No one saw this coming. Amazon.com, Inc. (NASADQ:AMZN)—the destroyer of brick-and-mortar stores—is starting to open grocery stores.
Yes, physical grocery stores.
This unexpected twist in the company’s strategy comes mere months after it opened an actual bookstore in Seattle. Many investors don’t know what to make of these mind-boggling moves, so let’s unpack what it means for Amazon stock (AMZN stock).
First off, let’s look at history.
In the early 2000s, Amazon put traditional bookstores out of business by undercutting them on price. At the same time, the company eviscerated department stores and big retailers.
Armed with low prices and speedy deliveries, the e-commerce giant proved over and over again that online stores can beat brick-and-mortar. Heck, shoppers were even waiting out the Black Friday sales so they could spend their money on Cyber Monday.
With that in mind, why would Amazon suddenly change direction and start opening physical book and grocery stores?
The answer might surprise you. Amazon is testing out physical stores because people like physical stores. Don’t get me wrong, they eventually gravitate to the lowest prices, but on a visceral, human level they like to go out and shop.
Shopping centers are where people congregate in the 21st century. We browse, eat, and drink. It is a common area for meeting and mingling, two cravings that are inextricably tied to the human condition. And it’s not just older generations who have these cravings.
Surveys show that people between the ages of 18 to 34 visit shopping malls more often than their elders. They went an average of 4.8 times in a three-month span, whereas 50- to 64-year-olds only went an average of 3.1 times. And more than a quarter of these Millennials weren’t there to shop. (Source: “Industry Conditions: Shopping Centers: Where Americans Buy, Socialize, Play and Work,” International Council of Shopping Centers, May 19, 2016.)
The Millenials were at the mall for “other types of entertainment or activities such as the movies, bowling, gym etc.” Like every generation before them, they need a place to get together. This is what Amazon executives understood about human nature, that we are social creatures.
Physical Stores Could Be Huge for Amazon Stock
Think about it this way: I wake up one day and realize my shoes are terrible. I need to buy a new pair. Do I go into a store or simply order them on Amazon?
Let’s say my budget is tight, and I’m short on time. Since Amazon offers a discount and the ease of buying from my phone, it is the logical choice. But I’m feeling a little rebellious in this hypothetical scenario, so I decide to go to the mall instead. Viva la revolution, right?
In any case, my experience at the mall could be worth the trip. Maybe I end up liking a completely different set of shoes because I can feel the materials. Maybe I run into an old friend. Whatever the scenario, the social value of physical stores could help offset the price difference.
To be clear, I don’t think old retailers like Barnes & Noble, Inc. (NYSE:BKS) or Best Buy Co Inc (NYSE:BBY) stand a chance against AMZN stock. When it comes to the numbers necessary for survival, they just can’t afford to go up against the king of e-commerce. But Amazon can easily afford to open up shops.
What it’s doing is genius.
It uses data from its online sales to decipher what customers want, then it stocks the physical store accordingly. For instance, Amazon’s bookstore only has a few hundred titles because they’re chosen based on what people are buying on the Amazon website.
Or, in Amazon’s pilot grocery store, you simply walk in and activate your app. There are no cashiers and no checkout lines. You just pick up what you need, the app keeps track, and you walk out. The ideas sound strange at first, but they could be enormously profitable.
A lot of people are laughing at AMZN stock right now. Most of them are tickled by the irony of an e-commerce giant entering the very business it demolished, which I admit is funny. But don’t make the mistake of thinking that Amazon stock is a joke.
Opening physical stores is a sign that the company is still cutting-edge. It understands why people are attracted to brick-and-mortar shops, so it took a risk. My guess is that it will pay off big-time for AMZN stock.