The Lex Newsletter: Amazon is determined to shop ’til it drops 

Dear reader,

Amazon used to run a strange chain of shops called 4-star. Filled with random goods such as avocado slicers, toys and electronics, the shops would only sell items rated four stars or above on Amazon’s online store. A perfect symbiosis of ecommerce and bricks and mortar? Not really. When I visited a 4-Star in Seattle on a cold February day in 2022 it was empty. One month later Amazon announced that all of the shops would be closed.

What is Amazon’s strategy for in-person shopping? Chief executive Andy Jassy says the company intends to “double down” on groceries and “go big” on physical shops. That is not an easy decision to understand. High margins in its new advertising business and the steady growth of highly profitable cloud computing make retail, particularly physical retail, one of the least exciting parts of the company.

Amazon launched its first physical store, a Seattle bookshop, in 2015. It added a few more spots in the US and overseas in the following years, using them partly as places for people to collect or drop off purchases made online.

But the real drama began in 2017 when the ecommerce giant announced plans to buy US supermarket chain Whole Foods for $13.7bn. The assumption was that Amazon had a strategy up its sleeve to transform the sector and destroy rivals. Share prices of competing grocery chains dropped in an instant.

That has not happened. Physical stores make up a tiny fraction of sales at Amazon — just over 3 per cent in the last quarter. Expansion is slow. Since the end of 2018, leased square footage for physical stores in North America has increased almost 20 per cent. Sales have grown just 10 per cent.

In recent weeks, Amazon has announced plans to close some of its Amazon Fresh grocery stores and Amazon Go convenience stores. New openings have been put on ice. But it is still not clear what Amazon wants. A huge global chain of grocery stores? A range of experimental shops? Or hubs for in-person and online commerce?

There have been some novel ideas. Last year, Amazon opened a “Style” clothing shop in Los Angeles that allows customers to use their smartphone to order clothes to the fitting rooms. But the company has not had a high rate of success with fashion in the past. The shop was dubbed “high-tech” but ultimately “underwhelming” by a reporter from The Guardian who visited.

Cashless technology is more promising. Amazon has created intricate systems that can track shoppers as they walk around, charging their accounts automatically when they leave with their purchases. No scrabbling for change required.

But the tech means little unless the stores have things in them that people want to buy. In San Francisco, a cashless Amazon store opened across the road from the FT’s office a couple of years ago. I went a few times to see if I could buy something for lunch. The selection was extremely ordinary. I haven’t been back.

In the last set of earnings, Amazon was asked about its plans for grocery stores and Jassy insisted that groceries were “a really important and strategic area”. He “really liked the progress” that Whole Foods had made on profitability in 2022, he said.

Why, then, does Amazon not expand Whole Foods? And why does it own the supermarket chain, which has more than 500 stores, while simultaneously expanding its own-brand range of grocery stores called Amazon Fresh?

Particularly as it is not clear that shoppers know why they should be visiting Amazon Fresh. Jassy said the company had no plans to “expand the physical Fresh doors” until it had worked out exactly what the “differentiation” was. He felt sure that would be uncovered this year.

Perhaps the most surprising thing is that Amazon has not turned the US into a nation of avid online grocery shoppers. Despite predictions that the pandemic would lead to an explosion of online food shopping, less than 10 per cent of Americans order weekly groceries online to be delivered or picked up, according to a Gallup poll.

What could Amazon do instead? Late last year, Jassy said Amazon had doubled its fulfilment network (the network that stores, packs and delivers orders) in the space of just two years. Speedy delivery is one of Amazon’s killer attractions. It offers same-day delivery in multiple cities. How about hiring out some of that space? Perhaps it could copy the successful model of its AWS cloud computing business. Spare warehouse and logistics capacity already in place could be turned into a new source of revenue.

Elsewhere in tech

You can read more about Andy Jassy’s challenging attempt to create a new vision for Amazon in this Big Read by Dave Lee and me.

The tech world remains obsessed with the battle for search engine supremacy. Here’s MIT Technology Review on why you shouldn’t trust artificial intelligence-powered search results.

Regulators are circling crypto. This snazzy video from Gary Gensler, chair of the Securities and Exchange Commission, ratchets up the pressure.

Enjoy the rest of your week,

Elaine Moore
Deputy head of Lex