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Why Amazon’s future depends on moving from the internet to the physical world

Why Amazon’s future depends on moving from the internet to the physical world

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Amazon’s cashier-less Go stores give us a glimpse at its vision for the future of retail

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The future of Amazon is starting to look a lot more complicated than just selling products on the internet. One of the company’s cashier-less Go convenience stores opened in San Francisco last week, with another store opening in the city later this year and more planned for Chicago and New York City in 2019. Coupled with Amazon’s purchase of Whole Foods last year, these Go stores give us a glimpse into a future hybrid form of retail that Amazon could use to expand from e-commerce into real-world purchases at restaurants, grocery stores, and elsewhere.

Understanding why the company is interested in those sectors, and what its real competitors are, is the key to understanding how we buy everything in the future is beginning to change. Amazon CEO Jeff Bezos has always set out to build the Everything Store, but it’s increasingly clear that to accomplish that, Amazon will have to become the do-everything company. And that includes competing with everything from Walmart and Target to CVS, 7-Eleven, and even the restaurant industry.

Amazon’s traditional businesses aren’t growing as fast as they used to

If you looked at Amazon’s business back in early September, it might look like it was well on its way to taking over the world. The company became the second US corporation to surpass $1 trillion in market valuation, after Apple, and it had just announced a dizzying number of new appliance, audio, and smart home products at an Alexa-focused hardware event in August. It seemed like Amazon could do no wrong, and that its bold vision of a future where it makes or sells you every possible product could reasonably become a reality.

But October was less rosy. Amazon’s most recent financial quarter revealed a less-than-stellar few months for the internet retailer, where growth in key areas like North American retail, Prime membership, and its AWS cloud division has started to slow. Since September, Amazon has shed nearly 20 percent of its market cap, costing CEO Jeff Bezos almost $20 billion of his personal fortune and adjusting the narrative around Amazon’s potential for future growth.

Photo by Vjeran Pavic / The Verge

It’s more important than ever for Amazon to shift into offline retail, and it’s more clear now what it has to lose by failing to do so. The company owns more than half of all e-commerce, and its fast-growing cloud computing and web advertising businesses make it one of the most powerful players in the tech industry. But e-commerce is just 10 percent of the overall $5 trillion retail spend in the US, according to the US Census Bureau’s most recent retail estimates. And for sectors like groceries, an $800 billion market, just 2 percent of it occurs online.

For Amazon to keep growing and continue to sell us ever more products — and in turn justify the immense faith its shareholders have put in the company’s future — it has to find new ways to sell us products. Increasingly, that means moving offline and into the real world, where most people spend money on food, drink, groceries, and household goods.

Amazon has to find new ways to sell us products

Amazon already has a number of ways it’s trying to shift customer behavior from offline to online. Its Prime Now service offers same-day delivery of products and household goods in certain markets, while its Amazon Fresh and Amazon Restaurants divisions are trying to capture more of the market for grocery and meal delivery. Prime Pantry is the company’s strategy for getting you to buy things like paper towels and peanut butter online, while its Dash buttons help customers with one-click ordering of products like laundry detergent without ever needing to pull out their phone.

But Amazon’s biggest hurdle to growth isn’t that another company might steal its e-commerce lunch. Rather, it’s that consumer behavior shows there are simply some products and purchases that live almost exclusively offline, for now at least. Think groceries, snacks, drinks, and take out, as well as the kinds of items you buy at CVS, 7-Eleven, or a local cafe. Amazon is virtually nowhere in these markets, and it risks ceding ground to the companies that do have the physical footprints it requires to build a shopping network as robust as the one Amazon is envisioning.

Photo by Vjeran Pavic / The Verge

Chief among Amazon’s rivals here is Walmart, which makes more than half of its nearly $500 billion in annual revenue from groceries. On top of that, Walmart has at least one store within 10 miles of 90 percent of Americans. In 2016, 95 percent of Americans visited a Walmart, compared with just 46 percent that bought something from Amazon, according to analyst firm NPD. In that sense, Amazon’s biggest fear is that Walmart transforms itself into Amazon before Amazon transforms itself into Walmart. And with Walmart’s purchase of Jet.com in 2016 and an impressive number of tech-focused partnerships in the last 12 months, it’s increasingly looking like Walmart could accelerate its shift into a hybrid retailer.

Not only does Walmart have Amazon beat in groceries by a mile, including in the new and growing category of grocery delivery and online ordering, but it’s also positioned to strategically capitalize on recent trends in consumer behavior that show that a sizable number of people are comfortable picking up items in person, if it means they can get it same day. Increasingly, consumers are buying online and choosing in-store pickup, or prioritizing the convenience of having a product immediately instead of waiting the 48 hours it takes for Amazon to get it to their doorstep. Not until Amazon has Prime Now in every city in America, or its drone delivery program up and running (which won’t happen any time soon), can the company offset those trends by shipping products even faster.

Amazon has to become Walmart before Walmart becomes Amazon

Take all of that data and those insights into account and it starts to make a whole lot of sense why Amazon’s future is much more than e-commerce. Amazon needs physical stores, and it needs a lot of them. Whole Foods certainly helps, but Whole Foods is far from the US’s most popular grocery chain and it has nowhere near the footprint of Walmart.

Bloomberg reported in September that Amazon could open as many as 3,000 of its Go stores by 2021 in a bid to become a major player in the restaurant, convenience store, and grocery industries, with each Go store tailored to a specific markets needs and offering a mix of different items. That kind of scale could turn the selling of sandwiches, salads, and low-key groceries into a major money-making business.

But the company has just six Go locations right now. Amazon has a long way to go before its offline retail ambitions would be fully realized, and it’s still an open question how Whole Foods and the company’s smattering of bookstores and other brick-and-mortar experiments would all fit in. But competitors are catching on; Walmart-owned Sam’s Club announced earlier this week that it plans to open a cashier-less Go store competitor of its own in Texas.

It’s clear that Amazon’s future lies in finding new and ever more creative ways to offer convenience, even when that convenience takes the shape of something familiar like a corner store, a local grocery, or a pharmacy. Convenience is what built Amazon’s empire, and it’s still the driving force behind everything the company does today. Its mission now is cracking convenience on an entirely new scale: selling us not what we might need in two days, but what we need right now. 

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