Not long after outlining plans to expand their retail presence, Amazon and Meta are hitting the breaks on physical retail.
During its fourth-quarter earnings call, Amazon CEO Andy Jassy announced that the company stopped the rollout of Amazon Fresh grocery stores while it mulls over ways to differentiate the chain and improve its economic value. Meta, on the other hand, is reportedly walking back its retail plans after opening its first retail store just a year ago, according to reporting from Insider. Meta’s head of store, Martin Gilliard, also left the company earlier this year and has reportedly not been replaced.
Both tech companies have struggled to improve their financial performance over the past few quarters. In April, Meta reported its first revenue increase of 3% after three periods of diminishing revenue due to its ad business being significantly impacted by Apple’s iOS 14 update. Meanwhile, Amazon’s e-commerce sales stayed flat in the first quarter, despite reporting a profit.
As their main revenue drivers remain unstable and economic conditions become more unpredictable, the rollout of physical stores has been put on the back burner. Just a few years ago, when Amazon was beginning its Fresh rollout and Meta was reportedly plotting its foray into retail, these companies launched ambitious physical retail projects that didn’t necessarily promise immediate return on investment. But around the time of Fresh’s launch, Amazon was posting 40% year-over-year sales growth, per its July 2020 earnings report. Meanwhile, when reports about Meta potentially opening a physical store were circulating in late 2021, the company’s revenue in that third quarter was up 35% from a year earlier.
But, in recent months, tech companies were hit especially hard, which made unprofitable investments more difficult to justify.
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“We’ve decided over the last year or so that we’re not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we’re optimistic that we’re going to find that in 2023,” Amazon CEO Andy Jassy told investors and analyst in an earnings call in February.
Andrew Lipsman, principal analyst at Insider Intelligence, said that these companies are now being mindful of their spending as they attempt to stabilize their core business. For example, Amazon has also closed nine of its Go stores, which feature its cashierless technology, as of this month. In May, Meta executed the last round of a three-part layoff plan, which impacted 10,000 positions.
“We’ve seen both of them cut back on a lot of different areas of the business that were luxuries to invest in two years ago,” Lipsman said. “Now they just can’t afford to.”
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There are also individual factors behind Amazon and Meta’s decision to pause store rollout. In Meta’s case, while reports from the New York Times claimed that Meta had planned to open stores in different countries, Lipsman said that its retail expansion was still experimental.
The stores also sold metaverse products — such as the smart video chat device Portal, smart glasses Ray-Ban Stories and virtual reality headset Meta Quest — in an attempt to lure shoppers into the virtual world. However, in recent months, major retail players like Walmart and Disney were pulling back on their metaverse strategies, which signals dwindling interest in the metaverse. An anonymous employee told Insider that the store sees 60 customers come into the store on a “good day.”
For Amazon, Fresh’s high-tech concept faces an uphill battle against more established grocery players that might be able to offer more value to price-conscious shoppers, said Barry Thomas, senior thought leader at Kantar. The company took on a $720 million impairment charge in the fourth quarter, with Fresh and Go taking the majority of the amount.
“They just haven’t found the right store concept that resonates with customers and is differentiated,” Thomas said. “They just haven’t figured it out.”
In pulling back the rollout of physical stores, these industry giants run the risk of falling behind competitors who are continuing to expand their retail footprint, experts said.
“When you expand into physical retail, you need to have a proper strategy,” said Sudip Mazumder, North America retail industry lead for Publicis Sapient. “That’s really the message for other retailers and if you look at most of the retailers, they’re actually thinking about different format stores.”
In the grocery space, for example, companies are experimenting with a range of store formats. Wegmans and Meijer’s newer locations unveiled smaller store formats, while H-E-B and Hy-Vee launched supercenters. Even Google opened a new neighborhood store concept last year.
“I do believe that physical retail is here to stay and it’s just going to get better and better with more digital-enabled tools and different formats,” said Mazumder.