Amazon plans hundreds of brick and mortar stores

by on February 2, 2016 at 5:38 pm in Books, Current Affairs, Economics | Permalink

The Seattle company plans as many as 400 bookstores, Sandeep Mathrani, chief executive of large mall operator General Growth Properties Inc., said on an earnings call with analysts Tuesday.

“You’ve got Amazon opening brick-and-mortar bookstores and their goal is to open, as I understand, 300 to 400,” said Mr. Mathrani in response to a question about mall traffic.

That compares to the 640 stores Barnes & Noble Inc. operates and the 255 locations Books-A-Million Inc. said it had as of last summer.

The WSJ story is here, here are others.  What is the underlying business plan?  To make these iconic locations like Apple stores?  To treat all future business, in all sectors, as depending on the focality of the company behind it?  To start with books, move on to other items, and eventually steal middle-class and upper-middle class consumers away from Walmart?  Somehow use these stores to lock people in Amazon Prime?  Do you have other hypotheses?  Is this overconfident folly, or is it the “for good” return of brick and mortar bookstores to our lives?

1 Gary Othic February 2, 2016 at 5:45 pm

It might be that e-book sales haven’t taken off the way they thought they were going to (sales of them have been dropping). This could be a good way of catching people out on impulse buys; stepping into the shop and having a browse etc. Especially if they’re going to offer the same discounts that you’d get online. Other than that it probably just helps keep the brand name out there.

2 Slocum February 2, 2016 at 6:23 pm

E-book sales have fallen in response to publishers pushing the prices up close to hardcover levels. I prefer ebooks, and used to buy $10 Kindle versions over used, but when the alternatives are an $8 used book and a $15 ebook, I’ll buy the dead-tree copy and figure out how to stuff one more in the shelves. At least in my case, the publishers have shot themselves in the foot.

3 Stephan February 2, 2016 at 6:45 pm

Another issue with Kindle e-books is that the graphics are not good. I bought an e-book on climate change; it’s full of graphs and they’re very hard to read. Same with Math and Physics text books, the equations are quite hard to read. As a result I avoid e-books except for novels.

4 bob February 3, 2016 at 11:39 am

It’s ridiculous how bad most e-reader software is.

5 Urstoff February 3, 2016 at 2:03 pm

Non-fiction on an e-reader is terrible, but there’s no other way I’d want to read fiction.

6 Gary Othic February 3, 2016 at 9:44 am

I think page numbers might be part of the problem as well – it’s a problem that’s not been all that well solved and can be irritating (to me at any rate).

7 willy February 3, 2016 at 4:22 pm

irritating to me as well. but an easy fix, put the ‘real’ pg # in parenthesis beside the e-page #. I agree w/ bob, one of many inexcusable shortcomings

8 Mark Thorson February 2, 2016 at 8:30 pm

It would make sense to offer a lounge with computers so I could browse and buy stuff on Amazon with a throwaway account or no account at all, so I could buy porn, medicine for an embarassing disease, a copy of How To Murder Your Wife, etc. without it being connected to any of my regular accounts. Even better if I can pay at the front desk in cash and have the goods shipped to the store and held for me to pick up.

I always thought my former stockbroker (Scottrade) should have done something like this. They’ve got offices at two locations within a few minutes drive of my house. About five years ago, they changed their software so it wouldn’t work at all with the Apple iBook I bought specifically to have more secure communication with their website. They claimed that the software change was to make their website more secure, and they recommended a workaround that would let this computer work with it. But their workaround was to run an x86 instruction set emulator and install a different browser. I bought this computer because it does not run the x86 instruction set, so it was secure against buffer overflow attacks — they were asking me to create a backdoor to enable these attack. Idiots. No thanks. I pulled all of the money out of that account and haven’t done any business with them since.

If Amazon had lounges with secure computers for communicating only with Amazon, and they were also a stockbrokerage, that would be a great idea. Throw in a Starbucks-like coffee shop, and they could scoop up a lot of retail business that’s not being served now.

Great book. Lots of good advice. Wish I’d seen it sooner. — Scott Peterson

9 Dan Weber February 2, 2016 at 8:32 pm

I bought this computer because it does not run the x86 instruction set, so it was secure against buffer overflow attacks

Ah, I love the smell of clients in the morning!

10 Dzhaughn February 2, 2016 at 11:30 pm

Deliciously naive!

11 Joel Oser February 3, 2016 at 3:46 pm

Even better if I can pay at the front desk in cash and have the goods shipped to the store and held for me to pick up.

Presumably you would need to show id to claim the items.

12 willy February 3, 2016 at 4:24 pm

why not just a receipt?

13 Regular guy February 2, 2016 at 5:49 pm

Distribution hubs with a secondary revenue generating use?

14 Greg February 2, 2016 at 6:41 pm

This was my first thought as well. Seems to have some similarity to the post below about Content Delivery Networks using old fashion logistics to distribute content.

15 Bill February 2, 2016 at 6:51 pm

Yes, and probably later establishing franchise operations for pick up (and return services) for other items.

Just wait for the 3D scan of your body and custom made clothing to arrive at the store. Your scan will be linked to your Prime Card.

16 JWatts February 2, 2016 at 6:56 pm

“Distribution hubs with a secondary revenue generating use? ”

That seems unlikely. For a distribution hub, you need a large building and lot to handle large tractor and trailers. That leaves you with something like a Walmart, not something like a Barnes and Noble.

17 Observer February 3, 2016 at 11:03 am

Party in the front, business in the back.

18 Ryan February 2, 2016 at 9:28 pm

It seems weird that bookstores could function as distribution hubs as well (as opposed to pickup centers), since high foot-traffic retail space is also probably much more expensive to rent per square foot than the relatively peripheral warehouse space that works for a distribution center. The pickup idea could be interesting, but I’d expect that Amazon would want to be as dispersed as possible for that use case.

I live in Seattle, where Amazon operates both its one existing bookstore and a bunch of lockers for package pickups. The lockers are generally stuffed in the back of convenience stores, and the bookstore is in a prime location in an upscale shopping mall.

19 Brian Timoney February 2, 2016 at 5:49 pm

Premium locations not too far from cheaper shipping/logistics not-quite-warehouses for quicker fulfillment.

Personally would like to see retail outposts in airports: knock out a lot of errands while waiting for a flight. Plus helpful assistants can help Prime customers configure their in-flight entertainment.

BT

20 Brian R February 2, 2016 at 5:51 pm

Hypothesis:

Perhaps Brick & Mortar stores were “worth it” for Amazon all along, but Amazon chose in the past not to build them because would subject them to sales tax in whichever state they had a physical presence in. Now that the sales tax loophole has mostly been closed on Amazon, they are no longer disincentivized to build the physical stores.

21 rich reynolds February 2, 2016 at 5:52 pm

i’ve discovered this crazy thing called the public library in my city… i wonder if amazon has just heard of it too… so far it’s cost them a few hundred dollars in book and dvd sales…

22 Slocum February 2, 2016 at 6:26 pm

Do you take into account the time and cost of schlepping books back and forth to the library? When I do the math, buying from Amazon generally comes out well ahead (and they always have just what I want without having to wait and I get to keep it).

23 K Booth February 2, 2016 at 7:22 pm

I read over 100 books last year, the vast majority from the Library. I believe I spent less than $100 on books from Amazon that weren’t available either in print at the library or through digital library loans sent to my Kindle.

Reading at the library saved me more than $1,000 over purchasing the books on Amazon.

24 Cliff February 2, 2016 at 8:18 pm

Yes but you probably spent a minimum of 100 hours and 1,000 gallons of gas traveling back and forth to the library.

25 Eric February 2, 2016 at 10:10 pm

My local library is right in my bike ride home from work, and I can have any book in the metro area delivered there for free. It’s great.

26 Peter Akuleyev February 3, 2016 at 2:41 am

I don’t know where you live Cliif, but in most decent towns in the Northeastern US public libraries are pretty central and convenient. In Boston even easily accessible by public transportation.

27 Hazel Meade February 3, 2016 at 11:39 am

The downside of the public liberary is, as Slocum notes, that they don’t always have what you want. Especially if what you want is something popular like Harry Potter books. Those are checked out with a waiting list that is months long.
If what you want is obscure, they probably won’t have that either.

28 Cliff February 3, 2016 at 4:08 pm

Good luck carrying your stack of books on your head on the subway ride or trying to pedal with no hands while you clutch your bucks in your little T-rex arms. You’ll probably have a heart attack from riding around falling off your bike spilling books everywhere, wasting your time. I’ll let Amazon bring me my books to my house, thank you.

29 Excursive February 2, 2016 at 5:57 pm

Ugh. Now they’ll have to charge sales tax for online purchases in my state.

30 Brian February 2, 2016 at 10:26 pm

That’s a plus; when they started collecting sales taxes in my state, it saved me the considerable hassle of trying to compute my use tax liability every April.

31 Darren February 2, 2016 at 10:40 pm

Yes, you and that one other guy who did that too..

32 Jane Gray February 2, 2016 at 6:07 pm

Sales of ebooks have NOT been dropping. Sales of ebooks from major publishers have been dropping, and shrinking as a percentage of ebooks sold (largely because of their $9.99 price floor)

33 JWatts February 2, 2016 at 6:59 pm

An E-book price floor higher than the cost of the same paperback is a mistake. It would make sense to charge more fore E-books the first year before the paperback is out, but the price ought to drop to no higher than the paperback price after that exclusion period.

34 ChrisA February 3, 2016 at 2:19 am

People who buy e-books rather than paperbacks are instant gratification types. Usually these people are charged more (see gas station prices). Prices are never charged on the basis of the cost of the product but instead on the willingness of the customer to pay. Publishers have figured out that lower volume-higher cost is the way to go for ebooks. Of course this is probably a short term model – almost every popular ebook is now available for free very quickly. And this kind of price optimization is the sort of thing that makes people easily rationalize their use of these alternative sources.

I think they should look for an alternative model myself – perhaps an access fee where you get access to as many ebooks as you want for a fixed amount. They would lose revenue from super-buyers (like Tyler I suspect) who buy multiple books per month but perhaps make it up on the January Gym types, who would sign up full of good intentions. Plus these things would be great birthday presents for aunts etc.

As to why physical stores for Amazon – my guess is it is a form of advertising similar to the way banks have fancy buildings. Amazon has an almost unique level of trust among Internet Sellers already, and this would just lengthen their lead in that category. Which means even grandmas feels ok buying a coat on Amazon where she would never do that with Coats-R-Us.com.

35 JohnBinNH February 3, 2016 at 10:38 am

You’ve just described ‘Kindle Unlimited’: you can borrow up to ten books at a time and pay a monthly fee. It only covers some books but there are vast amounts of SciFi/Fantasy/Horror/Mystery books available on it so it’s been a win for me.

36 ibaien February 2, 2016 at 6:11 pm

people like the ‘feeling’ of shopping as a social activity but want the security of knowing that the thing they want is in stock (because they confirmed or ordered it online beforehand to be shifted from the warehouse to the store). that’s my guess.

37 Todd February 2, 2016 at 6:18 pm

Would 300-400 more nodes of space help to reduce delivery/shipping costs for their online business? Do they want to get into film/tv rental business? Amazon also owns media content companies, and it’s brick and mortar stores could provide exclusive places to get hard copies of that music/films/tv/games/apps. I don’t know else Amazon owns, but many WalMarts have banks, eyecare shops, salons, McDonald’s, etc…

38 rayward February 2, 2016 at 6:23 pm

Of course, to believe that Amazon is a technology company is to believe that Google, Facebook, and the rest are technology companies. It’s a farce.They only wish to sell you something. And they are very good at selling you something. And I don’t doubt they will be as good at selling you something at a brick and mortar store as they are at selling you something the old-fashioned way, from your browser.

39 Dzhaughn February 2, 2016 at 11:34 pm

+1 They don’t want to change the world except that changing the world might make them a buck. With any luck they will do so by making the world ten bucks better for the rest of us.

40 Justin February 2, 2016 at 6:52 pm

Streamlining returns. One of the biggest barriers I have to ordering certain things on Amazon is the overhead of having to make a return. So, for some things, I have to go find it in a real store first, check it out, then buy it on Amazon if it’s cheaper.

For example, I just got a pair of mittens on Amazon for my 2y/o. I had to jump through the hoops of contacting the company that makes them to find out of they were what I wanted. It took about a week and a half to get a response. They assured me they were what I wanted. They showed up, and they’re nothing like what I asked for. Now, it would cost me something like $10 to return a pair of mittens that only cost me $15 to begin with, plus the hassle of dealing with shipping, and the outrageously inefficient UPS store.

If there was an Amazon store down the street where I could just drop them off, I would.

This was a major factor for me in buying my wife a new computer. I ordered a couple of tablets and laptops online from the Microsoft store, since I knew I could return them to the physical store down the street once she decided which one she wanted to keep.

41 Cliff February 2, 2016 at 8:20 pm

Justin if it’s not what you asked for you can return it free of charge and have it picked up from your house by UPS.

42 Darren February 2, 2016 at 10:42 pm

Amazon allows returns on most items free of charge, and for those they don’t as a matter of course (possibly mittens?) you can still get a free return is the item was misrepresented.

43 Hazel Meade February 3, 2016 at 11:57 am

Tangent …

I’ve found that (suprisingly) there are a lot of fraudulent storefronts for retailers selling via Amazon.
We received one item as a registry gift that the Amazon seller “VooMall” replaced with a knockoff item from China that took three weeks to arrive, and then was impossible to return without telling the person who bought it for us. The knockoff was markedly inferior to the authentic version.
It’s just as bad as E-Bay for knockoff Chinese products.

44 Justin February 4, 2016 at 3:14 pm

Free returns are only kind of true.

For more expensive things. Ski boots, I had to buy something on the order of 6 different pairs, ranging from $500-$700/pair, to find the right fit. While UPS MIGHT pick it up from my house, I can’t stay home all day to wait for them, and I’m not about to leave several $1000s worth of stuff sitting on my porch. The same goes for computer equipment, or even some clothing.

Amazon also generally provides a return shipping label, but not always return shipping packaging. I bought a portable AC unit that had to be returned, but the box it came in was so destroyed I had to have it repackaged. Sometimes I’ve simply recycled the box a thing came in before realizing I need to return it. Any of the air pack padding anything comes with my son pops almost immediately after opening the box, which usually leaves me needing at least some repackaging help.

Many things some in non-reusable bags, at least by the time I’ve managed to open them.

And, there’s still the hassle of dealing with the UPS store, which is always horribly inefficient. Returning a laptop to the Microsoft Store I was in and out in about 5 minutes. Dropping off a simple package at the UPS store often requires just waiting in line for longer than that, if you need anything packaged plan on being there at least 30 minutes.

My take is, there are just some advantages to having a physical store. It makes some things much easier. That’s why I still opt for buying certain things from REI, or Best Buy, because I know I have a local store I can deal with.

I know Amazon also has their Amazon Lockers, but again, there are times life is just easier when you can deal with a person.

Aside from that, they’re opening bookstores, a place people are comfortable being, and hanging out for awhile. I can’t imagine they intend to sell a lot of books. I think it’s about having a physical presence. I can go see an amazon support person, to deal with my amazon issues in person.

So, another example, I bought a new fridge recently, from Best Buy this time. Within a few months it started leaking water all over my floor. My wife spent some number of hours on the phone with support trying to figure out how to get it fixed/replaced. The phone support was almost no help at all, they basically said contact Samsung (the manufacturer) and deal with it yourself. I went to the store where I bought it in person, found a sales clerk, got the store manager, and had the fridge replaced, plus a $200 gift card in about an hour. It’s often that having the peace of mind of having a local store I can deal with changes my purchasing decision.

I could also see their stores having some synergy with Amazon Prime Now. Place an order online, have it delivered to your local store for free, instead of to your home, same day for pickup.

45 Steve Y. February 2, 2016 at 6:58 pm

“What is the underlying business plan?” Recognizing that Jeff Bezos doesn’t always hit a home run, I’ll play.

One trap is the term “bookstore.” (What was the initial reaction to Apple opening “computer stores” when they were being shuttered across the nation?) Amazon’s bookstores will bear little resemblance to the bookstores we have known and loved.

Security: We know that delivery security is a problem in urban and dense suburban areas. Each location would also be a site for Amazon Locker, where one could pick up packages.

Quality and speed: despite the increasing popularity of e-books, occasionally one needs to have a real book, perfect-bound with high quality paper, especially if there are pictures. Inkjet or laserjet won’t do. I want my gravure (or offset)! Perhaps Amazon has figured out a way to produce books on demand that home printers cannot easily duplicate.

Showroom: “showrooming” has fallen into disuse because Amazon has put most of the showrooms out of business. Why won’t Amazon be killed by overhead and inventory holding costs? Answer: Big Data. Amazon knows what the top-100 bestsellers are in each region. This week the store will display walking shorts next to an iPad pro next to a crockpot. Next week it will be a portable generator and a snow shovel.

A small footprint coupled with popular goods makes for a crowded store, high inventory turns, and buzz. Of course, I could be wrong.

46 bulgarian license plate February 2, 2016 at 9:32 pm

Steve Y. – You got, in my corporate-finance-trained opinion, almost all of if but you missed the finite but energizing stream, completely tributary in the direction of current Amazon high-level employees, of hedonic revenue consisting of the ability to hand out 800 job offers to deserving people (not just promising MBA grads but also friends, neighbors, and their family members) who will be unsurprisingly grateful for having been named one of the 800 number ones 400 stores require (400 primary tout court and 400 primary-when-the-primary-has the day off). And, not to get all Proustian or anything, but maybe Amazon decision makers believe it is not hard to imagine liking 400 leafy North American commercial locations enough to risk other people’s money on putting what they think is a nice store there instead of yet another un-nice store. (Sorry for the syntax in sentence one but I proofread my comments and get bored with Hemingwayesque prose on any subject less than Hemingway-worthy, hence i do not write such prose on such subjects although I do talk it, as do most of us, never in our edenic pre-AI days having had occasion to proofread the words of my contributions to conversations).

47 JWatts February 3, 2016 at 8:09 pm

This reads like a bot wrote it.

48 bulgarian license plate February 3, 2016 at 10:36 pm

Thanks for reading my follow-up comment. Not a bot, just a tired human who every once in a while likes to practice writing in one or more of the less common styles my fellow primates write in for the purpose of making them (that is, the some among “m.f.p.” who write in those less common styles) feel less alone in the world. It has worked before, but who knows how often? And at what opportunity cost (Prv. 1:1) ? I hope I did not crowd out a better response to Steve Y’s excellent comment. I don’t say edenic in real life, not sure how to pronounce it, but I do mention our pre-AI days every once in a while, which I can imagine someday being missed the way Beulah was missed long long ago. Cor ad c. loquebatur, as Newman used to say over a pint or two, and if he didn’t maybe he should have.

49 Dan Weber February 2, 2016 at 7:00 pm

Having a bunch of store fronts seems like an obviously good thing if they aren’t expecting them to make money, but using them as experiments. Office space is closer to people than warehouse space, so they’d be the place to try drone delivery.

I’m skeptical on drone delivery, but if you wanted to do it, you would want something like this.

50 JWatts February 2, 2016 at 7:03 pm

300-400 stores is a high number to call it an experiment.

51 Dan Weber February 2, 2016 at 7:16 pm

It’s not like each store is going to be hemorrhaging millions of dollars a year. The average one might even be money-positive.

52 JWatts February 3, 2016 at 8:12 pm

Yes, but covering the initial deployment would be expensive. What’s the cost going to be? $1 million per store?

That’s 300-400 million for an experiment, even assuming the stores are at least break-even. And break-even would need to cover the cost of corporate style remodeling every 5 years.

53 Nick_L February 2, 2016 at 7:01 pm

Hmm, we have all these drones. Where can we store them? Oh, wait a sec..

54 Rob Lindwall February 3, 2016 at 5:09 am

Exactly, they are forming a micro-airport network in major cities that they can then use as hubs for drone delivery / storage.

55 Mitch Berkson February 3, 2016 at 8:01 am

That nutty idea is still on the table?

56 Dan Weber February 3, 2016 at 9:53 am

I don’t think drones were ever really on the table, but it’s just one example of what Amazon could experiment with by having retail locations.

Piling the “send it to me now” orders into a car that drives around and delivers stuff is one example. The car could be computer-driven or meat-bag-driven, for that matter.

57 JWatts February 3, 2016 at 8:13 pm

So, what your implying is that Amazon is actually a front for SkyNet. Has Jeff Bezos ever gone through a metal detector?

58 kendall February 2, 2016 at 7:05 pm

Location/target-customer-base is the key.

Amazon’s first and only Seattle bookstore near the University of Washington reveals the plan — sell real books to college students (..and staff) at large college locations across the country. That’s a niche customer base with the motivation, time and money for serious book browsing/buying at very, very convenient brick & mortar shops.

Book stores for the general public are now well proven money losers, so the business model changes to a carefully targeted non-general customer base.

Also, college textbook sales are a lucrative market, ripe for real business competition. College bookstores in collusion with faculty/admin have been ripping off students forever.

59 prior_test February 3, 2016 at 1:41 am

‘College bookstores in collusion with faculty/admin have been ripping off students forever.’

Actually, the reality is that the publishers are in the driver’s seat, especially following the wave of consolidation that started in the 80s.

Here is a bit of flavor to how that works –

‘The biggest publishers in the world today are education publishers.

It’s not even close. In 2009, Pearson’s Education division alone brought in more revenue than any other book publisher besides number two, Reed Elsevier, whose biggest businesses are Lexis-Nexis and Elsevier Science.

Education publishers dwarf trade presses. Only the top trade press, Random House (itself owned by Bertelsmann) is bigger than Cengage, the little-known education publishing division that Thomson spun off in 2008 before merging with Reuters.

Education publishers are also much bigger than other media companies that attract much more attention. Pearson is far bigger than AOL or The New York Times Company (and much more profitable). In order to find publishers with greater revenue or profits, you have to go up the ladder to companies like News Corp that include global television markets, or retail entities, like Amazon. This makes companies like Pearson too big to ignore, especially when they’re willing to partner up.’ http://www.wired.com/2012/01/why-education-publishing-is-big-business/

The faculty and bookstore get the crumbs from the table, and are thankful.

60 Sean P. February 3, 2016 at 2:42 pm

You’ve clearly never been to the store or the shopping center in which it is located.

61 Ray Lopez February 2, 2016 at 8:10 pm

50% of business mergers go bad. By analogy 50% of business decisions like this one go bad. Hence my vote is that it’s a bad business decision that will be over-ruled, since Amazon does not have the ‘cult factor’ that Apple stores do. Time will tell but that’s my bet.

62 Ray Lopez February 2, 2016 at 8:14 pm

overruled.

63 Dan Weber February 2, 2016 at 8:32 pm

Sustained.

64 scram-kid February 2, 2016 at 8:37 pm

I know the Borders near me is still empty… be nice to have it reopen as a bookstore, instead of a Target

65 Nelson February 2, 2016 at 9:27 pm

I wonder if it’s an advertising play. Starbucks has famously claimed its stores are its billboards. Even if they lose money, the money they might lose on 400 outlets in high-traffic locations will pay for lots of visibility.

66 Ray Lopez February 2, 2016 at 10:12 pm

Starbucks? Do they sell coffee online for pickup? Or with a 3D printer you can print the coffee at home?

67 Kyle M February 2, 2016 at 9:55 pm

What comes to my mind:

1. Physical stores are a big compliment to Amazon Now. Having Amazon Now and other delivery services (like grocery) succeed is a huge win for Amazon because it gives them a natural monopoly edge in home delivery.
2. Amazon has an amazing collection of reviews, which few other companies have. This allows them to offer an incredibly well curated physical store. The reviews at Amazon are one of their key competitive advantages, and this could be a new way to monetize it (and this goes far beyond books, where there are probably even bigger gains to using the data well).
3. Netflix had a saying that was roughly “we’re going to become HBO before HBO can become us” and both companies are looking increasingly similar. I think there is something similar happening with Walmart, where Amazon is trying to become Walmart before Walmart becomes Amazon. Walmart is trying to gain an online foothold using their huge physical presence and top notch logistics. Amazon is trying to gain a physical foothold by using it’s huge online success and top notch logistics.
4. Since online is still driving most of their sales, the cost of having inventory that doesn’t move is lower. Amazon can just take the books that aren’t moving quickly and send them back to the warehouse. They’ll sell eventually and the cost to hold goes down significantly. Other companies don’t have that option and this flexibility could offer a big cost advantage. (a lot of bookstores just return books they can’t sell, but by either promising not to do this or having a lower return rate, Amazon could probably negotiate a lower price)
5. There are probably a bunch of advantages when negotiating with publishers once they can offer both physical and ebook distribution, especially if they’re 25% of physical distribution.
6. Lots of companies have ways to track what you buy at their store, but Amazon has a much better ability to monetize that information the next time you log onto Amazon.com.
7. Most stores do not want you to check the tag and see what the cost is online. Amazon on the other hand would like to integrate the store with online information. Make it easy to read reviews on your phone, add products to your wish list, order that dress but one size smaller. Figuring out the best way to do it will take a while, but eventually it could become a big advantage. And if that technology gets good enough people will begin to expect that service and will be in other stores using their Amazon app to get the right shoe size.
8. When you trade at 440 P/E, the market is telling you to expand.

68 Kyle M February 2, 2016 at 9:57 pm

Well, that formatting came out a lot worse than I expected.

69 Dan Weber February 3, 2016 at 9:55 am

There is some magic javascript/CSS on this page that kills normal line-breaks. In theory a third-party tool could fix that. Who’s writing that stuff these days? They need to stop being so lazy. . .

70 Ray Lopez February 2, 2016 at 10:13 pm

That’s a consultants report. Reformat it and sell for $10k, the Beltway Bandits price for something you will find in The Economist for $7 a year later (time is money in consulting).

71 Simonini February 2, 2016 at 10:08 pm

Build them all next to the surviving Barnes & Nobles, undercut their prices, and finish them off?

72 Dan Weber February 3, 2016 at 10:17 am

Is that a strategically good idea? Letting a competitor stay alive is a great way to keep anti-trust off your back.

73 JWatts February 3, 2016 at 8:16 pm

Wouldn’t the smart play be to buy them out and then Re-Brand them as Amazon B&Ns.

74 Ray Lopez February 2, 2016 at 10:16 pm

In other news, Alphabet (Google) overtakes Apple as the World’s Most Valuable Public Company. There *is* a great stagnation.

75 Jeff February 2, 2016 at 11:15 pm

iPhone
iPad
Mac – essentially 3 products

Apple is a company with 3 major product lines, a couple minor ones (Apple TV), and they sell content for that system.

As their market gets saturated, they have a choice: to price themselves lower and out of their profits, or to price themselves higher and retain a smaller market. The iPhone hits a nice spot – it has a premium price, but not too premium. It also punched a hole in a new market and disrupted it. But now it’s not a disruptive force.

Those on the edge of the curve are still buying this crap every year, but as their market expanded, the average customer slips further back. Replacement times slow. Now even luddites buy them, but they don’t replace them with the same fervor.

Technology also caught up with itself. The easy gains are gone. In 2009, mobile hardware was behind the curve in terms of manufacturing processes. The CPU in the original iPad wasn’t pushing any thermal constraints of anything. Today? The A9X is a legitimate high performance chip, made on a cutting edge process, and comes within a hair’s breadth of Intel’s Core M – which is a moderate performance laptop chip found in $1200+ Apple computers, and $700 non-Apple computers.

Mobile CPUs got faster and more efficient – but they ALSO got a lot more power hungry on the high end, at load. This drove the greater than Moore’s Law level performance gains we have seen, and in terms of mobile, the pace of advancement will now slow down to the speed of the ever so slightly slowing Moore’s Law itself.

Is that stagnation?

That’s just catching up to the curve.

Apple has been so successful in recent years – anybody that thought the growth frenzy would go on forever was deluding themselves. Their model is hardware, at a price, and they are running in to its limitations. You can’t sell one person more iPhones than will fit in their pockets. If they want to expand, they’re going to need to sell something else (Such as the oft rumored cars).

And… is expansion everything? It seems like companies are often judged on the basis of increasing profits is the only goal of a company. Is it a big problem when you only put $40 billion in cash in the bank one year, instead of $60 billion the previous year? They will be able to carry on for decades on their laurels if they never disrupt another market. It’s OK. Someone else will come in and disrupt them.

Thing is, we can’t predict it. We can try. Some people will “get” it, but they’re just the lucky ones. That black swan will rear its head some day.

Or will it? 😉

76 prior_test February 3, 2016 at 1:43 am

Wait – not a word about the revolutionary Apple Watch?

77 Axa February 3, 2016 at 2:54 am

The Apple watch also can be described as premium but not too premium. Great summary Jeff.

78 KDV February 3, 2016 at 2:27 pm

Based on revenues, Apple Watch is already larger than the number three/four smartphone/handset manufacturer in the world, HTC.

79 Ray Lopez February 3, 2016 at 2:42 am

That was good. Repackage this post with a speech and PowerPoint and it if was a few years earlier, make $3k as a consultant doing a special report on AAPL. Throw in a few buzzwords like thermal constraint, battery hysteresis and cross-talk too.

80 Jeff February 3, 2016 at 8:09 am

Hindsight is 20/20, but I will say that if people seriously pay money for stuff like that, I’m in the wrong line of work.

81 Andy February 3, 2016 at 11:57 am

None of this is new. The stock market can’t properly value Apple when nobody knows what the next hit will be and when it will arrive. In 1984 Apple was a Macintosh company. In the early 2000’s Apple was considered primarily an iPod company. Later, Apple was considered primarily an iPhone company and was valued on that basis. Some day Apple will be considered primarily an “x” company and will be valued on that basis. It’s a pretty safe bet that Apple has been working on a variety of potential “x” products for a long time. But we are not even a decade into the modern smartphone era. The iPhone is such a valuable and appreciated product I wouldn’t be surprised if it remained their primary breadwinner for another ten years.

82 Jeff February 3, 2016 at 4:56 pm

It’s not a question of when the next hit will happen. It is if, before when. There is no inevitability.

If it never happens again with Apple, it wouldn’t shock me in the least. But it wouldn’t surprise me if they did, too.

83 Ben Peli February 2, 2016 at 10:42 pm

My first thought is that this is to remedy an issue I’ve had when buying books on Amazon. I used to browse in Barnes and Noble and Borders to discover new books to read. The recommendation engine that Amazon uses is not nearly good enough and doesn’t provide the same experience. I see a much more limited selection of books than if I went to a bookstore. This has substantially cut down on the number of books I buy, and now I mainly purchase books from authors that I’ve already read. I rarely buy a book from a new author. They do provide samples and I’ve tried that, but the books they’re recommending don’t pique my interest sufficiently. However whenever I do stumble into a Barnes and Noble I always manage to find at least two new authors I’d be interested in giving a shot.

84 Derek February 2, 2016 at 10:43 pm

1. Fedex makes more money per sale than they do.

2. The cheapest ‘free delivery’ is to have the customer push a shopping cart to their vehicle.

3. They have to start showing some profits.

85 Cliff February 3, 2016 at 4:14 pm

They have massive profits which they reinvest

86 Alain February 3, 2016 at 12:47 am

My initial guess would be more Amazon lockers, plus somehow they have figured out how to make a small footprint bookstore slightly profitable.

87 Nigel Lawson February 3, 2016 at 3:46 am

Maybe the purpose is to increase their power over publishers, record companies and Hollywood by becoming the primary retail outlet in real space as well. Becomes a lot harder for publishers to oppose Amazon if they can shut down most of their retail at will.

88 dearieme February 3, 2016 at 9:31 am

They’re going to open four pick-up joints because they think they’ve found a way to make money off them?

89 DanC February 3, 2016 at 10:30 am

A stand alone bookstore doesn’t make a lot of sense. Matching inventory to market is harder then the online outlet.

I would assume they are looking to do a few things.

1) Upsell other high margin items once you are at location. Coffee, seasonal items, fad items, etc
2) Used books can have large margins, if they can create a location to buy and sell used books they could remove some of the risk (low quality) and reduce cost (customer shipping used book to Amazon)
3) related, segment market. Some people buy books online and can now return books to physical location for store credit on new books. Amazon increases inventory for used books for a different type of consumer.
3) As mentioned, college locations with bulk purchases of text books could give Amazon more price leverage with publishers, could move into used text book market, could create their own textbook line (although they could do this online.
4) They could create academic reading packages tailored to local college or high school market.
5) Amazon prime pricing may not be working for books
6) They are making a mistake

90 DanC February 3, 2016 at 10:32 am

Made post easier to read

1) Upsell other high margin items once you are at location. Coffee, seasonal items, fad items, etc

2) Used books can have large margins, if they can create a location to buy and sell used books they could remove some of the risk (low quality) and reduce cost (customer shipping used book to Amazon)

3) related, segment market. Some people buy books online and can now return books to physical location for store credit on new books. Amazon increases inventory for used books for a different type of consumer.

3) As mentioned, college locations with bulk purchases of text books could give Amazon more price leverage with publishers, could move into used text book market, could create their own textbook line (although they could do this online.

4) They could create academic reading packages tailored to local college or high school market.

5) Amazon prime pricing may not be working for books

6) They are making a mistake

91 Hazel Meade February 3, 2016 at 11:51 am

Amazon Locker + Returns.
Customers can order online, and pick it up at a storefront, and can also return it to a store front. Target and Walmart already provide these services. Saves on shipping cost and is faster than waiting to receive an item, and then waiting to return it.

PLUS, can be combined with some sort of rapid delivery service, in which drivers pick up items from the storefront and drop them off at people’s addresses. There was some experimentation last year with offering people discounts at Walmart if they would pick up someone’s online order and drop it off at their home. You could do this Uber style with an app that offers people a few bucks per delivery.

92 Florian February 3, 2016 at 11:56 am

Brick&mortar is not a dead as you might think, neither in terms of market share nor in terms of profitability.

#1 profitability:
Amazon has a surprisingly low profit margin. Lower than many traditional brick&mortar chains.
And Amazon isn’t a small tech start up any longer (where this might be excusable). They are in the retail business for decades now. And still there profit margin is very slim

#2 market share:
Online is still only around 10% of the retail market. (20%, if you exclude food).
[These are European numbers. US might be somewhat higher. But i guess it’s the same ball park].
Yes, that share is growing.

93 Floccina February 3, 2016 at 12:35 pm

I wonder if they use the stores to save on shipping. That is have people pickup stuff at the stores because the last mile is the most expensive.

94 MyName February 3, 2016 at 6:45 pm

It looks like this *may* be a hoax. Though there’s a possibility of some kind of limited number of stores in the future.
http://the-digital-reader.com/2016/02/03/roundup-amazon-wont-be-opening-400-bookstores-but-that-hasnt-quelled-the-speculation/

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