This is why Amazon will open physical bookstores

Brick-and-mortar bookstores are a great idea for Amazon. Here's why.

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Opening physical bookstores is the best idea Amazon has had since the creation of Amazon Prime.

But wait, you say! Wasn't the report that Amazon is even planning a store retracted? And wasn't Amazon created as an efficient alternative to brick-and-mortar stores? Aren't all the bookstores going out of business partly because of Amazon?

Confusion on all this abounds. Here's what you need to know about Amazon's brilliant plan to launch a chain of physical bookstores.

Accidentally telling the truth

Sandeep Mathrani is the CEO of a company you've probably never heard of called General Growth Properties (GGP). It's a Chicago-based real estate investment trust that owns and manages shopping malls.

Last Tuesday, Mathrani accidentally blurted out the truth during an earnings call. He said: "You've got Amazon opening bricks-and-mortar bookstores, and their goal is to open, as I understand, 300 to 400 bookstores."

amazon logo Leonhard Foeger/Reuters

He was responding to a question, and his point was to highlight a trend among online stores, including Warby Parker and Birchbox, of opening physical retail locations.

Amazon doesn't like having its plans made known to the public. It's not hard to imagine that Amazon CEO Jeff Bezos got mad, called Mathrani and demanded some spin control. Mathrani did issue a statement, and said his comment about Amazon stores "was not intended to represent Amazon's plans."

That feels and smells like a retraction, but it's not. Mathrani literally said nothing about the accuracy of his claim -- in other words he stands by his statement.

The truth is very likely that Amazon is, in fact, planning to open dozens or hundreds of retail stores.

The company is aggressively hiring for its brick-and-mortar bookstore operation, which it calls "Amazon Books." If you search the company's job listings, you'll see that it has lots of new positions to fill.

Amazon's single physical bookstore, in Seattle, was apparently just a trial run. The company is actively recruiting in La Jolla, Calif., an affluent San Diego neighborhood.

Other physical locations are likely to initially come one at a time, rather than dozens at once.

Why physical bookstores are a great idea for Amazon

First, let's dispense with the false idea that Amazon is a bookstore that competes with, say, Barnes & Noble.

Amazon has been described as the "everything store." It sells auto supplies, groceries, gardening supplies and much more. In fact, in the U.S., Amazon sells about 200 million individual products in 35 categories. That means Amazon sells books, like Barnes & Noble does, plus 34 more categories of products that Barnes & Noble does not carry.

echo amazon echo

The Amazon Echo

Amazon is also a major enterprise cloud storage and hosting site. It's a major book publisher itself, and a major marketplace for downloadable content like movies and music. Amazon is also a leading maker of consumer electronics, including the Amazon Echo and a line of book readers, among other things.

Taken in aggregate, Amazon's business has no significant resemblance to Barnes & Noble's.

Barnes & Noble sells books. Amazon sells everything. Or, more specifically, what Amazon sells is the impulse to buy everything from Amazon.

Amazon competes through innovation and services. For example, Amazon is driving innovation in delivery. Its "one-day delivery" program has made Prime membership a coveted service. The company has experimented with ways to drive the delivery time down to less than one day, with initiatives that include the use of couriers, "lockers" and drones.

Retail locations will help Amazon win on delivery. Retail stores could double as product pickup locations, distribution warehouses and, eventually, drone airports from which products are flown to nearby homes and businesses.

Another Amazon innovation is the use of "gateway drug" products, which are designed primarily to facilitate the buying of more products from The Kindle line of e-book readers is for easy ordering of Amazon e-books, as well as other products. The Fire TV products are designed for easy Amazon Prime Video rentals.

I think it's no coincidence that Amazon's retail store group is headed not by a bookstore guy, but by a Kindle guy. Steve Kessel is in charge of the retail store initiative. He is best known for launching the first Kindle reader. Based on Kessel's track record, it's likely that Amazon sees physical bookstores as a great way to sell e-books, too.

Amazon's most successful homegrown product, the Amazon Echo, exists to let you order products on Amazon by talking.

The Amazon Echo is super compelling to anyone who tries one. The trouble is, there's no way to try it unless you buy it.

Retail stores will help. They'll become showcases where people can try an Echo to see how it works, and that will lead to a lot more people buying Echos.

Each Amazon retail store will be much more than just a gateway drug to Amazon's products. It will be a gateway drug where people will buy gateway drug products like the Echo.

When Barnes & Noble sells a book, it sells a book. When Amazon sells an Echo, it sells a lifetime of easy ordering of everything from Amazon.

Amazon is hyper-aware that mindshare is everything. You'll notice that every year, just before the holidays, Amazon CEO Jeff Bezos makes a huge drone announcement. The obvious purpose of this annual stunt is to get people thinking about Amazon just as they're about to begin their holiday shopping.

Amazon hybrid drone prototype for Amazon Prime Air service Amazon

An Amazon drone prototype.

Think about what it's like at a shopping mall in November and December: Crowds of people frantically shopping for presents. Malls are horrible places to shop for gifts. They tend to have limited quantities of incredibly ordinary products. What kind of gift are you going to buy in a mall? A scented candle?

An Amazon store in the mall reminds everyone that is the place where people can find anything and have it wrapped and delivered. Even if shoppers don't enter the store, just seeing the store is a reminder that Amazon could be the solution to holiday shopping problems.

Amazon is a major book publisher. The company offers myriad services for editing, design, formatting and distribution of hardcover and paperback books.

Amazon competes with other book publishers for authors. What other publishers can offer that Amazon cannot is coveted placement in physical bookstores. Those tables you see in a bookstore when you first enter are hot properties in the world of book marketing. And Amazon can't compete with that, until it gets its own bookstores.

Physical bookstores will help Amazon attract bigger-name authors.

One of Amazon's secrets to customer service is that it accepts returns, no questions asked. Physical bookstores would make it easy for people to return products.

They could also serve as "outlet" stores to sell returned merchandise, saving Amazon millions.

One of Amazon's big advantages is that it has so many credit cards in its system. The knowledge that Amazon already has your payment and delivery details means you don't have to enter all that information into a new site.

In order to grow, of course, Amazon has to attract new customers -- people who aren't already using its services. In fact, the majority of all retail sales still happen in physical stores. Those real-world sales are Amazon's growth opportunity.

One way to get new customers is to get their credit card information and other personal details. Amazon can do that by offering killer deals in physical stores. Once Amazon has someone's credit card, it will be able to remind that person later that buying more stuff is just a one-click deal now.

Another way Amazon eviscerates traditional retailers is via the practice of showrooming. That's where you go to a brick-and-mortar store and find the product you want but then buy it on Amazon -- sometimes standing right there in the store, using Amazon's mobile app.

Physical Amazon stores can encourage and facilitate showrooming, because they will have friendly salespeople to help you find, install and use the app. Once they teach you how to showroom in an Amazon retail store, you can continue showrooming in other stores.

The bottom line is that physical stores make total sense for Amazon from a growth perspective.

Amazon is not a "bookstore" anymore. It's the "everything store."

And eventually, it will be the "everywhere store."

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