E-commerce giant Amazon is increasingly venturing into Brick and mortar retail. The company has signaled its interest in brick and mortar previously, notably with its limited rollout of Amazon bookstores and grocery retailer Amazon Go. But in its latest move, the company has upped the ante in terms of its interest in brick and mortar, acquiring Whole Foods Market earlier this month, the 30th largest retailer in the United States.
What explains Amazon’s interest in physical retail stores? Well, it only makes sense that Amazon would eventually diversify beyond e-commerce. In spite of rumors that the rise of e-commerce will put traditional brick and Mortar Stores out of business, with the exception of Amazon, the top ten US retailers are all old-fashioned, brick and mortar stores. That would suggest that in order to be at the top of its game, a retailer can’t afford to be only online.
Part of this boils down to economics. Research consistently shows that brick and mortar stores are more profitable than online stores. In fact, analysis of sales trends at 20 publically traded retailers found that while online sales grew by 5 percentage points between 2012 and 2016, profit margins actually steadily declined. E-commerce is simply less lucrative than brick and mortar stores as a result of shipping and handling and the costs associated with much higher return rates. In many cases, it would seem that retailers’ brick and mortar stores are actually subsidizing their online businesses.
Moreover, research shows that consumers – particularly millennials – actually have a preference for brick and mortar stores over online shopping. A full 70 percent of millennials would rather shop at an actual physical store than shop online. Considering that millennials have now displaced baby boomers as the biggest purchasing group, it behooves retailers to make efforts to get into their good graces.
Of course, in this context, it only makes sense that Amazon would set its sights on becoming more of a major player in the world of brick and mortar retail. So, what can we expect next from the retail giant? It seems likely that we will continue to see the company investing in physical retail stores, cultivating its presence and visibility as a major physical retailer in addition to an online giant.
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