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The ‘Raw Truth’ on Amazon’s Rumored Department Store Launch

As much of the retail industry races to expand their presence online, Amazon is reportedly moving in the opposite direction.

According to The Wall Street Journal, the champion of e-commerce plans to open “several large physical retail locations in the U.S.” “akin to department stores.” Their footprint is estimated to be around 30,000 square feet, in line with the scaled-down formats Bloomingdale’s and Nordstrom have begun opening, the Journal said.

The report characterized the move as a step to help Amazon expand its reach in clothing, household items, electronics and “other areas.” The company’s private-label goods—it sells clothes, furniture and electronic devices under its own brand names, for example—“are expected to feature prominently,” the Journal reported.

The news comes a year after rumors emerged that Amazon was in talks with Simon Property Group to convert mall anchor properties once occupied by Sears and J. C. Penney into fulfillment centers.

As it did with last year’s unconfirmed talk, Amazon declined to confirm or deny the report, saying the company does not comment on “rumors and speculation.”

Former Macy’s Inc. CEO Terry Lundgren told CNBC’s “Squawk Box” he was “surprised that it’s taken Amazon this long” to make a bigger play in physical retail. “They recognize that the large majority of business takes place in physical stores, and they want their share of that,” he continued, so that’s where their next horizon is—they’re headed for that next horizon of capturing more share, and it’s got to come from brick and mortar.”

He believes opening stores makes a ton of sense when it comes to apparel. When it’s “done right, clothing can be much more profitable than the home furnishings business,” Lundgren said, pointing to faster turns and better margins. But the other side of the equation is that “the actual online experience of purchasing apparel, particularly on the women’s side of the business, is not particularly pleasing, because 40 percent of apparel that gets bought online gets returned.”

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However, Amazon’s supposed pivot into department stores would come at a tough time for the company’s brick-and-mortar business. Like other retailers, the company saw sales slump when the pandemic hit and has yet to see sales return to pre-Covid levels. In fact, Amazon’s second-quarter physical sales came in lower than both the second quarters of 2019 and 2018.

Sucharita Kodali, vice president and principal analyst with the research company Forrester, described the move as “silly all around.”

“Silly for them,” Kodali continued. “Silly that the media is picking up on it. Silly that anyone cares. The sector has been in decline since 9/11, Amazon has shown no competence in physical goods retail and Amazon is probably going to be regulated or broken up in some way anyway in the next 5 years.”

However, Paula Rosenblum, co-founder and managing partner at RSR Research—having always been of the opinion that Amazon should buy out Sears—sees multiple potential upsides in the company’s shift toward larger brick-and-mortar stores.

“The raw truth is that cargo plane fleet or no cargo plane fleet, it is very hard for a pureplay retailer to make a profit, especially with the vast assortment of products Amazon carries,” Rosenblum said. “Stores will give them an opportunity to do less long-range shipping, act as local distribution centers and, of course, make some money—and, also, expand its total addressable market into people who would prefer to touch products before they buy them.”

Can Amazon do it well? Rosenblum is not sure. “It shouldn’t be that hard, but the company hasn’t exactly done wonders for Whole Foods Market,” she said.

Has Amazon overtaken Walmart

Amazon’s rumored play for a department store-like retail presence comes amid a report that it has overtaken the brick-and-mortar king, Walmart, as the largest retail seller outside of China.

Looking purely at reported revenues, Walmart still maintains the upper hand. According to the earnings results it released Tuesday, the retail titan drew in sales of $566 billion over the 12 months ended July 31. Amazon, meanwhile, posted revenues of just $443 billion over a roughly similar 12-month period ended June 30.

However, the financial research firm FactSet believes the actual amount people spend at Amazon—a value that includes all third-party sales—is much higher. It estimates this number, the e-commerce giant’s “gross merchandise volume,” totaled $610 billion in the year ended June 30, well above Walmart’s $566 billion.

Kodali said this was “inevitable.”

“I think anyone who is surprised by this hasn’t followed retail,” Kodali said. “Amazon seems to have taken share from many now-dead retailers but has also captured a significant amount of any growth that is there in retail.”

The true value of Amazon’s third-party sales remains a mystery—hence FactSet’s need to estimate. Amazon founder and executive chairman Jeff Bezos offered a glimpse into this side of the business in an April 2019 letter to shareholders. In it, he expounded on the success of its third-party business. “Third-party sellers are kicking our first-party butt. Badly,” Bezos wrote.

According to that letter, third-party sellers went from accounting for 3 percent of Amazon’s physical gross merchandise sales in 1999 to 31 percent in 2009. From that year on, the percentage grew by at least two points every year, reaching 58 percent in 2018.

Though Amazon doesn’t report the total value of sales made by third-party sellers, it does note the revenue it earned from related services, including commissions and any related fulfillment and shipping fees. In the second quarter, it reported $25.1 billion in sales from “third-party seller services,” a 34 percent increase from a year earlier. Net sales from Amazon’s online stores, meanwhile, rose just 13 percent to $53 billion over the same time period.

According to The New York Times, which was the first to report Tuesday that Amazon had “eclipsed” Walmart, the brick-and-mortar icon still sells more in the United States than Amazon. J.P. Morgan, however, estimates this could change next year, the Times noted.

Ignoring third-party sales, Amazon is gaining on Walmart, and killing it on the apparel front. (Mickey Drexler also recently panned Walmart’s attempts to produce compelling fashion.) In the six months ended June 30, Amazon recorded $222 billion in net sales, a substantial leap compared to the $164 billion it pulled in over the same period the prior year. Walmart, meanwhile, saw total revenues climb just 2.6 percent from $272 billion to $279 billion in the six-month period ended July 31.

Still, legislation emerging from an ongoing antitrust investigation into Amazon and other Big Tech firms could slow the e-commerce company down. Led by antitrust subcommittee chairman David N. Cicilline (D-R.I.) and antitrust subcommittee ranking member Ken Buck (R-Co.), House lawmakers introduced a bipartisan agenda in June that included three bills that could have a major impact on Amazon’s business model.

“Right now, unregulated tech monopolies have too much power over our economy,” David N. Cicilline (D-R.I.), one of the two lawmakers who introduced the legislation, said in a statement. “They are in a unique position to pick winners and losers, destroy small businesses, raise prices on consumers and put folks out of work. Our agenda will level the playing field and ensure the wealthiest, most powerful tech monopolies play by the same rules as the rest of us.”

The bills include the Ending Platform Monopolies Act, which would make it illegal for a company like Amazon to effectively sell its own branded products and sell competing products on the same marketplace. The American Innovation and Choice Online Act would ban companies from “self-preferencing” their own products and services over others’, a practice Amazon has long been accused of. The Platform Competition and Opportunity Act would prohibit dominant threats from acquiring competitive threats or companies that can expand or entrench their market power.

Amazon, and other tech giants, quickly pushed back on these proposed reforms, releasing a statement voicing its opposition to the bills. More recently, it has been contacting its third-party sellers to discuss the legislation, CNBC reported Wednesday.

“We’re reaching out to a small group of our sellers to make them aware of a package of legislative proposals, currently in Congress, that is aimed at regulating Amazon and other large technology companies,” an email supposedly said. “It is early in the process and the bills are subject to change, but we are concerned that they could potentially have significant negative effects on small and medium-sized businesses like yours that sell in our store.”

Amazon also faces a legal antitrust challenge from D.C. Attorney General Karl Racine, who filed a lawsuit in May accusing it of using pricing contracts with third-part sellers to maintain monopoly power. A year ago, Bloomberg reported that attorneys general from New York and California were working with the Federal Trade Commission (FTC) on an investigation into Amazon as well.

Now, Kodali said, the FTC and Congressional investigations into Amazon’s market dominance and “the non-level playing field on which it operates” are “more important than ever.” Additionally, she said she thinks the Securities and Exchange Commission should force Amazon to share its gross merchandise value in North America versus the rest of the world.