Kindle-wielding Amazon dips toes into physical world

SAN FRANCISCO Mon Feb 6, 2012 6:41pm EST

A worker lifts a box at Amazon's new fulfilment centre after it was opened by Scotland's First Minister Alex Salmond in Dunfermline, Scotland, November 15, 2011.The warehouse covers more than one million square feet (93,000 square metres), about the size of 14 soccer pitches, and is Amazon?s biggest in the United Kingdom. It will create 750 permanent jobs, along with a further 1,500 temporary jobs during peak periods.  REUTERS/Russell Cheyne (BRITAIN - Tags: POLITICS BUSINESS)

A worker lifts a box at Amazon's new fulfilment centre after it was opened by Scotland's First Minister Alex Salmond in Dunfermline, Scotland, November 15, 2011.The warehouse covers more than one million square feet (93,000 square metres), about the size of 14 soccer pitches, and is Amazon?s biggest in the United Kingdom. It will create 750 permanent jobs, along with a further 1,500 temporary jobs during peak periods.

Credit: Reuters/Russell Cheyne (BRITAIN - Tags: POLITICS BUSINESS)

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SAN FRANCISCO (Reuters) - Amazon.com Inc is dipping its toes into the physical world as the largest online retailer offers more products in stores that may benefit from hands-on interaction with shoppers.

Analysts said the move may be inspired by the success of Apple Inc, which has hundreds of its own glitzy stores to show off iPhones, iPads and other gadgets and accessories.

Quidsi, an online retailer Amazon acquired in 2010, opened its first retail store in Manhasset, New York, last year to sell expensive cosmetics and perfumes under the BeautyBar name.

Amazon also plans to open a physical store in its home town of Seattle in coming months to showcase and sell its growing line of gadgets, including the Kindle Fire tablet, industry blog Good E-Reader reported this weekend.

At a conference in late 2011 run by the National Association of Real Estate Investment Trusts, some industry players hinted that Amazon might launch a retail store presence like Apple to let consumers test its gadgets, according to Cowen & Co. analyst Jim Friedland.

"The primary goal of the test is to determine if a physical retail presence can accelerate sales of Kindle devices and follow-on consumption of digital content at an attractive return on invested capital," Friedland wrote in a note to investors on Monday. An Amazon spokeswoman declined to comment.

Such moves are a major departure for Amazon, which has thrived by competing aggressively on price with traditional retailers that are saddled with the cost of leasing physical stores.

But Amazon's line of Kindle devices may sell better if consumers have a chance to try them out before buying.

These gadgets are already sold at other retailers, including Target, Best Buy and Staples. However, Amazon is likely looking at the potential benefits of having its own stores, analysts said.

If Amazon brings out other gadgets, like a smart phone, or a larger tablet, having an Amazon store will help the company explain how to use these gadgets and the other services tied to them, Friedland said.

Apple Inc, which Amazon now competes against in the tablet market, has had huge success with its chain of retail stores which numbered 361 at the end of 2011.

"I don't expect to see a bunch of Amazon Supercenters anytime soon, but seeing Apple's success with retail and realizing that Amazon is more than just an e-tailer now, I think it's smart for them to explore the opportunity," Colin Sebastian, an analyst at RW Baird, said.

Amazon often tests new concepts in the Seattle area, the analyst noted.

Amazon has to collect sales tax on online sales in states where it has a physical location. A retail location in Seattle would not trigger new obligations like this because the company already collects sales tax in Washington state, Sebastian noted.

BEAUTYBAR

Amazon also collects sales tax in New York state, where Quidsi's BeautyBar store is located in an up-scale shopping mall called Americana Manhasset.

"It's very much about the brick and mortar retail store experience," said Andrea Sanders, creative director at Americana Manhasset.

Consumers can have their hair blow-dried at the BeautyBar store's "Blow Dry Bar" or get facials, peels and waxing services from a licensed aesthetician in the "Treatment Room," she explained.

"That's an experience that you can't get online," she added in an interview with Reuters.

LOWER RETURNS?

Such efforts could dent Amazon's return on invested capital and hurt the company's positive working capital dynamic, Cowen's Friedland warned.

Amazon shares closed down 2.4 percent at $183.14 on Monday.

Wal-Mart Stores, the world's largest traditional retailer, generates a return on invested capital, or ROIC, of 19 percent, the analyst noted.

Amazon's ROIC is typically about 35 percent, although returns are currently lower because of big investment projects the company is pursuing, according to Friedland.

Having retail stores may also dilute the competitive advantages of Amazon's online retail business, including vast selection and convenience, the analyst added.

"The initiative is just a test and a national rollout is not a forgone conclusion," Friedland said.

Amazon launched an online grocery store called Amazon Fresh in Seattle almost five years ago and the company has not expanded that because the business has yet to generate an attractive return, the analyst noted.

(Reporting By Alistair Barr; Editing by Bernard Orr)

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