Amazon's Next Big Move Into Big-Box Retail Could Be a Smart Move
Key Points
Amazon is planning a new superstore in the Chicago area.
The company has struggled to achieve success with previous brick-and-mortar stores.
The new concept is not only for shoppers but will also act as a storage location for Amazon's products.
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While Amazon (NASDAQ: AMZN) has achieved incredible success with its e-commerce business, forays into brick-and-mortar stores have proven to be a struggle. The company closed its Amazon Go and Amazon Fresh locations this year. So when reports surfaced of a massive 229,000-square-foot superstore in a Chicago suburb, this seemed like Amazon's latest attempt at throwing spaghetti at the wall to see what sticks.
That said, the project is not necessarily a doomed effort this time. Media attention has highlighted the e-commerce giant's attempt to outdo competitor Walmart's superstore concept, which typically runs 179,000 square feet. However, the new big-box retail location may serve a key purpose in helping Amazon cement its supremacy in online sales.
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Image source: Amazon.
The advantage of Amazon's new superstore
The new store is not just about a bigger emporium to sell more stuff. Part of the space will be dedicated to storing items. In essence, Amazon's new retail concept will also serve as a mini-warehouse.
This is a key element in the design. It gives Amazon a storage location closer to customer homes, providing greater flexibility for its massive logistics operations and enabling speedier shipping. These attributes are desirable because, as Amazon CEO Andy Jassy explains, "Despite many improvements over the years, customers always want lower costs and faster delivery speed."
The ability to accelerate shipping translates into more revenue. According to Jassy, "When we promise faster delivery times, customers complete purchases at a meaningfully higher rate and shop with us more frequently."
To that end, Amazon created a new streamlined warehouse format called Same-Day Fulfillment Centers. These facilities carry the top sellers, with the goal of delivering an item within the day it is ordered.
The company is also experimenting with an ultra-fast delivery service called Amazon Now, which aims to get items to customers within 20 minutes using micro-fulfillment centers. The service is only in select international markets, and in these countries, Amazon Now orders are increasing 25% month over month. Prime members triple their shopping frequency after they start using it.
The company is looking to expand Amazon Now in the U.S. and Europe. The new superstore could be part of this plan, serving as a micro-fulfillment center.
Other benefits of Amazon's new retail store
The company has extended its delivery capabilities to third-party sellers, meaning Amazon's new superstore concept could help them, too. Third-party sellers are a key component of the tech titan's sales growth. They contributed $41.6 billion of Amazon's $181.5 billion in first-quarter sales.
The company also offers shoppers the option to pick up their purchases from retail locations, such as its Whole Foods stores. Sending products to a central place rather than getting them to individual customer homes simplifies shipping for Amazon. The superstore can expand the retailer's pickup spots.
Of course, the new big-box location will generate its own income through product sales. The question is whether it can do so more successfully than the company's previous efforts. If the concept can produce sufficient sales and serve as a hub for faster deliveries, additional superstores are likely to extend into cities across the country. At that point, it can have a meaningful impact on Amazon's financials and potentially its stock price.
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Robert Izquierdo has positions in Amazon and Walmart. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
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