Amazon's Foray Into Department Stores Could Breathe New Life Into Segment: Analysis

By Steve Wynne-Jones
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Amazon's Foray Into Department Stores Could Breathe New Life Into Segment: Analysis

The decision by Amazon to open large physical outlets – akin to department stores – in the US could generate some impetus in a segment that has been lacking innovation, an industry analyst has suggested.

Neil Saunders, managing director of GlobalData, was commenting following reports that Amazon's first department stores are set to open in Ohio and California in the coming years, although no date has been set.

These stores will occupy a space of around 30,000 square feet, smaller than a typical department store of around 100,000 square feet, the Wall Street Journal reported.

"Amazon’s rumoured move into opening department stores may seem odd," Saunders commented. "After all, it has long been said that the department store format is dead. And given the chronic underperformance of US department stores, which have seen their share of overall retail slip from 14.5% in 1985 to about 2.9% today, such a narrative is not misplaced."

Adapting To The Times

That said, the demise of the department store industry in the US has been largely due to their failure to adapt to the times, indicating that Amazon may be in a position to breathe fresh life into the segment, he added.


"Against this backdrop, Amazon’s latest foray into physical retail makes more sense, especially as the shops are likely to be much smaller than the larger department stores and will be in locations with good footfall rather than in failing malls."

As to why Amazon, which recently appointed Andy Jassy as its new chief executive, is plotting such a move, when it continues to generate strong growth from its online operation? According to Saunders, there are a number of reasons.

"The first is that Amazon doesn’t view the world through the lens of what is happening today," he said. "It never has. It constantly thinks about how it can continue to drive performance over the longer term. This means Amazon will be looking ahead to a time when its online business is so mature it becomes much harder to generate strong growth. As such, this is as much about testing ways to future-proof the business as much as anything else.

"The second is that Amazon knows that the future of retail is multichannel. As much as it has superior logistics and extremely efficient delivery networks, most consumers still shop using a combination of stores and online.


"The third is that as much as Amazon is successful, there are still categories – like apparel and home furnishings – where it can do better. Many of these segments are highly multichannel and they benefit from curation. Stores will help Amazon do a much better job of showcasing its offer, especially in own brand, and encourage consumers to engage more.

"The fourth is that more stores bolster Amazon’s whole ecosystem and flywheel. They create more touchpoints for consumers to interact and to make returns and pick up products. They also allow Amazon to gather data and to understand consumer preferences better – understanding that can, in turn, be used to improve the whole proposition."

Potential Bumps In The Road

While there are benefits to Amazon entering the department store space, success is not guaranteed, according to Saunders.

He suggests that proper curation will be vital, although Amazon in a strong position to achieve this, given its level of data on consumers at a localised level.


"The move by Amazon will be experimental at first," said Saunders. "However, if it gets rolled out in a serious way, it is very bad news for traditional department stores. Kohl’s may suffer, if only because Amazon is likely to favour locations similar to its own. Macy’s, which is supposed to be developing its own smaller department store concept called Market by Macy’s, is behind the curve on rolling this out.

"In short, the lack of innovation by traditional department stores means their defences are very weak so the last thing they need is to fend off a new invader to their space."

In May, Amazon announced that it was entering the pharmacy space in the United States, going head to head with the likes of Walgreens and CVS.

© 2021 European Supermarket Magazine – your source for the latest Retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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