3 Reasons Why Amazon Is Opening a Physical Retail Store

LIONEL BONAVENTURE/AFP/Getty Images

LIONEL BONAVENTURE/AFP/Getty Images

Amazon is going retro. The e-commerce giant that has grown to dominate the online retail market will soon be opening its first brick-and-mortar store in New York City, according to insider sources cited by The Wall Street Journal, as well as multiple locations in California, according to Geekwire. While the new Amazon store will be in a prime location across from the Empire State Building on 34th Street, the decision to open a physical retail store seems to be a puzzling move for a company that helped popularize online shopping by offering goods at a lower price point than traditional retailers that had to pay for physical store spaces could.

However, despite the obvious downside of having a higher overhead cost when running a physical retail store, there are actually several advantages in taking an old-school approach to retail. Here are three reasons why Amazon may be dipping its toe into the traditional retail business.

Traditional retail still tops e-commerce

According to a recent report from the U.S. Department of Commerce, U.S. retail e-commerce sales for the second quarter of 2014 grew an estimated 15.9 percent compared to the year ago quarter. This far outpaced the overall retail sales growth rate of 4.4 percent during the same time period. While this statistic seems to support the idea that Amazon should stick with e-commerce, the overall retail picture is a bit more complicated than it would appear at first glance.

Out of an estimated $1,174.1 billion in U.S. retail sales in the second quarter of 2014, only $75 billion, or 6.4 percent, of total retail sales came from e-commerce. In other words, despite the rapid growth rate of the e-commerce market, the lion’s share of retail sales is still done within traditional stores. There is also evidence that the e-commerce growth rate is slowing down. In the second quarter of 2013, the e-commerce growth rate was around 18 percent. On the other hand, the overall retail sales growth rate in the second quarter of 2013 remained about the same as this year’s, at around 4 percent.

Omnichannel commerce is the future of retail

Another recent study from global management consulting firm A.T. Kearney suggests that the best approach to retail may actually be a combination of physical stores with an online presence, or what it calls “omnichannel commerce.” According to A.T. Kearney’s study, physical retail stores play a key role in converting sales, even if the sale is eventually completed online, rather than in the brick-and-mortar store. A.T. Kearney researchers noted that two-thirds of customers who purchase online use a physical store before or after the transaction.

So even when sales are completed online, physical retail stores still play an important role in creating value for the company through product and brand awareness. “It’s not physical or digital; it’s physical with digital,” wrote A.T. Kearney researchers. “Having multiple channels is good for business.”

New hardware needs a showroom

Amazon — which entered the smartphone market with its Fire phone this summer — may also be following the lead of Apple, a company that has found unprecedented success with its mobile device sales by combining an online retail presence with physical retail stores. According to market research firm eMarketer, Apple leads the physical retail marketplace with the highest sales per square foot of any other U.S.-based retail store with an average of $4,551 in sales per square foot. This does not include any online sales that the physical Apple Stores may initiate by providing customers with a showroom that allows them to try out products or have a face-to-face interaction with a sales representative. Amazon, which also recently released several new versions of its Kindle Fire tablet, may be trying to emulate Apple’s success in this area.

Although Amazon’s ultimate plan may be to create an Apple-like Amazon Store, it appears that the upcoming retail location in New York City will initially be used mostly as a place for customers to pick up online orders and as a mini distribution center for couriers, according to The Wall Street Journal’s sources. While it remains to be seen if a physical Amazon retail store will be successful enough to spur the company into opening more locations, there is no doubt that even an e-commerce pioneer like Amazon can derive some benefit from an old-fashioned approach to retail.

Follow Nathanael on Twitter (@ArnoldEtan_WSCS)

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