Ready, Set, Go!

As if to coronate its becoming the largest retailer outside China, the WSJ reports that Amazon is going to be opening several physical retail locations in the U.S.

Amazon.com Inc. AMZN +0.79% plans to open several large physical retail locations in the U.S. that will operate akin to department stores, a step to help the tech company extend its reach in sales of clothing, household items, electronics and other areas, people familiar with the matter said.

This should come as no surprise given that Amazon first started experimenting with physical stores back in 2015. Using online purchase data, the company was able to figure out the ~5,000 most popular books in a geographic area and then optimized the store to facilitate browsing and discovery.

Here's Bezos explaining the strategy back in 2016:

Shortly after, Amazon started rolling out Amazon Go stores which the company describes as "a new kind of store featuring the world's most advanced shopping technology. No lines, no checkout – just grab and go!" In short, these cashierless convenience stores use a collection of cameras and sensors to track what you pick up and when you walk out, your account is immediately charged.

The combination of a smaller physical footprint and frictionless checkout has the potential to be a potent combination in retailing which is known for having thin margins and has seen little innovation in the checkout experience (and no, self-checkout where you basically do the cashier's work for them is not an innovation).

One massive advantage that Amazon has over its competitors is that – similar to the bookstore approach – they will be able to leverage their online data to know what's popular in a given geography. This means they are able to dramatically reduce the physical footprint of the stores. Indeed, the WSJ reports that this is going to happen:

Some of the first Amazon department stores are expected to be located in Ohio and California, the people said. The new retail spaces will be around 30,000 square feet, smaller than most department stores, which typically occupy about 100,000 square feet, and will offer items from top consumer brands.

The other big advantage Amazon will have is the Amazon Go technology which can help reduce friction in the buying process. Small reductions in friction applied across millions of transactions can have a massive impact. How many times have you been in a line at a store and the more you thought about a specific item, the more you realized you didn't really need it? How much time is wasted at Costco waiting to check out and then waiting to have the number of items counted as you exit the store? If Amazon is able to roll out Go-like technology it will represent one of the most transformative changes in the retail experience since the advent of the credit card.

Zooming Out

In AI Superpowers Kai-Fu Lee discusses the difference between U.S. companies and Chinese companies. One key difference is that copying product features and ideas is common in China whereas it's frowned on in the United States:

Central to that ideology is a wide-eyed techno-optimism, a belief that every person and company can truly change the world through innovative thinking. Copying ideas or product features is frowned upon as a betrayal of the zeitgeist and an act that is beneath the moral code of a true entrepreneur. (p.26)

Because of the speed of execution and the willingness for companies to simply copy others, Chinese companies tend to need to build out real-world operations as a competitive moat:

The only way to survive this battle is to constantly improve one’s product but also to innovate on your business model and build a “moat” around your company. If one’s only edge is a single novel idea, that idea will invariably be copied, your key employees will be poached, and you’ll be driven out of business by VC-subsidized competitors. (p. 15)

Lee goes on to argue that China – with its mountains of data, technical sophistication, and willingness to tolerate business models that combine online and offline components – will lead the way in rolling out these blended "online-merge-offline" technologies which he describes as the next evolution after online-to-offline.

Online-merge-offline (OMO) is the next step in an evolution that already took us from pure e-commerce deliveries to O2O (online-to-offline) services. OMO constitutes the full integration of the two. It brings the convenience of the online world offline and the rich sensory reality of the offline world online. Over the coming years, perception AI will turn shopping malls, grocery stores, city streets, and our homes into OMO environments. In the process, it will produce some of the first applications of artificial intelligence that will feel truly futuristic to the average user. (p. 118)

With their push deeper into physical retailing, Amazon really represents the first consumer-facing manifestation of OMO technology this side of the Pacific. So while all of us are busy talking about the metaverse, Amazon is putting the pieces in place to fundamentally alter the way retailing happens in the 21st century.