The mid-week, Aug. 19 retail stock surge after two big department store chains reported outstanding results took a brief dip after the Wall Street Journal revealed Amazon‘s (NASDAQ:AMZN) leaked plans to open department store-style brick-and-mortar locations in several U.S. cities. The store openings, which may foreshadow a much wider entry of Amazon into physical retail, couldn’t keep the stock market’s bubbly mood down for long, but they do raise some questions.
If Amazon does try to position itself in retail, will it succeed, and will this end up putting other brick-and-mortar retailers out of business? A closer look at the situation suggests there’s nothing to sweat over, at least right now.
What we know so far about Amazon’s plans
After outcompeting and shuttering many of the previously thriving department store chains such as Sears with its e-commerce model, ushering in the age of the “retail apocalypse,” Amazon is now planning its own brick-and-mortar retail outlets. Sources told the Wall Street Journal that California and Ohio are targeted for some of the first stores. Apparently, the stores will be stocked with Amazon’s own private-label merchandise.
At 30,000 square feet apiece, according to the insiders, the stores will be a third the size of typical department stores. They will be much larger than Amazon’s existing Whole Foods stores, though. They are said to be organized along the same lines as department stores. However, the stores will presumably also be integrated closely with Amazon’s delivery, return, and other e-commerce services.
The plan may have been incubating since well before the COVID-19 pandemic, raising the possibility it was put on hold by the retail closures of 2020. In May 2019, the Wall Street Journal published a YouTube video reporting how Amazon bought several former shopping malls in Ohio, including the Randall Park Mall in North Randall and the Euclid Square Mall in Euclid.
However, these mall spaces are significantly larger than the rumored 30,000-square-foot facilities mentioned now, with Euclid Square encompassing 642,528 square feet, and Randall Park featuring a 2.2 million-square-foot area, making them better candidates for fulfillment centers. However, these facts show Amazon has had an interest in buying shuttered Ohio retail spaces for several years at least.
Some outlets such as The Verge have commented that Amazon first put department stores and malls out of business 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 the news of Amazon’s fresh foray into brick and mortar, bidding even the day’s retail winners Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) down into negative territory, though both soon went explosively positive again. Dozens of other retail stocks also dipped simultaneously on the news. Investors clearly think Amazon going into physical retail is a potentially important factor, not only for the e-commerce titan but for a whole swath of its possible competitors.
Previous experience, however, suggests there may not be too much to worry about in the short to medium term. Amazon bought out Whole Foods Markets for $13.7 billion in 2017, but the grocery retailer remains relatively weak compared to other sectors of the business and has not come to dominate the brick-and-mortar grocery arena. Out of Amazon’s $115.1 billion in second-quarter 2021 revenue, only about $4.2 billion, or 3.65%, came from its physical stores, which mostly consist of approximately 500 Whole Foods locations.
During the past six quarters, four reports have shown negative growth for physical stores. Even when positive growth occurs, the range is only 8% to 10%, versus the 13% to 49% growth for Amazon’s online stores or the 31% to 60% growth in third-party seller services revenue.
Physical retail is clearly Amazon’s weakest point, despite multiple attempts by the e-commerce giant to break into this market. With the company’s relative lack of success in the space and the small size of the stores relative to other department stores limiting the selection of products likely to be on display at any future “Amazon department store,” it’s difficult to see the idea as a serious threat to either department stores like Macy’s and Kohl’s, or more specialized retailers such as Nordstrom (NYSE:JWN) or Ross Stores (NASDAQ:ROST). Nor do the stores seem likely to improve Amazon’s delivery or return services significantly, given how quick and efficient those services already are.
Brewing a storm in a teacup?
At this point, the idea of another set of Amazon physical stores looks unlikely to majorly affect other retailers that have managed to survive the retail apocalypse so far. It is probably mildly accretive at best for Amazon itself, given the dominance and effectiveness of its e-commerce operations.
Until and unless the new “department stores” prove to be something unexpectedly new and game-changing, investors interested in retail stocks may want to view this latest experiment as neutral for both Amazon and the various big box, department, and clothing stores. This is true even if the stock market temporarily reacts (or perhaps overreacts) to new information about the matter.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.