Video Index

00:14 Amazon Retail closings (Fresh and Go stores)
01:13 Warehouse closings
01:53 Recent Amazon property sale cap rates
02:27 Amazon’s retail future (including Amazon Style)

Hello Investors!

In today’s newsletter, I’ll be talking about Amazon’s foray into bricks and mortar retail, and how that has been evolving over the past 8+ years.

In 2015, Amazon opened its first bookstore in Seattle.  Since then, they have expanded to over 600 retail locations, including 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 Andy Jassy 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.

Cap Rates on Amazon property sales

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.

I’d have to think that this recent news of Amazon scaling back will likely affect the cap rates 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.

What is Amazon looking to do next?

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.

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.

I hope you enjoyed this week’s newsletter and learned something. Thanks for reading and I’ll see you next time!

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