Is Amazon Reinventing Retail for the 21st Century?

As the Internet drives consolidation in competitive industries, with Facebook dominating social media, Apple ruling smartphones, and Uber becoming the king of transportation, Amazon wants to capture market share from its rivals by ingraining itself in our daily lives.
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What is a store? Must it have merchandise? A checkout counter? Sales representatives?

None of the above, says Amazon. The company -- which generated $29 billion dollars in net sales last quarter -- is using more than a dozen new stores to aggressively manage its brand and improve online fulfillment. The stores will not sell anything.

Last week, Amazon opened Amazon@Penn, a retail location on the University of Pennsylvania's campus. It is the 5th college pick-up destination this year, following store openings at Purdue University, UMass Amherst, Isla Vista and the University of Cincinnati.

Before leaving campus, I decided to check out the store -- I had to find out what all the hype was about. I have to admit -- it was pretty cool. The store is centrally located, halfway between the academic buildings on campus and the residential side of campus, where most upperclassmen live. Inside, it looks like a hangout space; there are tables available for group study work, and a big pickup counter in the middle.

I left with a smile on my face. I was thinking, "I really love Amazon." Now this is a business that finally understands my lifestyle and is quite literally adapting to it. That's when it dawned on me that fostering brand loyalty might be the real genius behind Amazon retail locations. This strategy offers a lens into the future of retail, in the age of the Internet.

The stated purpose of Amazon's retail locations is to improve package fulfillment. Universities like Penn are monopolistic institutions, extracting rent from customers (err, students). As such, they have little incentive to provide high-quality services to their students -- hence, routine delays of up to two weeks in delivering mail/packages to students. (When I lived on-campus, I got accustomed to receiving magazine subscriptions a week late, so I was always reading last week's news).

On many college campuses, Amazon now accounts for more than 50 percent of packages received by students. According to Business Insider, Amazon Prime is "wreaking havoc on college mailrooms." In a press release, Marie Witt, vice president of Business Services at Penn, wrote, "The preference by today's students for on-line shopping has led to a significant increase in deliveries. When we looked closely at the shipping activity, we discovered that almost half of all packages delivered to Penn student mail rooms were from Amazon."

Now with Amazon pick-up locations on campus, the company is offering same-day delivery if students order by noon and free one-day delivery for packages ordered before 10:00 p.m. For students who order their daily necessities from Amazon (textbooks, hangers, light fixtures -- you name, we've ordered it), this is a significant improvement.

Amazon is in the business of convenience, but it's not clear that retail locations will generate enough new revenue to justify their costs. After all, students were already ordering tens of thousands of packages from Amazon, before the company eliminated two-week wait times. How much more can we order?

In the long run, Amazon's pick-up locations are brand management at it's finest. Amazon is building relationships with tens of thousands of college-educated adults. If I built out a financial model -- and I won't -- I might conservatively value each of these customers as having a lifetime value of upwards of $5,000 each. The real goal of Amazon stores is not to increase sales now, but to convert college students into lifelong loyal customers. If Amazon becomes a visible part of our daily lives, we'll keep our Amazon Prime subscriptions long after we graduate.

Amazon's new strategy provides insights for traditional retailers, whose decline has been one of the central business stories of this year. Macy's is struggling. U.S. retailers had a bad Christmas, even as online sales climbed. Hedge fund investments have gone sour. JC Penney keeps making headlines for its failures. Bloomberg reported, "department stores are on their deathbed."

Amazon stores are "showrooms" -- rather than selling products, they promote the brand. The idea behind the showroom model is that since people are buying less and less in stores, companies need to reduce their store counts and instead focus on using stores to drive online sales. As this idea becomes mainstream -- it's now a popular buzzword used in business schools and the mainstream media -- managers are taking note.

Amazon takes this evolution one step further. For Amazon, physical retail locations are about more than driving online sales. As the Internet drives consolidation in competitive industries, with Facebook dominating social media, Apple ruling smartphones, and Uber becoming the king of transportation, Amazon wants to capture market share from its rivals by ingraining itself in our daily lives. Amazon wants to be the be-all and end-all retail destination. This strategy is working.

As the buying power of millennials grows, stores will evolve from revenue centers into focal points for brand management. Inventory will be replaced by sexy, modern store layouts and designs. This is great for consumers; shopping will be more enjoyable, delivery will be faster, and the selection will be more varied. Whether this comes at the expense of entrenching mega-corporations and eliminating competition, only time will tell.

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