Amazon had to pass these four tests by Jeff Bezos before launching its first physical bookstore
Aly Weisman/Business Insider
In Amazon's shareholder letter written in 2007, Bezos explains he never approves a new business idea, like opening a physical store, unless it passes the following four tests:
- We must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon
- And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company.
- Furthermore, we must believe that the opportunity is currently underserved
- ...and that we have the capabilities needed to bring strong customer-facing differentiation to the marketplace
"I often get asked, 'When are you going to open physical stores?' That's an expansion opportunity we've resisted," Bezos wrote at the time. "When you do see us enter new businesses, it's because we believe the above tests have been passed."
Bezos notes that the idea for physical stores fails all but one of the tests he mentioned above, which is scalability.
"We don't know how to do it with low capital and high returns; physical-world retailing is a cagey and ancient business that's already well served; and we don't have any ideas for how to build a physical world store experience that's meaningfully differentiated for customers," Bezos wrote.
But given that Bezos backtracked and opened Amazon's first physical store, with plans to launch more, it would seem the company has now figured out a way to satisfy all four tests.
In fact, Amazon's first physical bookstore is already proving to offer a completely differentiated shopping experience. No prices are shown next to the items, because it fluctuates based on the price online. Each book comes with a user review and ratings from the website, and the store recommends books based on what you like. Amazon is even working on an app that lets you pay without having to go through a checkout counter, according to Re/code.
Amazon's bookstore shows the traditional retail experience can be changed. If Amazon has also figured out a way to generate returns from physical stores, it won't be long before we see more stores open under Amazon's name.
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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