By Alexander Chernev
May 31, 2017

Amazon’s seventh physical store opening—the latest in New York City last week—might seem rather counterintuitive. Why would a company that is responsible for the demise of many bricks-and-mortar retail stores bother to open its own physical stores? Yet, from a strategic standpoint, brick-and-mortar stores are not a slip backward into book retailing, but rather a step forward toward establishing a unique, cross-category, omni-channel approach. There are several ways in which physical stores might benefit Amazon:

Content discovery
Amazon’s online bookstore is a place where customers can easily find the book they are looking for. But its huge inventory comes at a cost: There is simply too much choice available for consumers who are unsure about what they want to read. Amazon.com—the pioneer of “one-click” online purchasing—is a great option for customers who like to save time when shopping, but its brick-and-mortar stores work better for customers who want to spend time discovering new reads. To this end, Amazon makes it easy by curating lists of books by consumer ratings, and even the speed of reading the content, as measured by Kindle data.

Content promotion
In addition to promoting other publisher titles, physical stores provide Amazon (AMZN) with an opportunity to promote its own content. Indeed, Amazon is not only a distributor, but also a prolific content creator. Among the major hits from Amazon’s studios is the critically acclaimed original movie, Manchester by the Sea, which won an Oscar this year. Given that Amazon has a large customer base whose preferences it knows intimately and whom it can easily reach, Amazon is poised to become a major force in the entertainment industry, both as a distributor and as a content developer. In this context, physical retail locations can serve as a viable venue for promoting Amazon’s own digital content, be it books, music, videos, or movies.

Device showcase
Amazon’s physical stores are becoming showrooms where people can experience its latest gadgets, including Kindle e-readers, Fire tablets, and the Echo personal assistant. Even if Amazon were to break even on book sales in its physical stores, these brick-and-mortar locations could create value for Amazon merely by showcasing its products and services and giving consumers a tactile experience of products in a way that isn’t possible online. Best Buy has embraced this strategy, recently partnering with companies such as Microsoft, Samsung, and Sony (SNE) to promote their products. In Amazon’s case, this approach does not need an external partner—it could make its brick-and-mortar stores worthwhile by promoting its own electronics.

Boost for Amazon Prime
With physical stores, Amazon is also finding new ways to promote its $99-a-year Prime membership. The hook is that retail store shoppers must be Prime members to avoid paying the list price, which could be much higher than Amazon’s online price. Transitioning Amazon customers into Prime members is an important aspect of Amazon’s business model because it not only increases customer loyalty but—as in the case with the other membership-based retailers such as Costco—makes a significant contribution to its bottom line. Amazon is also promoting its branded credit card in its stores and online, which can help garner even greater consumer loyalty.

Brand-building
In addition to their functional benefits, physical stores have the potential to enrich Amazon’s brand image by adding a tangible dimension to the brand and increasing its prominence in consumer minds. In this context, Amazon’s retail strategy mirrors that of companies like Nike (NKE), Disney (DIS), Apple (AAPL), and Microsoft (MSFT) that have used their physical locations to increase customer loyalty by showcasing their brands. Amazon’s new store at Columbus Circle in New York embodies an astute brand-building move that goes well beyond selling books.

 

Will Amazon’s brick-and-mortar bookstores succeed where other booksellers are struggling? Only time will tell. But Amazon is a customer-centric technology company that knows how to use data to identify, track, and anticipate consumer preferences. By creating its own showrooms in its bookstores, Amazon has heightened its ability to promote its offerings across multiple categories while still capturing the benefits of scalability and cost-efficient logistics. These benefits cannot be optimized by bookselling alone, but they can be captured across a broad portfolio of products and services. Thus, the success of Amazon’s physical bookstores hinges on utilizing the synergies across the different offerings in its ecosystem. These synergies, coupled with a loyal customer base and sound management, should go a long way to help Amazon succeed in bringing back the brick-and-mortar bookseller business model.

Alexander Chernev is a professor at Kellogg School of Management at Northwestern University.

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