Why it makes sense for Amazon to open its own stores

Amazon (s amzn) is reportedly preparing to dip its toes into the brick-and-mortar retail market with its first boutique store in the Seattle area. A report in Good E-Reader, based on sources close to Amazon, says that the online retailer will have the new test store open in the next few months.
The company will focus on selling its Kindle line of tablets and e-readers and exclusive books from its Amazon Exclusives line. The store will be small and will also sell other high-end items as well as accessories such as cases, screen protectors, and USB adapters.
Big turning point?
The move into retail, if it proves true, would be a big turning point for Amazon and one that ultimately makes sense though the move doesn’t seem intuitive considering Amazon’s online roots. The company has made a practice of stealing away business from physical retailers, whose aisles end up being showrooms for Amazon shoppers. Amazon even provided a $5 discount during the holidays for shoppers to find products in stores and buy them online. Now, Amazon could be competing in the same market, though not necessarily on the same level. It could just run its stores as showrooms and ship physical products to users by mail rather than fulfill sales immediately.
One of the reasons Amazon has shied away from pursuing retail stores is to avoid charging taxes, something it must do in a handful of states. But increasingly, it looks like Amazon is accepting taxes as inevitable and so there may be fewer barriers to moving into a retail stores. It signed a deal in September with the state of California to start accepting online sales tax starting this fall.
Compelling reasons
Now some would wonder why Amazon would start paying rent on stores and getting into that market when it does so well online. But I think there are a number of compelling reasons to do so.
The upside is that Amazon can let people get hands-on with their products, and they can provide a high level of customer service, especially for its Kindle line of tablets and e-readers. That’s been one of the successes behind Apple’s (s aapl) retail store strategy, giving top-notch customer support through its Genius Bars. Barnes & Noble (s bks) has also been stressing this point with its Nook devices, which are getting their own display areas in stores and dedicated support. Though Kindle devices appear to be doing better than Nooks, the fact that Barnes & Noble is doubling down on Nook sales and support shows that Amazon will likely want to have some kind of answer.
Amazon has signed deals to get Kindles in a lot of existing retail stores but having its own boutiques could be a way to really highlight its products. That could be helpful for its Amazon’s publishing line of books, which Barnes & Noble and others have said they won’t stock in-store. Amazon is reportedly looking at expanding the number of products it makes under its own name. The current combination of online sales and partnerships with retailers can work for the time being but if Amazon moves into smartphones and other goods, it doesn’t want to vie for shelf space in Best Buy (s bby). It will want to have its own showcase for goods.
Extending the Amazon experience
My colleague Om Malik actually predicted Amazon would open a physical store during a taping of This Week in Tech last June, saying it would ultimately extend the Amazon experience. The idea is that consumers can still buy online through Amazon but physical stores can be where Amazon reinforces the buying and discovery experience and gets into communities. As Om pointed out, it could be a place where Amazon highlights a recording artist or a place for authors to do their book tours. Here’s what he said:

Amazon will have to do it as it will become more and more important in our life. As a company it needs to kind of have that local presence and also remember we are living in a world where we have an iPhone or a smartphone in our pocket all the time. So for the retailers itself, it’s a very comparative market; there are certain apps which can basically let you check the price and order it online, while you’re looking at it in a store. So the stores have to think in terms of what is the plus experience they can offer, so that people come to the store and buy their thing. And the same is with Amazon too. They need for people to keep buying from them but they need to create a whole experience around it…
I think you’ll look at what Barnes & Noble is doing right now is that they are creating more and more experiences around their store. They’re shutting down the ones which are not working but they are creating more of an experience and less stocking books there, and I think that’s exactly what I’m trying to tell you guys. That’s where, where Amazon will end up. If not, Amazon somebody else will end up trying to do that, because that is important for the whole ecosystem of books, music, and those kind of things.

Online sellers face challenges too
I agree that Amazon needs to think about building out its whole service. It’s not an online seller, it’s a seller. And that means you work to provide the best selling experience possible. Also, shopping apps like ShopSavvy are working hard to point out that they can surface cheaper deals than Amazon most of the times and some of those deals are in physical stores. It’s not just physical retailers that face a challenge as smartphone buyers get more savvy. It means that all retailers need to step up and provide not only low prices but a good experience too.
I first imagined that Amazon could eventually move its distribution centers into bigger cities after dealing with the tax question and then set aside some space within its warehouses to open stores. But it seems like Amazon is thinking about being even more ingrained in the community, being in locations where I assume shoppers are plentiful. I think it makes sense not to go with big locations, but smaller store fronts that let people interact intimately with a handful of Amazon products. Consumers could develop an even deeper relationship with Amazon, which could be crucial if Amazon keeps putting out more of its own branded goods.

Biting off too much?
The strategy is not going to threaten Walmart (s wmt) any time soon. I don’t think Amazon wants to go the big box route, as Jason Calcanis reported in December. I think it will stay modest and look at selling things that extend Amazon’s name and brand.
We’ll have to see what Amazon does ultimately. It has razor-thin margins and struggled through a tough quarter, in part due to its very competitive pricing on Kindle Fires. Opening stores may be tough when shareholders and analysts want more profits and may not see much return on this investment — Amazon offered guidance on a possible loss in the coming quarter. But Amazon has also shown that it relishes the chance to be a disruptor and knows that innovation takes a long time to grow. It’s already started testing out click and collect lockers where users can get Amazon deliveries.  And it received a patent on for a mini-building design in 2009. It could be that the new store remains just a test and not a long-term bet. But I still think it’s likely that we might see local Amazon stores when all is said and done.