Amazon’s Secret Strategy with its new Department Stores

Amazon never does things for only the obvious reasons, which makes me wonder what the company is up to with its latest retail foray: department stores.

Last week, the Wall Street Journal reported:

The new retail spaces will be around 30,000 square feet, smaller than most department stores, which typically occupy about 100,000 square feet, and will offer items from top consumer brands. The Amazon stores will dwarf many of the company’s other physical retail spaces and will have a footprint similar to scaled-down formats that Bloomingdale’s Inc., Nordstrom Inc., and other department-store chains have begun opening.

These new department stores will extend and complement the company’s other brick and mortar retail endeavors that started with bookstores, 4-star, and the Amazon Go robot bodegas, and then extended into their purchase of Whole Foods and launch first of the short-lived 365 grocery chain and later the new chain, Amazon Fresh.

Having almost annihilated brick-and-mortar bookstores and massively contributed to the perils of ordinary retail and shopping malls, the obvious reason for Amazon to move into department stores is that there’s a vacuum the company can profitably fill.

As the Journal article notes:

An expanded store footprint would enable Amazon to offer consumers a bevy of items they could try out in person before deciding to buy. That would be particularly beneficial in apparel, which can often be a guessing game for customers shopping online because of size and fit concerns. It would also give customers even more instant gratification than the quick shipping offered by Amazon for online purchases.

But I’m convinced there’s more to it.

When Amazon bought Whole Foods in 2017 it was to get into the more than one trillion dollar (per Statista) annual U.S. grocery business. One less obvious reason for the acquisition was to put fulfillment centers and easy returns into places where there were already Whole Foods stores (which also overindex with Amazon Prime subscriptions). While “the milk at the back of the store” is a decades-long success strategy for grocery stores, “Amazon returns at the back of the store” prompts customers to notice all the goodies in the aisles between the front door and the returns desk. It also lowers Amazon’s costs by having customers return things directly rather than dropping them at a UPS store.

We can see the same sort of secret strategy in the new Amazon department stores, where ultimately it's all about the data contrail that customers will leave in their wakes as they shop and buy.?

Here are the things I’ll be looking for at Amazon’s new department stores and why:

Amazon Shopping App Auto-Start: A cluster of different technologies (Shopkick, Gimbal) exist to activate a smartphone app when I walk into a store or near a place in a store. Amazon already has deep smartphone and inventory integration in the Amazon Go cashier-less bodegas. I expect the Amazon app on my smartphone will automatically activate when I walk through the department store doors.

If I get near items that I've either searched for at Amazon or put onto an Amazon list, I expect notifications to pop up on my smartphone (or for Alexa to whisper helpfully into my ear, see below). If I take something off the shelf and later put it back onto the shelf, Amazon will know that I've rejected the item (or the size) and factor that decision into what it shows me online later.

That might sound creepy, and it is, but it's also in service of Amazon's total commitment to customer satisfaction.

Fitting Rooms & Body Scanners: If customers can try things on at the new department stores, then that not only creates instant gratification but also a data trail that Amazon can use to sell those same customers more things later. If I try on three shirts but only buy one of them, then when I next go online Amazon will offer me variations on the shirt I did buy, in other colors. I'll have confidence that the shirt will fit.

The fitting rooms might also come with optional (I hope) body scanners where I can strip, stand, and turn while being scanned... like a more private version of what happens with TSA at the airport. That scanner data will allow Amazon to offer me bespoke clothing that fits me perfectly and that they'll send straight to my home, so long as I haven't gained or lost a lot of weight.

Prime Profiles: My entire family uses the same Amazon Prime account, and I sometimes wonder if Amazon thinks I suffer from Dissociative Identity Disorder because the things I buy are so different than what my wife and kids buy. With the new department stores, I predict that Amazon will start to drive individuals to create profiles within a larger family account—like Netflix and Disney+ and other streaming services with accounts shared among family members.

That will allow the company to create more nuanced and personalized offers, promotions, and experiences as people engage with Amazon whether it's at home, on a smartphone, shopping for groceries, or exploring the offerings at a department store. This data will also support Amazon's fast-growing digital advertising business, which is now a third, junior member of the former "duopoly" of Google and Facebook.

Alexa Integration: As I walk into the department store, I might get a smartphone notification inviting me to activate Alexa. "Would you like Alexa to help you shop today?" If I agree, then I might find myself asking, "Alexa, where are mens' socks?" "Try Aisle 5 on the second floor, Brad," Alexa might reply. "By the way, you searched for Fruit of the Loom briefs the other day: we have them in your size on Aisle 7, same floor. We also have the Amazon Basics brand, which is a few dollars cheaper."

Amazon, Apple, and Google are currently in a war to be my default digital assistant. Apple with Siri and Google with the Google Assistant each have an advantage over Amazon because those two assistants are built in as the defaults with the iOS and Android mobile operating systems. But Amazon is king when it comes to shopping of all kinds, and if the company can get me to turn on Alexa when I'm wandering the aisles, that will build my relationship with and reliance on Alexa, both when I'm in the store and later when I ask my Echo smart speaker to play the latest news.

Exclusive Amazon Prime Video Merch: Despite the Journal article stating that the new Amazon department stores will feature "items from top consumer brands," I expect to see Amazon's own brands showcased.

Amazon has already blazed new trails in shoppable advertising with, among other shows, the Savage x Fenty lingerie brand it co-created with Rhianna. The 2020 edition of a variety show promoting the brand on Amazon Prime Video, which was essentially a 56 minute commercial, was nominated for an Emmy. The show featured Prime's "X-Ray" functionality that let viewers start shopping for the lingerie directly from the show.

As Amazon invests more and more into its house and co-created brands, I expect to see those brands prominently featured in the aisles of the new department stores.

"Salience" is how readily an idea pops to mind as we wander through our everyday lives. Brick and mortar stores are salience-creating engines, exposing us to brands again and again and making it easier for us to move those brands into our consideration sets later.

Amazon's media properties (Amazon Prime Video, Twitch, IMDb TV), the latter two of which are advertising supported and therefore can feature promotions for house brands, will drive both awareness of house and co-created brands as well as the understanding that those brands are only available on Amazon and at Amazon's retail stores. The reverse will also be true: tee shirts featuring "Invincible" or "The Marvelous Mrs. Maisel" will drive viewership of those Amazon Prime shows in a virtuous cycle.?

Creating Demand

Since its inception, the publicly-available internet has been fantastic at demand satisfaction and mediocre at demand generation. The COVID-accelerated explosion of streaming video and immersive advertising environments like the mobile ads on Instagram and Snapchat have made online demand generation more feasible.

However, there is still nothing like a physical retail environment to create demand simply through repeated, salience-building exposures to products as we wander the aisles.

Amazon knows this.