Why eCommerce Giants Like Amazon are Opening Brick and Mortars

Usually it is consumers who drive paradigm shifts. Much as we would like to give credit to the internet for the increase in empty stores on Main Street, that would not have happened unless consumers decided en masse that online shopping for everything from groceries, to apparel, to home furnishings, was superior to going to the mall. As a result, major retailers from Lord & Taylor to Sears, J.C. Penney, and even Target felt the pinch and have closed or are continuing to close stores. Most cited online shopping and even levied blame at eCommerce giants such as Amazon. What happened next, and is the topic of this article is unusual: Amazon, Google, and Apple, arguably the biggest if not the most dominant online brands, are opening retail outlets. What can this mean and where is eCommerce headed?

Until the U.S. economy dipped in 2008, physical retailers did not consider online commerce a threat. After all, the internet did not offer the security shoppers were thought to value most. Over time online transaction technology improved and detailed product descriptions, and facilitated returns processes overcame shoppers’ need to examine items before they make their buying decisions. The internet, the rise of mobile devices to access the web, better and more ways to shop, the convenience of online browsing proved to be more competition than brick and mortar retailers could handle. Over the decade from 2006-2016, J. C. Penney, Sears, Sears, Nordstrom, Macy’s and Kohl’s posted a combined loss of $75B in market share. And for the same 10-year span, how did Amazon fare? From under $20B it grow exponentially to almost $356B in market share.
So why, now, are so many eCommerce giants opening physical retail outlets? The costs associated with starting and running an online business are substantially cheaper than establishing a brick and mortar. There are no leases for one thing, nor salaries for salespeople. Warehousing and distribution channels are less costly as well. It is just smart business today to start a business online then transfer it to Main Street or to the mall.

Where Startups Go to Thrive

eCommerce is also way kinder to startups. Statistically, nine out of ten new brick and mortar businesses will falter within a year. However, there are thousands of examples of thriving enterprises that got their start on the net. One such example: two short years ago, few knew about Warby Parker, which makes affordable prescription eyewear. The now-established brand has stores in select markets in strip malls and on Main Streets. The firm now earns more per square foot than long-time household name brands such as Best Buy and is giving Lenscrafters a run for its market share. Yes, Warby-Parker got its start online. Need another example? Everyone needs a mattress, but until a few years ago in this highly competitive industry, no one would have considered buying one without trying it first. Enter Casper which joined this crowded field online, established itself as a luxury mattress brand, and is now making its presence known in select shopping malls throughout the country.

Okay, that scenario makes sense for new business. But what about these eCommerce giants? Amazon did not go all in. Not at first. It tested the waters by opening zilch cost to maintain kiosks in malls across the country. Most of these outlets succeeded leading to Amazon’s more ambitious foray into physical retail. What is their game plan, and what’s in it for them that they are stealing a page from brick and mortar’s playbook?

Turns out, to fully reap the benefits from all possible revenue streams, online giants have to reach stalwart brick and mortar shoppers. To partner with resellers at brick and mortars is just not as economical as setting up their own shops. For Google, Amazon, and most notably Apple (who still maintains profitable relationship with resellers) this model is fast becoming a well-worn and very profitable. Think how quick but impersonal it is to buy personal technology such as Apple’s latest iWatch, iPad, or iPhone without being able to hold it and run it through its paces? Should you go to a reseller such as a cell phone provider, however, that environment is one of hustle and hurry with profit, not service, as their goal. But go to an Apple Store, and these sleek beacons of the latest innovative gadgetry allow you to roam freely, examine any product you wish, and purchase or just ask questions of knowledgeable staffers.

So what are consumers and retailers alike learning from this new shopping experience? To begin, brick and mortar retail is not dying. Instead it is going through a major period of adjustment and readjustment. The business model is changing due to shifts in consumer buying habits. And impulse is fickle. That paradigm can and will change, but the concept of going into a store, seeing, touching, sampling, and selecting merchandise is not going to disappear any time soon. There may be fewer sales staff to assist, as is the case with big box stores such as Home Depot who have moved almost entirely to self service point of sale stations.

That said, one key function of the buying experience will never change: personalization. When consumers no longer feel that their needs are being fully served online, they will return to brick and mortars to regain that control over the sales process. When they do, they’ll be in for a surprise. In their absence, even big box retailers will be operating from smaller premises. From the seduction of no or low-inventory supply chains and distribution centers to semi-automated checkouts, the interactive aspect of online shopping has come home to roost for physical retailers. Perhaps a happy medium has been struck. Time will tell.