What To Make Of Amazon's Push Into 4-Star Brick-And-Mortar Stores

Amazon.com, Inc. AMZN grew to a $1 trillion valuation by stealing market share from brick-and-mortar retailers with its massive online marketplace. Given Amazon has built its empire via e-commerce, it may seem strange to some investors that Amazon has focused so much on opening its own physical stores in 2018.

According to Deutsche Bank analyst Lloyd Walmsley, Amazon’s brick-and-mortar strategy makes perfect sense. Walmsley said in a note there are six reasons Amazon investors should love the company’s new 4-Star store that it opened in New York this week:

1. The stores could help Amazon add to its Prime user base.
2. Brick-and-mortar stores can serve as Prime Now fulfillment centers.
3. Physical stores can help the company better manage online returns.
4. Customers have a chance to discover and test the most popular products before buying.
5. Stores allow Amazon to reinforce its brand and reputation for high-quality customer service.
6. If Amazon pursues the healthcare route, these stores could potentially serve as pharmacies in the future.

For now, Walmsley said investors shouldn’t focus too much on the profitability of the stores or their direct impact on Amazon’s financials.

“Although on a standalone basis, the store likely could remain a loss leader in the foreseeable future and is likely one of many seeds the company is throwing out, we believe the value of the initiative comes not just from the P&L of the individual location, but from the value it adds to Amazon’s aggregate share of the customers’ wallets,” Walmsley wrote.

In addition to the 4-Star store, Amazon owns about 20 bookstores, 479 Whole Foods locations, and four Amazon Go automated stores.

Deutsche Bank has a Buy rating for Amazon's stock.

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