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Amazon Scaling Back

Mike Lin
460 subscribers
308 views 2 years ago
00:14 Retail closings 01:13 Warehouse closings 01:53 Recent amazon sale cap rates 02:27 Amazon's retail future (including Amazon Style) In 2015, Amazon opened its first bookstore in Seattle.  Since then, they expanded to over 600 retail locations, which of course includes over 500 Whole Foods stores. About a year ago, in March 2022, Amazon made an announcement to close all 68 of its physical non-food stores in the US and the UK, which included their bookstores, 4-star stores, and pop-up shops. At the time of that announcement, Amazon was intending to focus more of its physical presence on grocery stores. Now it's a year later, and that is changing, as well, as they have announced the closings of many Amazon Fresh and Amazon Go stores.  In a recent earnings call with investors, Amazon's CEO said that the company is experimenting with different ideas to differentiate itself from other grocery stores. Until they figure that out, the company doe …...more
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Amazon Scaling Back
00:14 Retail closings 01:13 Warehouse closings 01:53 Recent amazon sale cap rates 02:27 Amazon's retail future (including Amazon Style) In 2015, Amazon opened its first bookstore in Seattle.  Since then, they expanded to over 600 retail locations, which of course includes over 500 Whole Foods stores. About a year ago, in March 2022, Amazon made an announcement to close all 68 of its physical non-food stores in the US and the UK, which included their bookstores, 4-star stores, and pop-up shops. At the time of that announcement, Amazon was intending to focus more of its physical presence on grocery stores. Now it's a year later, and that is changing, as well, as they have announced the closings of many Amazon Fresh and Amazon Go stores.  In a recent earnings call with investors, Amazon's CEO said that the company is experimenting with different ideas to differentiate itself from other grocery stores. Until they figure that out, the company does not plan to open any new physical Amazon Fresh stores. Although Amazon is well-positioned within the digital space, it continues to try to figure out physical retail. The company derives only about 3.5% of its total revenue from physical store sales, including sales from Whole Foods locations. Whole Foods is doing well and has been expanding aggressively, with 50 new openings planned.  Amazon's industrial real estate. Amazon has been the largest builder of warehouses over the past three years, totaling $10 billion dollars, or 6% of total construction activity.  The company now controls about 400 million square feet of warehouse space. However, the company has recently admitted that it has taken on too much warehouse space, and has announced that it will be closing warehouses and scrapping its plans to build new ones. Overall, the company is closing 21 facilities, canceling construction on 21 more, and placing a further 27 on hold. Unfortunately, these changes are going to result in about 18,000 workers getting laid off.   From a commercial real estate perspective, let's look at some of the cap rates that Amazon properties are selling for. An Amazon Fresh store sold in Los Angeles in 2021 for a 4.2 Cap.  And the average cap rate across the sale of 40 Amazon warehouses was a 3.65%. I'd have to think that this recent news of Amazon scaling back is likely to affect the cap rates that investors are willing to pay for properties leased to Amazon.  While I'm sure the corporate guarantee is still good, no landlord wants to own a building that is dark, even if the tenant is still paying rent. On the bright side, Amazon is continuing to invest in more last-mile delivery facilities, which are locations in smaller warehouses, or even in retail centers, that will get packages to your home quicker.  Also, they continue to be creative with new in-store concepts, such as its Amazon Style clothing store. Last July, I made a video of my experience in the first Style store in Glendale, California.  Since that video, Amazon has opened a second store in Ohio, in a former Forever 21 location.  The Style stores are designed to combine the convenience of online shopping with the personalized service of a physical store. With minimal on-floor inventory, shoppers have more than twice the clothing options available compared to a traditional clothing store of similar size. Using Amazon's shopping app, the user can scan a barcode on an item to have it sent to either the dressing room or the pickup counter. As buyers shop through the store and examine clothing, Amazon takes advantage of its machine learning algorithms to propose personalized, instant recommendations about other merchandise they may be interested in purchasing. With all these changes, it is clear that Amazon is not done testing new concepts for customers.  I commend them for trying lots of different ideas, even if most of them fail.  But their core business of online retail is still strong and will continue to fund some of the struggling business lines until Amazon finds its next big hit.

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Mike Lin

460 subscribers
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