KINDLING A FIRE
Amazon picked books as its first product category because it felt books were a particularly good fit for eCommerce at that stage in the industry’s development. They were right—the low price point, large global demand, and advantage of a huge selection made Amazon’s book business a roaring success and within just a few years of starting, it was the largest book seller in the US.
Amazon leveraged its massive customer base to start moving into an even lower-cost book business starting in 2007 with the release of its Kindle e-reader. eBooks could be shipped literally instantly to users upon purchase at practically zero marginal cost to Amazon, and with no waiting time for the consumer.
Forbes estimates that by 2014, Amazon eBook sales (just the books) topped $500 million.
Though initially a high-growth category, eBook sales appear to have hit a plateau and by some estimates are declining.
What happened? Two leading theories:
- The reading experience for eBooks was never able to match that of print. Those who have had the misfortunate of, say purchasing a graphics-heavy book, such as a Lonely Planet travel guide, can certainly attest to this. Trying to decipher the tiny print on maps and diagrams when squinting at your smartphone or e-ink black and white reader is a nightmare.
- Others suspect “digital fatigue”. Fully 25% of book readers want to spend less time on electronic devices. Interestingly, the younger the reader, the stronger this effect is.
BOOKSTORES ARE BACK
In light of this decline, Amazon has returned to bricks-and-mortar. Having built a bookstore in Seattle with confirmed launches in Chicago, Boston, San Diego, and Portland, and likely hundreds more in the works, many are scratching their heads around what growth sees in the very model it’s been putting out of business for the last two decades. The answer is that although it looks the same, Amazon’ physical retail model differs in key ways:
- Leveraging purchase data — In the good old days, consumers could enter a bookstore, peruse the aisles and crack open whichever books they were interested in, talking with the store clerk and asking for recommendations on what would be good to read. Although this experience was initially difficult to replicate online, Amazon used user purchase histories to understand which pairs of books tended to be purchased together. This then led to a “you might also like” algorithm, in which the purchase of one book would lead Amazon to recommend books to you that others tended to purchase alongside the one you did. Amazon’s physical locations will leverage this same database, recommending other books and showing user reviews as you browse the aisles. So while having physical locations may suggest Amazon is taking a step back, Amazon may actually be creating lay-outs, cross-sells, and inventory combinations that actually generate sales efficiency far higher than what traditional bookstores have seen.
- Bookstores as billboards – Some hypothesize that as with other business lines, (such as Amazon’s Prime Video Streaming Service), the physical locations may simply serve as a showroom for books and items already available on Amazon’s website. Previously, this distinct “privilege” was enjoyed by Amazon’s brick-and-mortar competitors (think evaluating goods at Best Buy and then buying from Amazon online). However, as these competitors go out of business and become ever sparser, Amazon needs to build showrooms of its own—and now they can present and advertise items as prominently and advantageously as they want. Amazon products such as the kindle, echo, etc can now also be tried before being purchased.
- Logistics leverage – Each bookstore may serve as a pickup point / warehouse. Shipping to bookstores will be cheaper and faster. Returns, also historically an expensive hassle, would also be made easier.
What this means
Amazon isn’t the first digitally-native business to go bricks-and-mortar (see Bonobos), but their move is certainly most ironic I’ve seen. It serves as a testament to the fact that as powerful, streamlined, and convenient as the digital space has become re: shopping, there are significant portions of the consumer populace (of every age) that want to handle physical items, as well as significant aspects of the consumer experience (such as trying on clothes) that simply can’t yet be replicated digitally.
Digitally native businesses should learn from Amazon—building brick-and-mortar stores doesn’t mean you’re necessarily signing up for all the disadvantages old brick-and-mortar businesses suffered. Leveraging the data and logistics of a digitally native business model can make physical stores efficient and profitable in ways they haven’t been previously.