Bricks vs clicks: What Amazon’s offline retail stores say about online shopping

Back in November, Amazon created waves when it opened its first brick-and-mortar store in Seattle’s University Village. Many questioned Amazon’s rationale; the giant did, after all, make its name from online retail — arguably cannibalizing physical retail stores across the US and the developed world in the process. The questions continued when another Amazon store opened on the Purdue University campus earlier this month. Another 300 to 400 stores are rumored to be in the works. Apparently, Amazon’s move into “brick-and-mortar” retailing is a deliberate strategy to compete with its remaining physical rivals in their own space. Does this mean that online retail is not the “killer app” that it has been held to represent? The substitution of brick-and-mortar sales to “click sales” has been interpreted as a measure of a nation’s performance in the digital economy. The higher the proportion of online sales, the better the (digital) economy is presumed to be performing. Despite the claims of online advocates, it was never likely that online sales would completely obliterate physical sales. I, for one, observed as much back in 2000 when commenting on the emergence of online grocery shopping. In my 2012 review, little had changed.

The strengths and weaknesses of online retailing

For sure, there are supply-side economies from centralizing warehousing in cheaper non-prime locations and replacing human staff with robotic workers. Retailers could also lower inventory holding costs by using sophisticated supply-chain management systems that centralize order placement but store and dispatch from remote providers. Online retailers such as Amazon have become platforms, contractually linking customers and suppliers without buying, holding, and dispatching stock themselves. On the demand side, customers too welcomed the additional welfare conferred by being able to choose from a wider range of goods. But along with the advantages, online retailing has also brought trade-offs. For the most part, these trade-offs are reflected on the demand side of the markets. The inevitable reality faced by all retailers is that consumers are inherently heterogeneous and sometimes value what online retailers simply cannot offer.

What online stores cannot do

Buying a book may not be just the transfer of ownership of a single copy. Shopping still ranks as one of our most favored leisure activities, and it is characterized by the bundling of a wide range of social, community, and entertainment preferences into the experience of purchasing consumer goods. It is far from clear that online sales offer viable substitutes for the full bundle that comprises the physical leisure shopping experience. Unsurprisingly, this phenomenon has long been recognized by physical book retailers. Cafes, children’s play spaces, and value-added personal services such as knowledgeable staff providing reviews and recommendations, sponsoring and hosting book clubs, and active engagement in community activities feature prominently among the survivors of the Amazon invasion. While the link between offering these activities and long-term profitability is not straightforward, their persistence bears testimony to the limits of the online purchase bundle.

The more things change, the more they stay the same

In this light, Amazon’s foray into physical retailing could be seen as channel expansion to appeal to a particular customer niche, or a move to mitigate risks related to potential market maturity. That the new stores are on university campuses is interesting. What student preference or characteristic is Amazon catering (or appealing) to with its new stores? And what experiences is it bundling with the sale of books and kindles to attract customers? Regardless of the answers, the message to policymakers is clear: Customer preferences and willingness-to-pay for physical alternatives limits substitution to digital-only applications. More digital is better only if customers value it more.

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