Six Reasons Why Amazon Brick and Mortar Is a Dumb Idea
Sometimes even the smartest and shrewdest management teams get really dumb ideas. The propensity to try to implement such dumb ideas seems to grow with the amount of cash a company has to play with: case in point, Amazon.com Inc.’s (NASDAQ: AMZN) experiments with brick and mortar stores.
There are many reasons why Amazon Brick and Mortar is a completely dumb idea, but a few of them stand out in my head. The major reasons why Amazon Brick and Mortar is a dumb idea are:
- Amazon is making lots of money without physical store fronts. It reported a TTM revenue of $88.99 billion on Dec. 31, 2014. That makes Amazon’s TTM revenue larger than most of the companies on the Stores/Kantar list of the top 10 retailers in America, including Target (NYSE: TGT) [TTM Revenue: $73.94 billion on Jan. 31, 2014], Home Depot (NYSE: HD) [TTM Revenue: $83.31 billion], and Walgreens Boots Alliance (NASDAQ: WBA) [TTM Revenue: $77.62 billion on Nov. 30, 2014].
- Amazon’s TTM revenue is growing fast while those of companies with brick and mortar stores are shrinking or stagnating. Amazon reported a quarterly TTM year to year TTM revenue growth rate of 14.62% on Dec. 31, 2014. In contrast, Best Buy (NYSE: BBY) reported a quarterly TTM year to year revenue growth rate of .57% on Oct. 31, 2014. Staples (NASDAQ: SPLS) reported a year to year TTM growth rate of -2.46% on the same day. Wal-Mart Stores Inc. (NYSE: WMT) reported a year to year TTM growth rate of 1.43% on Jan. 31, 2015.
- Foot traffic at physical stores is continuing to decline despite reports of a “good holiday season” at some of them. It made headlines last month when Walmart USA reported a 1.4% increase in foot traffic for the holiday season, according to Forbes. Target was excited by a 3.2% increase in foot traffic. Those numbers do not seem to make up for drops in shopper visits at other times of the year. ShopperTrak reported that shopper visits at stores fell by 5% between August 2013 and August 2014, The Wall Street Journal ShopperTrak’s numbers show that store visits fell by 7% in June 2014 and 5% in July. If 2015 is anything like 2014, the holiday season will not affect overall retail trends. Sorry, optimists, the customers are not back.
- The retail environment in the United States is so bad that chains could close over 4,000 locations by the end of 2015. Entire chains, including Alco, which operated 198 stores, and Radio Shack, which ran 1,784 outlets, are shutting down. Office Depot/Office Max alone plans to close over 400 locations. This is occurring because retail in the U.S. is overbuilt, retail analysts like About Money’s Barbara Farfan There are simply too many stores in the United States, and Amazon wants to open more.
- com is not Apple Inc. (NASDAQ AAPL) and should not try to be. Apple is basically a manufacturing and design company that designs, makes, and markets a select line of physical products. Amazon is an online marketplace that has a sideline making a few brand name electronics. It makes sense for Apple to have a few physical locations—the Apple Store—where consumers can see and touch its products. It makes no sense for Amazon.com to invest in infrastructure for a few of its products such as the Kindle or the Fire Phone that bring in a tiny portion of its revenues.
There are are cheaper and more practical ways for Amazon.com to provide the few brick and mortar retail services that might enhance its business. Having a physical counter where customers could return merchandise or pick up deliveries might be a good idea. That could be provided by shipping service providers like The UPS Store and FedEx Office. which have hundreds of existing locations.
It could also be provided through the customer service counters at grocers like Kroger (NYSE: KR) or Safeway/Albertsons or drug stores like Walgreen, which do not compete directly with Amazon. If Amazon wants customers to see the Kindle or the Fire phone in person, why not simply sell them through traditional retailers like Best Buy or the shops run by wireless providers like Verizon (NYSE: VZ). The bottom line is that there are lots of existing retail resources Amazon could take advantage of to provide these services without having to open its own stores.
Amazon should concentrate on what it does best—online retail—and leave brick and mortar alone. There simply is no room for an Amazon storefront on Main Street or at the mall.
