- Amazon’s former physical stores boss Steve Kessel was asked last year at an internal staff meeting when to expect Amazon to bring the “future of retail.”
- He said it could take a long time as “innovations happen by continued focus on smaller innovations over time,” according to a recording of the meeting obtained by Business Insider.
- He compared Amazon’s progress in physical stores to its shipping service, which took nearly 20 years to shorten its standard delivery time to one day.
- But in recent quarters, Amazon has stopped disclosing adjusted revenue growth rates for its physical stores, making it less transparent.
- Amazon’s physical stores revenue dropped 1% in its most recent quarter, and has largely remained flat over the past year.
- Amazon is still expanding its physical store presence, and just launched a new cashierless grocery store last week.
- Visit Business Insider’s homepage for more stories.
Change in physical retail doesn’t happen overnight — it could take years, if not decades.
That was the message during an Amazon internal staff meeting last year, when an employee asked then-physical stores boss Steve Kessel about the company’s plan for “launching the future of retail,” across Whole Foods and the grocery business in general.
Kessel, a 20-year Amazon veteran who left the company this year, said most innovations take place over a long period of time. He likened Amazon’s progress in physical stores to its shipping service, which took nearly two decades to shorten the standard delivery time to one-day.
“The question frames it in a way where we would wake up tomorrow morning and we would announce the future of retail — and most innovations, in my mind, don’t happen that way,” Kessel said, according to a recording of the meeting obtained by Business Insider. “Innovations happen by continued focus on smaller innovations over time.”
He went on to list some of the changes Amazon has brought to Whole Foods since the 2017 acquisition, such as discounts and new pickup services. As Amazon doubles down on those seemingly minor innovations, the future of retail will slowly start to emerge, he said.
“I think as we continue that and look back over the years, it’ll start to look like the future of retail — but that’ll take some time,” Kessel said.
At a time when Amazon is expanding its physical stores business, Kessel’s comments from last year draw renewed attention to the company’s famously long-term thinking — and explains its continued investment in brick-and-mortar retail despite having failed to show meaningful growth in the space lately.
Just last week, Amazon unveiled Go Grocery, a larger version of its Go cashierless stores with more selection, like fresh produce. Additionally, Amazon runs a number of different stores, like Whole Foods, bookstores, and its 4-star stores that only stock highly rated products.
While those initiatives have drawn a lot of publicity, they haven’t led to substantial revenue growth. In its most recent quarter, Amazon reported $4.4 billion in physical stores sales, down 1% from the year-ago period. Growth of that segment, which includes sales from Whole Foods and other physical stores, has remained mostly flat, never exceeding 1%, since first being disclosed in the third quarter of 2017.
Rick Watson, CEO of RMW Commerce Consulting, told Business Insider that it’s too early to pass judgment on Amazon’s brick-and-mortar strategy, as the company likes to experiment with different ideas before fully committing. For example, he said Amazon’s popular fulfillment service started out small before becoming one of the most successful storage and shipping options for online merchants.
“Amazon tends to go slow before they start scaling,” Watson said. “They test, learn, cancel, and reboot for a while.”
A recent change in Amazon’s financial disclosure, however, reflects less transparency in its physical-store business.
Amazon no longer shares adjusted revenue growth rates for physical stores, after having disclosed it in the first two quarters of last year. The adjusted figure includes sales from online delivery and in-store pickup orders because those numbers go under the “online stores” segment instead. Amazon’s CFO Brian Olsavsky, for example, said physical-store sales would have grown 5 to 6% in the first two quarters of last year — instead of the 1% reported in both quarters — had it included those numbers, but stopped updating it over the past two quarters.
Amazon’s representative didn’t respond to a request for comment for this story. The company declined to provide the adjusted number for its most recent quarter in a previous email to Business Insider.
“Usually, when a company stops disclosing numbers, it’s because there’s been some funny fluctuation that they don’t want to answer,” said Sucharita Kodali, an analyst at Forrester Research.
Amazon made its foray into physical retail in 2015 when it opened its first bookstore in Seattle. The biggest move, however, came in 2017 when it bought Whole Foods for $13.7 billion. Now, Amazon runs hundreds of Whole Foods stores, dozens of bookstores and Go stores, among others.
Those initiatives were largely led by Kessel, who suddenly stepped down earlier this year. His team is now under Dave Clark, SVP of worldwide operations, who runs everything from warehouses and logistics to marketing, Prime memberships, and robotics at Amazon.
Kodali said Amazon’s physical store strategy still remains a bit unclear. Whole Foods hasn’t really been a game-changer for Amazon, while the other store formats, like the Go cashierless stores, are rolling out too slowly to make an impact, she said. The new Go Grocery store addresses two problems associated with the cashierless technology by proving it can work in a larger store and scan perishable products, but it’s still not anything “super extraordinary,” she said.
“It hasn’t been a growth engine within Amazon,” Kodali said about Amazon’s physical stores business. “They’re throwing things against the wall to see if something sticks.”
During Amazon’s most recent earnings call, Olsavsky said grocery delivery orders from Whole Foods and Amazon Fresh “more than doubled” from last year without sharing any other details. He said at this point Amazon’s grocery business is “just testing and reacting to customer demand.”
But at least one Amazon executive seems to want the physical stores team to move faster: CEO Jeff Bezos.
During last year’s meeting, also attended by Bezos, as Kessel started to answer the question about the future of retail, Amazon’s CEO said with a smirk: “It’s a good question — I think they just want you to hurry.”
Here’s Kessel’s full response:
“I think innovation generally doesn’t happen that way. The question frames it in a way where we would wake up tomorrow morning and we would announce the future of retail — and most innovations, in my mind, don’t happen that way. Innovations happen by continued focus in smaller innovations over time. Jeff talked about, if you find things that are durable — like price, selection, and convenience — you can continue working on them over time. If I think back to the last 20 years, and I think about shipping on Amazon, when Amazon first started, we would deliver something in 5 to 6 days and it seemed amazing for customers. And then we introduced Amazon Prime and we would start to get things there in two days for customers, which was amazing. And with Prime Now, you can now get things delivered in 1 to 2 hours. But that happened over 20 years.
And what we’re doing with Whole Foods is very similar. I would imagine that we’re on a similar path. They’ve been a part of Amazon now for 18 months and what you’ve seen that team do is they’ve worked hard to lower prices a couple of times, you’ll continue to see that as they continue to take cost out of the system, they’ll pass those savings on to customers. We’ve introduced the Prime program there where you can walk in and identify yourself as a Prime customer using an Amazon app and get additional deals and discounts. If you have the Prime credit card, you get an additional 5% savings. In probably 60 cities, now you can order your grocery from Whole Foods and have it delivered from Prime Now. For orders over $35, it’s free. I think that’s a huge benefit for customers. And probably 30 cities, you can order your groceries and pick them up on your way home. For those of you who haven’t tried that, it’s a magical experience. On average, we get the groceries, after you pull into the parking lot, we get them loaded into your car in about 50 seconds, and then you’re on your way.
And so these are a series of the innovations that have happened between the two companies driving the fly wheels together over the last 18 months. And what you’ll see is continued focus in that way whether it be with Whole Foods, Amazon Go, Amazon Fresh, Prime Now. And I think as we continue that and look back over the years, it’ll start to look like the future of retail — but that will take some time.”