Amazon’s Bricks-and-Mortar Plan

by Cynthia Wilson | February 8, 2012 6:30 am

Amazon (NASDAQ:AMZN[1]) wants to go bricks and mortar. That’s right; the company that took e-commerce to a whole new level plans to open a traditional retail store in Seattle, where it is headquartered, before year’s end.

And if the first store is successful, the world’s largest Internet retailer wants to see if a chain of namesake boutique-style stores featuring its products will be profitable. Amazon also is looking for a way to better differentiate and promote its products – specifically the Kindle e-reader, accessories for it, and books written by authors Amazon signed through its publishing house to create exclusive content. The store will give visitors a way to buy Amazon books and, via a Wi-Fi connection, a way to sample titles from its e-book inventory.

It may seem strange to some investors to saddle a successful online retail business with an old business model. But Amazon’s share of the home entertainment and computer networking market is growing – up 14% during the last six months. Amazon’s flagship Kindle Fire gets much of the credit for that.

The holiday season was particularly good for Kindle sales. About 4 million were sold during the holiday period, many of them were sold of which were made at traditional retail stores. Had Amazon’s storefront locations been up and running, sales might have been even better, and the company wouldn’t have had to share profits with Wal-Mart (NYSE:WMT[2]), Target (NYSE:TGT[3]), and Best Buy (NYSE:BBY[4]). Amazon also said that its No. 1 and No. 4 bestselling e-book releases were published by independent authors through its Kindle Direct Publishing platform.

Still, there’s risk involved, and it’s not just because operating retail stores often involves a lot of overhead and a bigger tax burden than Amazon’s online counterpart. Kindle e-readers didn’t sell well until Amazon lowered the price, with the Kindle Fire priced less than it cost to make. A recent survey by ChangeWave showed that the Kindle Fire’s price cut was the primary reason most Kindle owners bought it. However, only 54% of those who bought the tablet said they were very satisfied with it, compared to a 49% satisfaction rating by owners of all other tablets combined. Meanwhile, 74% of Apple (NASDAQ:AAPL[5]) iPad 2 owners said they were very satisfied with the product.

Many Kindle owners also said they wanted the device to include a camera, 3G capability, and a bigger screen – all things found on the iPad 2. The Kindle Fire 2 is expected to offer those features when it is released this spring. But the tablet will still lack the speed and storage space available on the iPad 2, even though most people seem to be using that device for entertainment purposes. Movies and books eat up a lot of space. Kindle sales also could be hurt by the iPad 3, featuring iOS 5.1 technology, which is expected to debut around the same time as the Kindle Fire 2. In addition to being smaller, lighter and able to support full touch-screen HD display, the iPad 3 is expected to feature a powerful A6 quad-core processor as well as wireless charging and data-transfer technology.

Another part of the bricks-and-mortar gamble for Amazon is that its customers may be seriously cost-conscious. They’ll pay $199 for a Kindle Fire—versus $499 for an iPad 2—but they might not spring for all the accessories and other high-margin items the company expects.

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