How Amazon's New Bricks-and-Mortar Strategy Will Fuel Growth

Amazon.com Inc. (AMZN), the e-commerce giant that's crushed one brick-and-mortar chain after the other, is moving aggressively to boost its own physical retail footprint.

The Seattle-based company’s omni-channel strategy, intended to boost sales and lower costs, has been driven by a simple fact – roughly 30% of all online orders made through the online retailer are ultimately sent back, triple the rate of purchases made in store. Amazon has been searching for ways to make this return process affordable for itself and easy for its sprawling and ever-expanding global customer base, as outlined in a detailed Bloomberg story.

E-Retailer Inks an Unlikely Partnership

This goal to ease the burden of the returns process is why Amazon is dramatically expanding its bricks-and-mortar partnership with discount retailer Kohl's Corp. (KSS). In 2017, Kohl’s and Amazon launched a pilot program in Chicago and Los Angeles, which let customers return packages at Kohl’s stores. Earlier this year, the two retailers said they would expand that initiative to reach more than 1,150 stores. That came after an announcement in March, in which Kohl’s said it would sell Amazon-branded devices in 200 locations. 

In an industry that has struggled with declining foot traffic and rapidly evolving consumer trends, for Kohl’s the alliance with the tech giant is an effort to boost sales. When customers enter Kohl’s to make returns, it hopes they will be enticed with 25% off coupons, or decide to browse the store before or after the return.

While Kohl’s has survived the retail apocalypse, thanks in part to its moderate prices, loyalty programs, leasing deals and partnerships, it said on Tuesday that it expects same-store sales to come in between flat and a 2% increase in 2019.

“Kohl’s had nothing to lose because people are still going to buy on Amazon whether they return their product to Kohl’s or not,” said Morningstar analyst David Swartz, as cited by Bloomberg.

Kohl’s deal with the once-enemy looks like it’s working out. According to Earnest Research, locations near Chicago saw a 9% increase in new customers in 2018, while stores in other parts of the country had a modest 1% uptick.

Amazon's Push Into Physical Retail

On Amazon’s side, the partnership alleviates the inconvenience of the return process for customers, who could have otherwise stood in long lines at the post office. On the cost side, bringing a return location within 15 miles of about 80% of Americans could lower its per package cost from roughly $10 to $2, per people familiar with the operation.

Amazon's success with Kohl's comes after it's launched many less than spectacular brick-and-mortar experiments. Amazon’s physical retail sales have barely budged since its acquisition of Whole Foods in 2017.

Over the past few years, it has initiated other projects including bookstores, grocery pickup kiosks, and cashier-less convenience stores. None of these have shown as much promise as the e-commerce giant’s unlikely partnership with Kohl’s Corp., the very definition of an old-school retailer.

Looking Ahead

It’s probable that Amazon could move to start selling its private label groceries and clothing alongside its electronics at Kohl’s, as well as land new partnerships with other brick and mortars.

Some market watchers even expect Amazon to buy Kohl’s, or another retailer like Target Corp. (TGT), as it approached $300 billion in annual sales and seeks more avenues for growth as it wages a war against Walmart Inc. (WMT).

“A big brick-and-mortar acquisition is inevitable. If you’re an odds maker, you’d say the probability of [it being] Kohl’s has increased,” said Loup Ventures managing partner Gene Munster.