Exactly 20 years after Amazon.com (NASDAQ:AMZN) went online as the first Internet-only bookseller, the electronic retailer has opened its first bricks-and-mortar bookstore.
The Internet was supposed to be the death of physical bookstores. Amazon has played a leading role in the demise of Borders Group, B. Dalton, and many independent shops, and it's primarily responsible for the weakened state of the last remaining national chain, Barnes & Noble (NYSE:BKS), so it's a bit ironic that the e-tailer is now joining their ranks.
But don't expect Amazon's decision to open a store in Seattle to herald a renaissance in the industry. One need only look at what happened to mom-and-pop grocery stores when Wal-Mart (NYSE:WMT) moved into a neighborhood, or to the independent hardware stores following a Home Depot (NYSE:HD) big-box store opening, to see what the future holds in store for bookstores. In reality, it's a death knell for the last vestiges of this once thriving format.
Big plans for big data
Although Amazon.com is viewed as a big marketplace to buy stuff, it's actually something much different, larger, and more exciting than that. It's really a numbers business, a storehouse of data that allows it to dive deep into consumer shopping preferences and habits. And to help others do the same.
When the Internet retailer reported its earnings last month, it revealed that its Amazon Web Services data analytics business saw explosive growth, with revenues surging 78% to $2.1 billion, accounting for more than half of all of Amazon's operating profits.
The Big Data business is a multifaceted platform operating in the cloud that gives a diverse list of customers deep insights into their operations. For example, AWS gives Netflix the ability to stream tens of thousands of videos instantaneously around the globe while providing NASA with the tools to deploy massive computations from robots on Mars.
Amazon can also use that capability to dive into its own data to power its own operations. That huge database of information will be used to develop its bookstore. In announcing the store's opening, Amazon said, "The books in our store are selected based on Amazon.com customer ratings, pre-orders, sales, popularity on Goodreads, and our curators' assessments."
All that data Amazon collects on its customers' buying habits -- in this case in the Seattle area -- will be harnessed to help select which books to stock. And though inventory will be more than just data driven, it provides Amazon with a competitive advantage that Barnes & Noble, let alone the independent booksellers, can't match.
The camel's nose under the tent
Amazon has been slowly dipping its toe into the real world of retailing, first with pop-up stores where customers can get a hands-on view of e-readers, tablets, and Fire TV; placing order pickup lockers in stores such as Staples and RadioShack; and then by replacing on-campus bookstores with its own textbook bookstores, which now compete with Barnes & Noble Education, which the bookseller spun off this past August.
Now it's opening an actual bookstore, and it could become a format that allows the e-tailer to selectively expand on the concept across the country and further threaten the viability of its rivals. Last quarter Barnes & Noble reported that retail segment revenues fell 1.7%, with a 1.1% rise in comparable store sales on the strength of non-book sales. Even its online sales were lower.
The potential for amping up the Wal-Mart effect of displacing smaller businesses when one of its supercenters opens is great with the new Amazon bookstore. It may be "creative destruction" in that more and better opportunities to buy and save are established, but it's disruptive nonetheless.
It's a pattern that is repeated with the local and regional hardware stores when Home Depot moves in. According to the Census Bureau, the number of independent hardware stores declined by more than 1,700, or by 13%, between 1998 and 2008, the latest figures available, leaving about 11,700 still in business at the time.
A real page turner
Of course, we're only talking about one bookstore here, not the 5,200 Wal-Marts in the U.S. or the 2,270 Home Depots. But Amazon.com's decision to directly compete against its rivals with an actual physical store suggests the Internet retailer is looking to drive out the last of competitors. It has the means, the infrastructure, and the data to march these atypical retail locations across the country.