Amazon’s Push Into the Physical World Is Just Beginning
Imagine a world where you walk into an Amazon AMC theater to see the twentieth installment of Fast and the Furious. After the movie you go on the Amazon app and find that based on the movie you just watched, they are now recommending the car detail products used in the movie. Fast forward to later in the week and you are at the newly acquired JCPenney, where as you walk in, you get a ping on your Amazon app letting you know that the leather jacket worn by 60 year-old (still ripped though) Dwayne Johnson in the movie is now available. There are dozens of other touchpoints where Amazon can now make recommendations to you just from this single experience. Compound that to the thousands of interactions most people have with some Amazon product (app, Whole Foods, Go Store, etc.) each month and this hypothetical may not be too far off from reality. However, Amazon’s push into physical wasn’t always part of their public roadmap.
In his 2006 letter to shareholders, Jeff Bezos resisted pressure to open physical stores.
Excerpt:
“I often get asked, “When are you going to open physical stores?” That’s an expansion opportunity we’ve resisted. It fails all but one of the tests outlined above. The potential size of a network of physical stores is exciting. However: we don’t know how to do it with low capital and high returns; physical-world retailing is a cagey and ancient business that’s already well served; and we don’t have any ideas for how to build a physical world store experience that’s meaningfully differentiated for customers.”
Today, Amazon now has 75 book, 4-star, Go, and Pop-up stores in addition to the 500 Whole Foods locations in the US, Canada and UK as well as its own grocery store concept, which is coming soon (opening likely in the Fall).
Obviously, a lot changed in the 14 years that followed that 2006 statement, but the question I ask is what changed with Bezo’s viewpoint on physical retail? Nothing, actually. Technology did however enable Amazon to realize one of those important attributes in their ‘test’: “meaningfully differentiated.” But with only one of the two attributes fulfilled, what prompted Jeff to really consider a physical presence and actively invest?
One such attribute, which in the last 10 years has become indispensable to Amazon’s future success:
Technology that can scale physically and can deliver 1) ‘low capital and high returns’ and 2) ‘ a ‘meaningfully differentiated’ experience.
In essence, the blending of technology and the physical world to create a new suite of B2B products.
Let’s first look at how ‘meaningful differentiation’, Jeff’s initial test attribute, has manifested itself in Amazon’s physical spaces. Amazon unfortunately doesn’t release revenue numbers broken out between Whole Foods and it’s other physical retail stores, but based on a few sources* we imagine their 75 stores to be pulling in double-digit million dollar revenue yearly (starting in 2019). This doesn't translate to high-returns and leasing prime real estate in major US cities is also not by definition ‘low capital,” but the stores provide a number of invaluable benefits to Amazon. First, they serve as smaller and more local distribution points for their wares and merchandise. Second, they act as test beds for it’s physical-world tech to come in direct contact with consumers. As an R&D cost point, this might be minimal, but has the opportunity to provide new insights (long-term payoff) for how to sell ‘said’ tech to other retailers (more on that later). It’s of note to mention that Amazon’s R&D budget is the largest in the world, double Apple’s R&D spend. In fact, it’s larger than Sony, General Electric, General Motors, and Ford’s R&D budgets combined.
Finally, the stores act as Amazon Prime Member hubs increasing the satisfaction of Prime Members (Amazon's most valuable asset) and driving Prime sign-ups at the point of purchase when it matters most.
Have you walked into a physical Amazon Book store or an Amazon Go store? On the surface you might not see much of a difference from a typical book or convenience store, however, if you look at the way items are displayed, organized, priced, and packaged, you’ll see the differences immediately. Using their understanding of shoppers habits, primarily, but not limited to search and purchase history data, they have created stores that are created in the eye of the customer, almost personalized. Books organized by top sellers in a geographic area, daily highlights based on searched items online, or featured sale items based on previous order history are just a few of the many personalized shopping features they have integrated into their brick and mortar environments. Their bookstores display books with the cover facing the consumer, versus the spine, since they know the cover is what grabs the consumers attention - it also mirrors how books are sold on Amazon. They’ve been able to leverage first-party customer data to create a differentiated experience that is meaningful - data they didn’t have in 2006, but do now. And, for Prime members it’s already worthwhile from the price point alone - Prime members receive the online Amazon price in store.
Technology that scales physically
Amazon’s purpose (directly taken from their website) is as follows… We aim to be Earth's most customer centric company. Our mission is to continually raise the bar of the customer experience by using the internet and technology to help consumers find, discover and buy anything, and empower businesses and content creators to maximise their success.
Let’s cherry pick the most relevant portion that shines a light on what we think is the most important attribute… using the internet and technology to help consumers. With digital now permeating the physical at every corner technology no longer stops at the screen in front of your face.
We believe Amazon’s ‘actual’ purpose is as follows: Moving technology to the physical world (when a winner-take-all result is possible)
Why do we believe this? Two important factors: 1) the growth of Amazon’s physical assets which they need to trial their tech in the physical world and 2) their digital features and businesses that can be ‘reproduced’ in the physical world.
Let’s look first at physical assets…
Land and Buildings - 10B USD
Equipment - 18B USD
Land and Buildings - 40B
Equipment - 72B USD
This is roughly 4x the amount of ‘physical presence’ growth in a five year time span. I don’t think there is another company in recent years on earth that has increased their physical presence at this scale. If someone knows of another company that has, please make me aware of them.
In their warehouses they are pioneering physical technology, to ‘raise the bar of the (end) customer experience’, but also to sell their warehouse technology to other warehouse operators. Amazon pioneers technologies to create efficiencies and enable a better consumer experience and then sells them to competitors or others in the market. This is the real purpose of Amazon.
Photographer: Bess Adler/Bloomberg
Let’s look at digital features or businesses that can be ‘reproduced’ in the physical world...
35% of Amazon’s 2019 revenue was driven by their recommendation engines. With 87B USD in revenue, the recommendation engine drove roughly 30B USD in sales. Not bad for a ‘hey, you might like this item too’ product of early machine learning technology.
Now imagine this, Amazon taking this technology to the physical world, as they have done with so many of their other technologies. You walk into an H&M, pick up a clothing item off the rack and an AR display highlights 2-3 other items that you might also like. B8ta’s Forum concept in Los Angeles is already experimenting with something similar. When you walk into the dressing room an RFID tag on the garment enables a pop-up screen projection featuring brand information and other products from the brand. It’s very likely that Amazon would be able to pioneer this technology, port 1st party data to enhance it’s abilities to personalize, and sell it to retailers like H&M for a subscription flat fee and 5% fee on revenue generated through the technology. That could be an extra 2B USD from just one retailer per year for Amazon. Of course retailers could create their own technology, but we know that doesn’t always work out that well. Amazon is utilizing this ‘pioneer and sell’ approach already with their cashierless tech, which they are peddling to larger grocers like Kroger, and with which they are courting Walmart and Target.
Amazon’s AWS DeepLens, allowing smaller retailers to utilize for object, face and activity detection.
What if Amazon’s personalization tech was implemented in grocery stores. Say goodbye to food waste. Currently, 10% of food in a supermarket is thrown away. If Amazon brings technology to market that can reduce this number at all grocers, billions would be saved.
And the rule has become not to bet against Amazon, no matter how harebrained the idea might seem at first glance. Even the Dash button, which initially was thought of as an April Fools joke, in time was lauded by CPG companies and users, with sales that quadrupled year-over-year and warmed consumers up to the current in-appliance replenishment buttons and shopping via Alexa.
What could Amazon ‘take physical’ next? How about Amazon’s marketplace? They’ve already taken direct sales physically so why not create a physical marketplace. Is it possible that Amazon could compete with Simon, Westfield, or Macerich in the future? With the outdated ‘mall’ concept in decay, it might be an interesting play for Amazon to showcase what a physical ‘marketplace’ might look and feel like. This could be great for real estate developers or a challenge should Amazon develop its own properties. Again, let’s not immediately scoff at the idea of this. Predictions made 5 years ago about Amazon that seemed absurd are now a reality.
Jeff is known for imbuing long term thinking into Amazon. While hearing him speak at Summit Los Angeles in 2018, he said “long term thinking is a lever that can allow people to commit to solving problems. We can do things at Amazon so well because we leave time to do things. Our competitors try to do things in 2 years and we leave ourselves 5-7 years so people feel that they can accomplish things.”
With the retail world going through a shake-up of epic proportions look for Amazon to swoop in and expand their physical presence. Just looking at the last few months there have been rumors of Amazon acquiring JCPennys and AMC Theatres. We might not see their brand everywhere in the physical world, but I’m certain their technology will be powering the back-end of most of what we come into contact with in the physical world in the coming years. It would serve other brands well to invest in digital-to-physical R&D with real-world customer testing, before their customers demand it, otherwise, their only option may be purchasing this technology from the company that could one day put them out of business.
About the authors
Ryan is the founder and CEO of MCL.digital, an transformation consultancy that unearths insights and develops innovative concepts in the Future of Retail, Workplace, Mobility, Tech, and Design.
Brian is a strategic advisor at MCL.digital and co-founder of BTblock, a leading blockchain, cybersecurity and digital transformation consultancy with offices in Denver, New York, Boston and Stockholm.
* Sources: Statista (paywall), Pyments