Why Amazon Will Open a Retail Store, in 3 Charts

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Jeff Bezos is hanging a shingle. Photo: Win McNamee/Getty Images

The Wall Street Journal surprised everyone yesterday by reporting that Amazon was planning to open a retail store on West 34th Street in Manhattan, right across from the Empire State Building — a store that would primarily be “a place for customers to pick up orders they’ve made online,” but would also eventually serve as a showroom for Kindles, Fire Phones, and other Amazon wares. Brick-and-mortar retail is about the last area we’d expect Amazon to enter — Amazon having positioned itself as brick-and-mortar’s mortal enemy — so why change course so suddenly?

The answer probably comes down to a few factors — some long-term strategic, some more immediate and practical. But here are three of the more probable ones.

1) Brick-and-mortar retail is still huge.

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via the Wall Street Journal

Amazon has made big strides in convincing Americans of the benefits of e-commerce. But the vast, vast majority of U.S. purchases are still made in physical stores, and it’s likely to stay that way for a long time. Most of us are just more comfortable shopping in stores — whether it’s because we want to try on clothes before we buy them, touch products to make sure they’re well made, or receive in-person assistance from a sales person.

The preference we may still have for brick-and-mortar retail is why Bonobos, Warby Parker, and other e-commerce brands have opened up physical stores to supplement their online offerings. (Bonobos has said that its in-store shoppers spend about twice as much, on average, as their online counterparts.) Amazon knows that despite its efforts to drive purchases online, some customers will still insist on seeing things before they buy them.

2) It worked for Apple.

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via eMarketer

Back in 2001, when Apple first announced it was opening a retail store, people thought it was crazy, too. “Few outsiders think new stores, no matter how well-conceived, will get Apple back on the hot-growth path,” wrote Businessweek’s Cliff Edwards. Edwards noted that to break even on its leases, Apple would have to sell $12 million worth of computers a year per store.

Today, Apple’s stores are the most profitable retail outposts in the world, making more money per square foot than luxury brands like Tiffany and Coach. In the first nine months of 2014, revenue per Apple store was about $39 million, or more than triple Edwards’s 2001 speculative break-even point. (And that was before the iPhone 6.)

Other tech companies have had modest successes at selling in the flesh. Microsoft now has more than 100 brick-and-mortar outposts. EBay, another e-commerce pioneer, is partnering with brick-and-mortar retailers, in part to provide an alternative to Amazon. Amazon’s product line doesn’t lend itself to brick-and-mortar sales as easily as Apple’s or Microsoft’s (unlike those companies, it carries hundreds of millions of products, a few more than will fit in a 34th Street storefront). But given Apple’s insane success, it has to try.

3) Stores are still a prestige item.

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via Business Insider

Whatever it costs Amazon to open a Manhattan retail store, it’s a drop in the bucket compared to the company’s other marketing expenditures. And it could pay off in some intangible ways. Maybe Amazon’s doomed-from-the-drop smartphone, the Fire Phone, would have sold better if customers had a central place to buy it. Perhaps Amazon is worried that its tablet business will shrink unless it can gets its Kindles in front of customers’ literal faces.

Or maybe Jeff Bezos just wants a store. Maybe he has Tim Cook envy, and wants to see Amazon customers wrapped around the block waiting to buy and unbox his newest devices. After all, even 13 years after the first Apple store opened, the number of people lining up outside them for new product launches is only growing. When new iPhones come out, people freak out — and unlike freaking out at your computer while hitting “buy” on an Amazon page, iPhone freak-outs are mass events. There’s no way to put a price tag on the kind of free publicity Apple gets every time it inspires superfans to camp out overnight.

There are other ways I can imagine Amazon using a physical outpost, and other reasons I can imagine Jeff Bezos wanting to plant his flag in midtown Manhattan. (One thought: Given the relatively small flying range and short battery life Amazon’s delivery drones will likely have, maybe you would need centralized bases in urban centers to recharge the drones between drop-offs.)

But maybe it’s just a simple matter of wanting to repeat Apple’s trick, and capture some business from people who don’t shop online. And if it is just a marketing move, could you blame Amazon? E-commerce is plenty profitable, after all, but nothing says “empire” like a line down the block.