Amazon Going Brick and Mortar?

Two days ago, while on an earnings call with market analysts, General Growth Properties (NYSE: GGP) CEO Sandeep Mathrani had a very interesting, if not startling, response when questioned about the general revenue possibilities of marketing to mall foot traffic.

“You’ve got Amazon opening brick-and-mortar bookstores and their goal is to open, as I understand, 300 to 400,” Mathrani said.

If that sounds a bit strange to you, I don’t think you’re alone.

After all, Amazon (NASDAQ: AMZN) virtually invented online shopping. It grew into a company today worth just a tick under a quarter-trillion dollars by taking the biggest bite ever out of the brick-and-mortar retail industry.

It’s pretty apparent just how big an impact Amazon and its imitators have had on the age-old process of shopping for consumer goods.

While still not as big revenue-wise as brick and mortar, online sales — with Amazon leading the way — now account for more than one-third of consumer retail spending.

It’s a system that’s pumped life into the company at a remarkable pace since it first went into business in 1994.

In 2015, this growth culminated in Amazon surpassing Wal-Mart as the biggest retailer in the U.S. by market capitalization.

And if that weren’t enough, the company is now about to embark on a drone delivery test program, which will have Amazon-labeled robotic quadcopters whisking Amazon-labeled boxes to customers in Canada, the UK, and the Netherlands.

So why would a company that’s built an entire industry on disrupting brick-and-mortar retail now start sniffing around the seemingly obsolete shopping mall?

More to the point, why would Amazon jump into the bookstore business, after having almost singlehandedly wiped Borders off the map?

Nowhere Else to Go?

The answer lies probably somewhere between the threat of market saturation, the $19 billion in cash that Amazon has sitting around, and the constant quest for diversification.

Physical stores will also be a great tool for expanded branding possibilities, which no company, no matter how huge, can ever overdo.

Moreover, with promises of similar pricing for its online sales as for these prospective offline sales, Amazon will finally get to benefit from that one human impulse that online shopping just doesn’t fully engage: browsing, leading to buying.

It may seem counterintuitive, but at the end of the day, Amazon suffers from some of the same problems that any retail organization does, whether the bulk of its sales are online or offline.

It makes its money selling and delivering physical goods, which means that it needs physical real estate to receive, package, warehouse, and eventually distribute the goods.

Below is a photo of just one of Amazon’s fulfillment centers.

There are hundreds like it all around the world.

And the need for more will grow in direct proportion with the volume of business — just as it would if the company had a physical storefront presence.

At the end of the day, it means that Amazon, unlike a true Internet company, is not infinitely scalable.

For it to grow, it requires ongoing infrastructural expansion, with price tags for property, development, and employees rising all along the way.

Viewed through that lens, the company’s decision to experiment with these several hundred physical bookstores makes a lot more sense.

Not So Strange After All

It’s really not too different from what Amazon’s been doing all along, which was selling goods to consumers — and now with this, Amazon will complete the market circle by providing the greatest number of potential consumers with the greatest number of opportunities to see, sample, and purchase their merchandise.

Because after all, when you’re already the biggest, have cash to burn, and have taken out one of the two biggest names in the sector (Borders), why not slip right in there and grab the market share?

It should also be mentioned that the other of the two big names in book retail, Barnes and Noble, saw its shares slip as much as 10% yesterday, the day after these Amazon rumors began to surface.

The question, though, is will this be enough?

The short answer is no, and it all goes back to scalability.

The law of diminishing returns states, “As total investment increases, the total return on investment as a proportion of the total investment (the average product or return) decreases.”

Eventually, there will come a point where more investment yields nothing.

Keep going past that, and you start losing.

This law is so universal that it applies in nature as well… The bigger an animal is, the slower it moves in proportion to its body size.

An ant can cover 10 of its body lengths in distance before an elephant can cover just one or two of its own.

This non-negotiable aspect of brick-and-mortar business is playing out right now, with the world’s other most famous retailer at the focus of the story.

On January 16, Wal-Mart (NYSE: WMT) announced that it would be shutting down 154 of its U.S. stores, as well as 115 overseas.

Its intent, not surprisingly, is to focus more effort on e-commerce, which will allow it to take advantage of existing infrastructure to volume.

Desperate times call for desperate measures.

Not All Companies Suffer From Scalability Woes

Since people will always need physical things, the problem of massive retailers growing too big and heavy for their own good will probably always be with us.

However, not all businesses suffer from this shortcoming… as not all businesses deal primarily in physical objects.

There are companies that are, for all intents and purposes, infinitely scalable.

Because their products are non-physical in nature and can be reproduced infinitely and delivered instantly anywhere in the world, the law of diminishing returns will have to wait until the world’s entire population of potential customers is exhausted.

And that won’t happen anytime soon.

It’s a new breed of business that just one generation ago existed only in the minds of fiction writers… And yet today, it’s one of the biggest and fastest-growing sectors out there.

Some of the world’s most successful investors ever have made careers off these companies, and unlike most other industries in today’s financial climate, growth isn’t abating.

One of my fellow Wealth Daily editors, Brit Ryle, has been working on new ways to take advantage of the incredible profit potential these infinitely scalable companies open to investors.

I’ve seen the strategies he’s come up with, and I think it’s an angle that almost anybody would understand but very few people are actually aware of.

His presentation, detailing exactly what these companies do and the best way to make them work for you, can be accessed immediately by clicking here.

Fortune favors the bold,

Alex Koyfman

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His flagship service, Microcap Insider, provides market-beating insights into some of the fastest moving, highest profit-potential companies available for public trading on the U.S. and Canadian exchanges. With more than 5 years of track record to back it up, Microcap Insider is the choice for the growth-minded investor. Alex contributes his thoughts and insights regularly to Energy and Capital. To learn more about Alex, click here.