Amazon (AMZN 1.10%) is one of those companies that's not afraid to dabble in new territory. The retail giant has, in recent years, branched out into a number of market sectors, from groceries to healthcare. And while it's known as a major player in the world of online retail, Amazon has also opened its share of physical stores through the years.
But like many brick-and-mortar retailers, Amazon has seen sluggish sales from its physical stores. And so now, it's making plans to shut them down.
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A strategic, telling move
Amazon recently announced plans to shutter 68 stores across the U.S. and United Kingdom. These include its physical bookstores, its Amazon 4-star brand (which feature a selection of the site's highly rated products), and Amazon Pop Up shops, which sell a mix of electronics and other popular items.
While Amazon's online sales have boomed in recent years, sales growth at its physical stores has lagged. In fact, Amazon's brick-and-mortar portfolio, which includes Whole Foods, delivered lower sales in 2021 than it did three years prior. And so now, Amazon is following in the footsteps of other retailers that are closing stores to focus on digital sales.
For Amazon, this certainly isn't a stretch -- digital sales are what the online giant does best. And Amazon has no plans to close its Amazon Fresh or Whole Foods stores anytime soon. Similarly, it plans to keep its Amazon Go convenience stores around. But ultimately, Amazon may have learned the hard way that consumer patterns are changing -- and that physical retail isn't exactly the most profitable place to be these days.
Is physical retail doomed?
The pandemic has been unkind to physical retailers, many of which were struggling with sales before the COVID-19 outbreak began. Even prior to the pandemic, consumers were beginning to do more of their shopping online, and foot traffic at malls was growing increasingly sluggish.
But the pandemic bolstered that trend. And now, more retail chains are looking at shuttering underperforming stores and focusing on building out their fulfillment and distribution center networks. That's a great thing for investors in the industrial space; for investors in physical retail spaces, not so much.
The fact that Amazon didn't have great success with its physical stores isn't shocking, despite the allure of the Amazon brand and the tech-centric setup of its brick-and-mortar locations that was apt to appeal to younger consumers in particular. But it's also a sign that retail REIT investors may want to start reassessing their strategy -- and diversifying their holdings outside of shopping centers and malls.
Right now, investing in retail space is a precarious prospect given the shift to digital sales that's occurred over the past two years. This isn't to say that shopping centers and malls are dead. But should we expect more closures in the near term? Probably.
If Amazon didn't manage to rake in the dough with its physical store offerings, then frankly it doesn't bode well for old-school retailers, many of which need a serious overhaul. And that's something investors will need to keep on their radar.
