, when you’re running hundreds of thousands of vendor contracts out of huge distribution centers. However, its brick-and-mortar stores will have to carry a streamlined selection.”

The fact of the matter is that any Amazon retail location will have to significantly reduce its inventory, offering a small focused selection of items (like technology and other hot sellers). The problem with this, of course, is that if customers want something not available in store, well they’ll be forced to order it from the retail centre anyways, something they could have done much easier from the comfort of their own homes.

Further, by delving into the realm of the physical Amazon is jeopardizing the one factor that has allowed it to undercut almost every market it operates in, it’s low overhead. By operating through vendors and large distribution centres and selling exclusively online Amazon has relatively small operational costs, allowing the company to offer significant savings on the products it offers. By establishing retail locations, however, that low overhead might quickly disappear, as now suddenly the company has to pay for the real estate, for staffing, for inventory, and everything else that accompanies presence in the real world.

As Lee Yo explains, “To offset the constraints on pricing, Amazon can try to reframe the value equation by offering value-added services and creating an extraordinary shopping experience.”

But what remains unclear in all of this is if Amazon really has the ability to do what it takes to be successful in the physical world, to detour from its tried and tested method of undercutting prices through low e-commerce overhead and establish a competitive retail brand that still offers the company’s branded value and selection.

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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