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Here’s why Amazon might buy a big retailer

Posted at 2:54 PM, Feb 09, 2017
and last updated 2017-02-09 14:54:27-05

Amazon now has stores in a handful of big cities and on college campuses. And it has plans to open up several more. But could the company’s next big move be the acquisition of an actual brick-and-mortar retail chain?

(Photo by Jaap Arriens/NurPhoto via Getty Images)

(Photo by Jaap Arriens/NurPhoto via Getty Images)

Some Wall Street analysts are betting that Amazon could do just that.

Cowen analyst Oliver Chen wrote in a report last week that Amazon could be an intriguing candidate to scoop up struggling Macy’s, which has already been approached by Saks and Lord & Taylor owner Hudson’s Bay.

Chen followed that up with another report this week to give the pros and cons for a Macy’s deal.

Amazon would gain relationships with some key vendors if it bought Macys, particularly in the apparel business. Owning more physical stores also would give consumers a place to easily drop off and pick up items.

“Amazon needs better brands, a more curated assortment, a physical place to return items, and customers could use help with ensuring fit — Macy’s would also give Amazon greater credibility in curation and fashion authority,” Chen wrote.

But he conceded that the risks probably outweigh the strategic benefits.

Would Amazon want to be, as Chen put it, “saddled” with the costs associated with store rents and a constant need to invest in stores to keep them up to date? Probably not.

There’s also all the new employees it would inherit and have to manage — buyers, merchandise managers, cashiers, etc. The beauty of Amazon’s business model is that it doesn’t require a lot of people to sell you stuff. Lower overhead helps boost profits.

It’s also worth pointing out that the only reason Macy’s is vulnerable to a takeover in the first place is because it is struggling to remain relevant. Why would Amazon want a brand that’s arguably in decline?

What’s next? Rumors about taking over Sears or JCPenney just because Amazon is big enough to do so? Amazon investors might revolt if it spent billions on an antiquated retailer.

But Bernstein analyst Brandon Fletcher has another idea for Amazon. It could buy discount chain Dollar General.

Fletcher argues that Dollar General would help Amazon increase its presence in rural markets, where it would face less competition from other large chains.

“The most powerful element of this combination is that the core strategy of price & convenience is a defensible one AND the location of most of the growth is defensible,” he wrote. “Being a rural retailer has serious advantages when the dominate disruptor is primarily urban.”

A spokesperson for Amazon had no comment on the speculation about it buying a physical retailer.

But a deal for a retail chain still doesn’t seem entirely out of the question. It now has seven college campus stores — including one at my alma mater, the University of Pennsylvania. Go Quakers!

Amazon is also opening bigger book stores of its own. It has three up and running, with a flagship store in its hometown of Seattle.

It also has plans to open five more — one in Chicago, two in Massachusetts, one in New Jersey and one in New York City’s Time Warner Center, which is currently the home of CNN’s Big Apple bureau.

So while it may still be unlikely that Jeff Bezos would want to splurge on a retail chain, it’s not out of the realm of possibility.

After all, Amazon has already shown a willingness to take risks and expand beyond its core business.

It’s branched into entertainment with original shows for its streaming video service. It’s invested in freight airlines and started its own Prime Air cargo jet division in order to reduce its reliance on FedEx and UPS. And its drone plans are well known.

Why not buy an old-school retailer then? Amazon can clearly afford to scoop up almost anything it sets its heart on — it has nearly $20 billion in cash and its market value is approaching $400 billion.

And with traditional retailers like Target, Best Buy and Walmart, which recently scooped up e-commerce unicorn Jet, investing more in digital operations, it might make sense for Amazon to make an even bigger move into physical retail.