AMAZON IS BUILDING BRICK AND MORTAR BOOKSTORES. SERIOUSLY.

Brick-and-mortar bookstores are among the first casualties on the path that led Amazon from Jeff Bezos’ garage to the US$380b+ company it is today. Many have been convinced that the operating leverage Amazon enjoys have doomed traditional brick-and-mortar retail to extinction. Now Amazon is opening its own brick-and-mortar retail locations. What on Earth is happening, and what can we learn from it?

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.

A PLATEAU?

Though initially a high-growth category, eBook sales appear to have hit a plateau and by some estimates are declining.

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What happened?  Two leading theories:

  1. 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.
  2. 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.

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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:

  1. 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.
  2. 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.
  3. 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.

(772 words)

 

https://digital.hbs.edu/platform-digit/submission/barnes-noble-playing-the-digital-game-all-wrong/

http://fortune.com/2016/09/20/amazon-boston-bookstore/

https://www.google.com/finance?q=amzn&ei=4F4vWKn7GMermAG0oaiAAQ

http://www.fundinguniverse.com/company-histories/amazon-com-inc-history/

https://en.wikipedia.org/wiki/Amazon.com

http://dealbook.nytimes.com/2011/02/16/borders-files-for-bankruptcy/?_r=0

https://en.wikipedia.org/wiki/Amazon_Kindle

http://www.forbes.com/sites/greatspeculations/2014/04/02/estimating-kindle-e-book-sales-for-amazon/#16df2d2e5bfc

http://www.publishersweekly.com/pw/by-topic/digital/retailing/article/70696-as-e-book-sales-decline-digital-fatigue-grows.html

https://www.wired.com/2015/11/amazon-killed-the-bookstore-so-its-opening-a-bookstore/

http://fortune.com/2016/09/20/amazon-boston-bookstore/

http://www.businessinsider.com/amazon-jeff-bezos-facts-story-history-2014-5

http://www.computerworld.com/article/3030321/e-commerce/this-is-why-amazon-will-open-physical-bookstores.html

http://www.fool.com/investing/general/2015/11/10/did-amazoncom-just-save-barnes-noble.aspx?source=isesitlnk0000001&mrr=0.33

http://www.nytimes.com/2016/03/12/business/media/a-virtual-trip-through-amazons-physical-store.html

http://nerdist.com/amazon-are-expanding-their-plans-for-actual-physical-bookstores/

 

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29 thoughts on “AMAZON IS BUILDING BRICK AND MORTAR BOOKSTORES. SERIOUSLY.

  1. Really interesting, Spencer. Is Amazon planning on carrying inventory at these stores or, as you suggest with the Bonobos reference, potentially using these store fronts as an opportunity to peruse their online catalog in person? In addition, I wonder if Amazon will use these stores as a way to expand their Amazon Locker service. I have to admit, I am a little surprised by this strategy by Amazon. We have seen major book stores struggle substantially in the last few years so I have to think that Amazon has to have another angle other than opening inventory intensive book stores. It will be interesting to see how this plays out for them.

  2. Another fascinating thing Amazon is doing in its retail stores is not displaying prices on its merchandise. Shoppers need to use the Amazon app on their phone or use a scanner. Currently, Amazon Prime members get the same prices as are offered online while non-Prime members pay higher prices. (Source: http://www.geekwire.com/2016/amazon-gives-prime-members-better-prices-physical-bookstores-hinting-new-retail-strategy/). In the future, I wonder if they would offer different prices to help move inventory and cross-sell additional merchandise. Imagine a historical fiction novel of which a store ordered 200 copies isn’t selling well. As an avid historical fiction reader, Amazon might ping me with a special offer to buy the book for $2.50, a price point that might lead me to buy the book even if I wasn’t particularly interested. On the other hand, someone else who has spent a few minutes standing in front of the book’s position on the shelf (as ascertained through store positioning hardware) and appears to be especially interested in buying the particular book might get charged $10.00.

    An additional use I thought of for these stores would be doubling as mini-warehouses for Amazon’s Prime Now delivery service, which offers free delivery of select items in as little as two hours.

  3. Very interesting article, Spencer. Its interesting to see how some effects of the digital don’t fully stick (i.e. ebooks). In your post, you mentioned how Amazon online tried to replicate the bookstore experience by having an algorithm to predict other books you might also like. You didn’t mention this but I feel like a search algorithm is quite different from the full bookstore experience. I love to just peruse around bookstores, take in the ambiance, and read the back covers of books. I love the feeling of looking through new books for an hour. An online algorithm cannot imitate that. I think one reason Amazon may be doing this is to compete in both the physical book and bookstore experience spaces.

    I agree that bookstores might not be highly profitable right now, but part of that reason is after going to a bookstore I sometimes buy items that I saw at the bookstore on Amazon. As Spencer mentioned above the bookstore as a Billboard may be a compelling argument for having the physical store.

  4. Interesting example of a major company going “backwards” in an attempt to capture additional value from consumers. I like your suggestion that each bookstore could serve as a pickup point or warehouse, and similarly, Brian’s notion that the bookstores could also serve as mini-warehouses for other amazon delivery services. These ideas underscore the fact that there are many new ways to look at an old concept and integrate it with an existing business model to capitalize on opportunities that weren’t available previously. I’m sure Amazon’s bookstores will be far from old-school and will likely be full of surprises.

  5. Thanks Spencer. I did not appreciate the fact that the ebook market has hit a plateau but now that you’ve laid out the facts I do understand why this has happened. In my own personal experience I have shifted back and forth from reading on my kindle to reading hard copies and now only read on my kindle if the books is more than 1,000 pages. In addition to the reasons you laid out above, I believe other reasons include the enjoyment people feel from going into book stores and talking to bookshop employees as well as the enjoyment from looking through physical books before purchasing. I think these two reasons are why independent book stores will always exist similarly to why independent pharmacies or cafes continue to exist despite pressures from large consolidators. With this in mind I am not sure that Amazon’s book stores will succeed financially but as you point out regardless of their financial success they may still make sense for other reasons.

  6. Very thoughtful post Spencer. I an era where we all are focusing towards more digitization, it is important to understand that consumers may have preferences for physical products. Going through the post, I realized that digitization can be an add on to the existing business, but completely ignoring the touch and feel part of a physical product may not be viable for many industries including news papers, magazines, books etc.
    http://www.forbes.com/forbes/welcome/?toURL=http://www.forbes.com/sites/rogerdooley/2015/09/16/paper-vs-digital.
    This is a very interesting article which explains how paper can beat digital according to Forbes.

  7. Creating physical stores also reminds us of Amazon’s humble beginnings and its original focus on books. This is a great brand-building move for Amazon, which has been vilified for driving small retailers out of business, since it humanizes the brand for its consumers – and creates visible local jobs. I’m eager to see what the in-store experience feels like and how they might design the store differently from other booksellers to make the experience sticky (and create online sales later). In contrast to the online environment, getting customers to linger in stores may be easier than getting them to spend time on the Amazon website, leading to higher sales and greater customer satisfaction.

  8. Really interesting post on a digital company incorporating what they do best into a traditional business model. It will be interesting to see if these stores are profitable or really drive new sales and efficiency. It actually reminds me of Apple’s retail model, and I wonder if it is an opportunity for Amazon to improve or gain new insights on the consumer experience. It would also be interesting to see what portion of Amazon’s investments are going towards stores vs. video streaming vs. cloud services etc… They seem to be spreading themselves all over the place.

  9. Spencer, this was a fascinating read – had no idea that e-book sales have hit a plateau. I love your last line – “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”.

    While this is currently just a bookstore, you could make the argument that the idea holds even in other product categories (like clothes, for example, as you mentioned). I wouldn’t be surprised if Amazon decided to open a “smartstore” for a range of product categories to test the idea further.

    What might also be interesting is that if they realize that users like the experience of being in a physical setup, would VR serve the purpose? They then do not have to invest in physical infrastructure to create the customer experience they want. I’m imagining a world where you have a second world of High Streets and Malls – except all in virtual space.

  10. You’ve certainly opened up an interesting debate, my friend! See, I’m not sure this is the coming of a new trend, or Amazon’s admission that penetration of ebooks is maxed out. You do well in identifying two reasons why books are still sticky: the ‘book experience’, and the digital fatigue. Book experience is certainly sticky but is likely to become more and more niche with time. Both the browsing of a bookstore as well as the reading on paper is a romantic notion that will simply be overcome by convenience, relegating the book to an art form ala the vinyl records. Digital fatigue, though, feels more in the sphere of control of Amazon. They currently have the ambition of both owning the device and the media, which could be limiting their penetration in the short term. Consumers increasingly want lesser devices to do more. In the long term though, I still have hope that Amazon’s bets will pay off on the devices front if they can continue to offer greater value on the media side. Could they boost this at a cost – quite easily – imagine if you could be incentivised that every time you buy a hard book, you get the e-version for free. I think we’ll find that behaviour change will be pretty rapid.

  11. Thanks for the interesting post! It’s so ironic that Amazon changed its strategy to go offline while most people know them as one of the largest online retailer. Though people sometimes are pretty skeptical that how online stores can perform well in offline channels, it seems that Amazon has worked on the combination of online and offline to improve the overall operation and customer experiences. If available, I’m thinking that maybe Amazon can also launch an “in-store APP” to identify customers’ online accounts and push notification on shopping recommendations. For example, if you have bought 1984 online, then when you walked through the bookshelves with other George’s books on them, Amazon will send notifications to your mobile to encourage you to buy his other books. This combination might help Amazon to have a even better coverage of customers’ lives and shopping experiences.

  12. Thanks for posting this, Spencer. I remember reading about Amazon’s planned bookstores before the first opened up. My first instinct was, “that’s weird.” It seems that the physical bookstores that have survived Amazon’s dominance in the space are smaller, local bookshops. Once-massive chains such as Borders and Barnes and Noble have been wiped out or severely crippled. It will be interesting to see whether the Amazon Books store outposts are money-makers for Amazon, or if they are merely another tool for data-gathering and brand-building. Certainly the factor that will most help Amazon here over other retailers will be their inventory management and logistics.

  13. Thanks for sharing Spencer. I’d like to propose an alternate theory as to why e-book sales stagnated last year on both the Amazon and Apple platforms. The ebook trend has in a sense democratized the publisher market in the U.S, but initially the AAP, a co-op of established publishers set prices for all of their content on Amazon and Apple. Now, however, you are starting to see non-AAP publishers who are not beholden to this high set pricing start to increase as a percentage of ebook sales and Big 5 publishing decline as a percentage. In my opinion, overall we’ll see e-book sales continue to overtake print in a big way as traditional publishing houses are dis-intermediated, and Amazon should be cautious about making too much of an investment on brick and mortar locations.

  14. As a huge fan of printed books this is very exciting. I wonder what Amazon will do as the footprint of the stores grows, some flagship stores will have mainstream content, but as they grow the opportunities are endless. One of their best assets is their data on customer behavior. How will they be able to tailor the store experience using that data? It would be groundbreaking if somehow Amazon could translate customer knowledge into store transformation, and if they are able to do so with books, what is to stop them there? The likes of Walmart and Target should be attentive as their biggest online threat becomes a brick and mortar nightmare.

  15. Interesting post Spencer. I had not realized that e book usage had actually plateaued. The reasons you listed definitely influence the rate at which the younger generations read books. Do you think that if they e book usage AMZN would have continued to focus on the e books/online books instead of going into brick and mortar? How do you think they decided it was time to enter the brick and mortar space?

    I am trying to think of other lessons that could be applicable as e commerce only retailers switch to a brick and mortar presence? For example, when should Harry’s razors open up a brick and mortar store instead of focusing on e commerce? Also, what is the inventory policy of the brick and mortar store? If I go to a bonobos store they do not carry inventory and ship it to my house after I purchase it. I think this gives stores an advantage over traditional brick and mortar but only works because they have conditioned the consumer to expect purchases from that store to take a few days.

  16. Great post, and, like many of the commenters above, I am skeptical about the long-term profitability of brick and mortar bookstores for Amazon. I do think that it is an interesting strategy from a marketing standpoint, and I liked your reference to “bookstores as billboards” which I think might be the real value-add for Amazon in this space. If the company uses bookstores as a means to push more consumers into the kindle funnel, then it may make sense for the physical stores to operate as a loss. The idea of “digital fatigue” is also interesting, and I wonder if it does indicate a revitalization of the physical bookstore in future years.

  17. Fascinating post! The usage of data here and integration of digital and physical is really intriguing. This reminds me of an argument that I’ve read against mobile (and the smart phone or tablet) as the future. In short, the mobile phone is pretty limited and while it’s proven the most versatile and economic way to usher in the digital age and reach a mass audience, it’s shortcomings may be why it’s replaced. The argument is similar to this one. Consumers are multi-sensory and want a multi-sensory experience which digital devices don’t deliver on well (in addition to being tiny print and often hard to read). The more likely future could be a world that looked very much the same prior to mobile’s proliferation, except all of our “things” are intelligent and divide/conquer what mobile does today to connect us to data and other people.

    On that note, I need to find one of these stores…

  18. This is a great post. Amazon is not the first digital-first company to venture into brick and mortar. Warby Parker and Bonobos are both retailers that started with online only distribution. I believe they realized that the brick and mortar shopping experience was actually not dead and there were benefits from having a physical presence. There is a big advantage for digital-first companies to have their own physical stores instead of establishing a physical presence through a department store or another big-box retailer. The companies are able to still maintain their culture. It actually is an opportunity for these companies to better demonstrate their customer promise.

    I think Amazon will be able to do a brick and mortar store better than anyone else because their data is so strong. They can glean customer preferences and understand exactly what books will be in demand. Additionally, Amazon’s distribution network is so strong they can probably find ways to pass on inventory related savings to customers who visit the stores.

  19. Thanks, Spencer. Super interesting post that shows a reverse in the digital trend that most other posts describe. Thank you for sharing. It’s interesting to think about how both young and old readers can make the case for print rather than electronic books. For the older customer who grew up with print books, it is easy to see how they would prefer them. Plus, as you mention, sometimes it is hard to view graphics, and someone with declining eyesight would have difficulty. I hadn’t thought about the reasoning for the younger consumer, especially since these are the people that I know of who use e-Readers. The point that more young people are trying to spend less time on electronics is one that I hadn’t thought of nor really witnessed, but as a book lover I’m glad to hear it!

  20. Great post! I really enjoyed learning about Amazon pulling a 180 on digitization and going towards building brick and mortar stores – the ones it built its business on disrupting. I am not entirely surprised that e-book sales are flattening out given the push to spend time away from screens, but I would be curious to see the data for physical book sales and how it compares. Are these sales increasing as e-book readers switch to printed versions, or are all book sales declining as we have access to more and more information online without even purchasing the book on a subject.

  21. Very interesting phenomenon. Many studies (see one: http://www.bain.com/publications/articles/three-rules-for-building-the-modern-retail-organization.aspx) have found that customers that buy across channels (online and offline) spend up to 5x more than customers that shop in one channel only. Retailers, Amazon included, are therefore aiming to strike a balance between channels to maximize the dollar spend. That said, I believe that online-first retailers (companies that started with an online-only business model) have a competitive advantage in creating a seamless omni-channel experience, particularly thanks to their head start in controlling and managing customer data, and integrating the information across channels

  22. Very interesting post Spencer, as evinced by the huge amount of comments! I thought it was really interesting how these stores could be used as logistics hubs. For example, many people living in city walk-ups struggle with how to get packages delivered. Nobody wants valuable packages lying around outside and people are rarely home to when the UPS or Fedex delivery-person arrives. Having packages delivered to your local Amazon bricks-and-mortar location might be a neat solution this problem.

  23. What an interesting post Spencer; I had no idea Amazon was looking into brick and mortar! The notion that they can leverage the data they gathered from online book sales to make a more efficient store is very intriguing. I think there are also opportunities to improve their website through insights they gain from running brick and mortar stores. I see these storefronts as massive user experience studies. With eBook sales stagnating, they can learn more about the types of books people are looking for in store and why they want physical books. Amazon can use these reasons to then improve the existing Kindles or even create new product offerings. I’m excited to see what happens with these stores!!

  24. Thanks for this post Spencer, very interesting! This makes me very excited, as I prefer printed books to e-books. I believe we will see more digital companies adopt this trend, and build brick and mortar stores. The tough part of this strategy surrounds deciding store location. Outside of best-sellers, I imagine consumer book interest is different across regions. After you construct stores in NYC, Chicago, DC, and other major markets where do you build?

  25. Spencer, thanks for the interesting post.

    I am fascinated by the idea of “Digital Fatigue” driving Amazon to do this. The chart you presented where the desire to move away from e-reading is strongest with the youngest age group makes alot of sense to me and I am interested to see where else we might see this play out. It reminds me of an article I recently read about a study that showed that staying off facebook was a secret to happiness (http://blogs.discovermagazine.com/neuroskeptic/2016/11/16/quitting-facebook/#.WDJlNNUrKM8). The idea that some of these technological advances that have changed our lives in such fundamental ways may not be the be-all and end-all answer to a better life is interesting. In a world where we are increasingly connected, plugged into the world around us and turned on 24/7, some of us are craving physical stores and paper books and Amazon is hearing that call.

  26. Super interesting Spencer! I love the idea of combining the data you tracked online on the customers to make him the most appropriate recommendation in the store. This omni-channel strategy trend is a good learning for e-commerce players who have started to realize how important it is to combine both offline and online shops to maximize the customer experience and satisfaction.
    Another dimension of the success of those stores is that it becomes a really powerful marketing tool for the e-commerce company as it sparkles interest of the customers and the press.
    On a side note, the company I worked for also launched a first “click-and-mortar” shop last year in Singapore (http://www.marketing-interactive.com/events/click-mortar-real-answer-retail-industrys-woes/). Our goal was a little bit different because of the South-East Asian context: to educate non digital-savvy customers on how to purchase online once they tried the clothes in the shop. The store was a great success and brought up to 15% new customers to the online store every month!

  27. Spencer, cool post! As Zirngibl said, it’s evidenced by the number of comments. Amazon going to bricks-and-mortars demonstrates one important concept: omnichannel retailing. In other words, providing goods and services wherever the customer is. There are two reasons why physical stores will always have a place in the world: goods will always have a physical presence, and customers will appreciate touching and feeling a product; physical stores provide convenience, which some customers will always demand.

  28. Thanks for sharing this Spencer. Having worked in the consumer products and retail space the past five years, I have spent a lot of time studying various e-commerce-native platforms who have migrated to adding brick-and-mortar stores or showrooms to their distribution strategy (e.g. Bonobos, Warby Parker, etc.). Therefore, I was especially not surprised to hear Amazon doing the same. Although traditional brick-and-mortar bookstores like Borders and Barnes and Noble have been devastated by the digital revolution, I believe that there will always be a place for bookstores on a smaller scale. I think it will be key for Amazon to leverage these stores to engage consumers across all of its distribution platforms.

  29. What a surprising move by Amazon! It excites me because I am one of those consumers who has resisted the e-book trend. There is just something about the physical book in hand that I can’t let go of. I’m very curious to see how Amazon will leverage their vast set of data on consumer preferences and behavior to design the in-store experience and bring differential value to consumer. It’s Amazon, I’m sure they will figure it out! Can’t wait to visit one of these stores.

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