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Here's Why Amazon Opening Retail Stores Makes Sense

By Daniel B. Kline - Feb 13, 2016 at 11:47AM

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The company may or not be planning physical locations, but there are plenty of reasons that it should.

The news media went crazy in early February when the CEO of a company that operates malls seemingly tipped off the world to Amazon.com's (AMZN -1.24%) supposed plans to open 300-400 retail stores.

Sandeep Mathrani, CEO of General Growth Properties, caused all the fuss and furor when during his company's most recent earnings call he said that mall traffic was up due to consumers buying items online and returning them in physical stores, USA Today reported. He then dropped the line that set media tongues wagging, "and this case in point, you've got Amazon opening bricks and mortar bookstores and their goal is to open as I understand 300 to 400 bookstores."

Were this to happen -- and Amazon has neither denied nor confirmed the report -- it would immediately make the online retailer the second largest brick and mortar bookstore chain in the United States. The company would only be behind Barnes & Noble (BKS), a one-time rival it has crushed.

If Amazon were to actually do this, the reason behind the move should have very little to do with books. That won't make Barnes & Noble executives sleep any easier, because books would certainly be sold in the stores, but that is not the chief reason the online retailer should consider opening physical stores.

Let's get physical
General Properties released a statement after Mathrani's remarks had become a global news story that essentially said its CEO had been misinterpreted. Despite his words being clear, the company claimed in a statement that his remark "was not intended to represent Amazon's plans," CNN Money reported.

So while Amazon may or not be planning retail stores, that does not change that having them in select markets would benefit the company. Physical retailers have few advantages over Amazon, which thrives in part due to its lower overhead, but they do have a couple. A brick and mortar store can allow customers to be hands on with items they are considering buying and they allow for online ordering with in-store returns.

The first is valuable for obvious reasons. It's easy to buy a book or familiar item on Amazon.com, but it's harder to make the leap with say bed sheets or clothing. Being able to either handle those items in a store or at least return them easily in the event a consumer does not like them would level the playing field for the online leader.

Even though Amazon has a liberal return policy it's still a hassle to ship unwanted items back. It's easier to drop something off at a store or to just buy the right thing in the first place because you got to touch it.

Going physical would give the company these advantages, which would let people order online with greater confidence. That would be big blow in Amazon's battle not just with Barnes & Noble but with all major retailers.

Amazon's local warehouses could supply its potential retail stores. Source: Amazon

Amazon knows what you want
When the potential Amazon stores have been discussed the word bookstore has been used, but that's not really an accurate description of what Amazon should do. Admittedly, the company's first (and only) full brick and mortar location in Seattle is basically a bookstore, but if the company decides to open 300-400 mall stores, it should not limit itself to books.

Amazon has an amazing amount of data about what people shop for. It even uses predictive algorithms in its warehouses around the country to pack certain orders before a customer actually places the order. If the retailer were to open stores, it should use this data to stock them with the items most likely to sell. That would include books, but it would be different in each market, perhaps markedly so.

In addition, the online retailer can mine its returns data to see which items get exchanged the most and it could look at the products people view online, but don't purchase.

Amazon knows what people buy, what they return, and what they look at, but don't purchase. Amazon also knows which cables, accessories, and other items people buy in each market it services. Maybe customers in Seattle purchase a lot of six-foot lightning cables while New York City residents, with their smaller apartments, buy more four-foot ones. Whatever it is, Amazon knows and it should exploit that information in any potential physical locations.

This just makes sense
In addition to doing all the things mentioned above, Amazon stores could serve as a testing center/customer service hub for the company's growing array of hardware. Consumers have been willing to buy Kindle tablets and Fire TV without a hands-on demo, but being able to handle them could increase sales and on-site support staff would be able to solve any technical concerns. In addition, Amazon's Echo speaker/digital assistant would benefit from people seeing it. It's an impressive product, but it's usefulness and home automation potential is hard to explain on a web page.

Opening stores would leverage Amazon's knowledge of its consumers and its network of wholesale warehouses. The stores would eliminate the returns/sampling advantage that has helped its retail rivals, and it would make it easier for people to pull the trigger on certain online purchases.

Yes, Amazon would sell books and doing so as it does in the Seattle store at online prices would likely mean the end of Barnes & Noble. But that's only a small piece for why the company should move forward with this plan even if it was never actually a plan in the first place.

Daniel Kline has no position in any stocks mentioned. He loves bookstores, but rarely buys anything in them anymore. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool owns shares of Barnes & Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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