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Can Amazon Really Do Department Stores Better?

By Rich Duprey – Sep 29, 2021 at 11:15AM

Key Points

  • Amazon has become the largest online retailer of apparel.
  • Its new department stores will primarily feature the e-tailer's own clothing brands.
  • Amazon's record with brick-and-mortar stores has not been particularly robust.

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A chain of tech-heavy clothing stores might not move the needle on the e-commerce giant's bottom line.

Amazon.com (AMZN 2.14%) is reportedly looking to begin opening its planned string of department stores as early as next year, and those locations are promising to be as tech-heavy as you'd imagine a store operated by the online retail giant would be.

Yet just because the e-commerce leader is slapping its name on a bunch of brick-and-mortar sites doesn't mean they will be any more successful than legacy department stores are in the current sales environment. The retail sector, though much improved, is still ailing -- and Amazon hasn't shown itself to be particularly adept at operating physical stores.

Smiling women with colorful shopping bags

Image source: Getty Images.

A destination for tech-savvy consumers?

Amazon has become the largest online retailer of clothes, with analysts estimating it will sell as much as $45 billion worth this year. The Wall Street Journal says it may open its department stores as early as next year. However, while a traditional department store is typically 100,000 square feet, Amazon's will be much smaller at around 30,000 square feet.  

While the stores will allow Amazon to highlight its own apparel brands, where the retailer likely hopes to differentiate itself is by infusing the stores with heavy flashes of technology.

The Wall Street Journal says one possibility is that consumers would be able to scan QR codes on clothes, which would signal employees to pull them from the clothing racks and put the items in dressing rooms. While trying them on, the customers could use touchscreens to alert employees that they want to try on different styles or sizes -- or perhaps even see options suggested by artificial intelligence systems. The workers would then retrieve the items and bring them directly to the customers' dressing rooms.

While that concept sounds like it could be deeply challenging for the workers who would be continuously running to and from the dressing rooms, there are other reasons an Amazon department store might not be a winning idea.

A jumble of clothes on clothes racks and floor

Image source: Getty Images.

A threadbare experience

Amazon's existing physical store footprint has never exactly lit up its sales growth. In addition to its 500-store Whole Foods Market chain, it also operates dozens of bookstores (Amazon Books), device stores (Amazon 4-Star), grocery stores (Amazon Fresh), and convenience stores (Amazon Go).

Second-quarter sales at those locations were $4.2 billion -- up 11% compared to the prior-year period when most retail outlets were closed, but 3% below 2019's second quarter even though it has more physical locations in operation today.

Further, the name Amazon has made for itself selling apparel online was primarily based on third-party retailers using its platform. Despite launching private label merchandise in 2016 and growing its portfolio to over 100 brands, it's not necessarily Amazon's own goods driving its gains.

There's nothing particular about Amazon's fashions that would draw in consumers. Online, it's typically price that differentiates its products, but The Wall Street Journal says the fashions it will feature in its stores will be an assortment of casual styles similar to what one might find at The Gap.

While that might also include name-brand apparel to heighten consumer interest, there's nothing especially fresh about this approach to the department store model to make it stand out.

A fashion faux pas

Department stores in general may not be dead, but the business model is still struggling. Mobile-device location data from analytics company Placer.ai recently found foot traffic at shopping malls had recovered all the ground lost during the pandemic, but the momentum may have stalled as visits began to slide again in August. 

That may have had something to do with the Delta-variant-propelled fourth wave of COVID-19 that is still in progress or the timing of the Labor Day holiday -- but broadly speaking, malls are still in an ongoing battle to attract shoppers.

It's possible that Amazon's opening department stores might help the malls, but these apparel stores don't seem likely to have much impact on the tech company's own bottom line.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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