Amazon’s Next Foe: Department Stores

The strength and might of the Greek Amazons have been on display in recent years, as D.C. Comics introduced Gal Gadot as the new Wonder Woman. Armed with the power of the “old gods,” Wonder Woman often decimates her foes handily, with very few even standing a chance in a fight with her.

Another Amazon has also been seemingly invincible recently—and it’s planning to enter a new arena, where the competition may also have a slim chance of surviving.

Amazon.com (AMZN) revealed in mid-August that it plans to open even more brick-and-mortar retail locations. You may recall that in 2015, Amazon opened its first physical bookstore, and then in 2017, the company acquired Whole Foods Market. Today, Amazon has approximately 89 physical locations or nearly 600 stores when you include Whole Foods locations.

That number could grow exponentially when Amazon makes its foray into department stores.

The reality is that many of Amazon’s private-label goods—clothes, furniture, and personal electronics devices—have grown in popularity in recent years. Wells Fargo reported earlier this year that Amazon is now the leading seller of clothes in the U.S. The firm estimated that Amazon sold $41 billion worth of clothing and shoes (private label and third-party sales) in 2020 or a 15% year-over-year rise.[1]

Now, a 15% increase doesn’t seem like much. But consider this: That 15% jump was during the pandemic. Amazon also sold more fashion items than Walmart (WMT), Target (TGT), T.J. Maxx (TJX), Macy’s (M), Kohl’s (KSS), Gap (GPS), and Ross Stores (ROST) in 2020! Amazon now has a firm 34%-35% market share on all apparel sold online and an 11%-12% share of all apparel sold in the U.S.

Wells Fargo also estimates that Amazon could achieve fashion sales of more than $45 billion, or a 10% year-over-year rise, this year. It’s easy to see why Amazon is planning to throw its hat in the department store ring.

The question, though, is what will this cost other department store chains?

There’s no denying that Amazon revolutionized how people purchase goods when it introduced its online marketplace back in 1994. The company had humble beginnings as an online book retailer before it expanded to offer clothing, furniture, food, back-to-school supplies, bedding, personal protection equipment (PPE), toys, personal electronics… and the list goes on.

The ease of shopping online has undoubtedly taken its toll on many sectors of the retail industry. As an example, how many bookstores and electronics stores do you see in shopping centers these days? Many retail chains like Borders Books, Crown Books, and Waldenbooks have shuttered their doors since Amazon hit the scene in the bookstore arena alone.

The global COVID-19 pandemic may have also sped up Amazon’s dominance in other retail sectors.

Along with its investment in Whole Foods, Amazon has opened Amazon Fresh grocery stores across the country. The company now has 15 Amazon Fresh stores in the U.S. and five already in the U.K. These stores offer lower prices and grocery pickup and delivery, which many consumers appreciated amidst the pandemic. During the second quarter, Amazon noted that physical store sales, which included Whole Foods and Amazon Fresh, increased 11% year-over-year to $4.2 billion.

The U.S. grocery market totals around $900 billion, so Amazon has a way to go before snagging a big chunk of that pie. But clearly, the company is creating more competition for stalwarts in the industry like Walmart and chains like Target and Aldi.

Unlike the grocery market, which is thriving, the department store market started struggling well before the pandemic swept the globe. Retail chains like Sears and Kmart closed more than 100 stores in early 2020. Then, the pandemic exacerbated the situation for other retail chains like J.C. Penney, Lord & Taylor, and Neiman Marcus. All three filed for bankruptcy in 2020 and are now under new ownership.

On the other hand, department stores like Macy’s and Kohl’s thrived when restrictions were lifted, and some folks returned to in-office work. Macy’s added more than five million new customers for the second quarter and achieved revenue of $5.65 billion, or a 58.7% year-over-year increase. Kohl’s reported that second-quarter revenue jumped 30.5% year-over-year to $4.45 billion, slightly higher than pre-pandemic revenue of $4.43 billion.[2]

It’s also worth noting that Nordstrom’s second-quarter sales nearly doubled, and in turn, the department store chain upped its outlook for the year. Second-quarter revenue came in at $3.66 billion, compared to $1.86 billion in the second quarter of 2020. Still below pre-pandemic levels, but an impressive 97% year-over-year gain.

That wasn’t good enough for Wall Street as JP Morgan dropped its rating on Nordstrom, citing those comparable to pre-pandemic results as anemic. Perhaps there is a smidgeon of Amazon fear in the rating reduction as well. Who knows?

According to Yahoo Finance, Nordstrom shares fell a whopping 17% in late afternoon trading the day after results were released.

The rebound in department store sales so far this year is impressive, and the timing of Amazon’s entrance into the department store arena feels more than a bit fortuitous. Amazon has a strong following of Prime members, and the opportunity to try on clothes, test drive electronics devices, and shop in person will appeal to a large chunk of these members. So, even if the square footage of its first department stores is smaller than Macy’s and Kohl’s, it’ll likely still capture its fair share of the market.

As The Buggles sang, “Video killed the radio star,” one must wonder if Amazon will kill the department store stars.

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[1] https://www.marketwatch.com/story/amazon-becomes-the-top-clothing-retailer-in-the-u-s-outselling-walmart-target-gap-and-others-11616002197

[2] https://www.fool.com/investing/2021/08/23/department-stores-winning-post-lockdown-turnaround/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article