I’ve been meaning to comment on this very interesting story from the Wall Street Journal last week regarding Amazon opening up retail stores. I’ve been going against the grain for years now predicting that this would happen. I started predicting that Amazon would eventually veer into having their own stores when everyone in tech was predicting the opposite. They were all saying that bricks-n-mortar stores were going the way of the dinosaur. I said “BS”.
Here’s a small excerpt from the Wall Street Journal:
Amazon.com Inc. plans to open several large physical retail locations in the U.S. that will operate akin to department stores, a step to help the tech company extend its reach in sales of clothing, household items, electronics and other areas, people familiar with the matter said.
The plan to launch large stores will mark a new expansion for the online-shopping pioneer into bricks-and-mortar retail, an area Amazon has long disrupted. —Wall Street Journal 08/19/21
So why did I feel so confident contradicting all of the tech pundits and futurists? Simple math. I’ve been a financial analyst supporting decision making at the Fortune 500 level for years for retailers and manufacturers. It all boils down to fixed vs variable cost structures.
For the sake of simplicity, I’m going to over-simplify here. Delivering packages to households from a distribution center is variable. Front door deliveries are relatively expensive but you only have to pay for the deliveries that you make. Meaning it’s cheaper to deliver to a territory than build a store if you don’t have a lot of customers there.
But once you get over a certain level of deliveries, it’s cheaper to build a store.
Building retail stores is increasing your fixed cost structure. Once you swallow the cost of that store and it’s employees, you can pump it full of inventory and increase your sales with relatively little increase to your cost structure.
When I was a financial analyst working for the Cabela’s Corporation, we used our catalog sales data to determine where we would build our new stores. It was a sweet advantage over competitors that didn’t have a catalog mail order business. Cabela’s knew where the stores would be an instant success because they already had thousands of customers in that area. And it was cheaper to ship a truck load of merchandise to a store all at once versus shipping each individual package to a customer’s front door.
Amazon has the same advantage that Cabela’s has, but on an even greater level. Amazon knows exactly where their customers are. And Amazon would save millions upon millions of dollars if they built bricks-n-mortar stores where customers would just come buy stuff and take it home themselves.
At the risk of breaking my arm due to patting myself on the back too hard, I also predicted that Best Buy was going to be just fine. And this was when everyone in Tech said that Best Buy was going to go bankrupt. Best Buy has flourished in the last 3 years just like I said it would. Told ya so again.
Yup, Amazon building stores was about as easy a prediction to make as Christmas coming in December, if you know the math.
RSS Feed