To Zip from IP, Amazon Morphs into Brick-and-Mortar - Report

The rumor mill churning around Amazon.com (AMZN) has offered up a new hatchling, in brick and mortar. The world's largest online retailer will open a physical store in Seattle, according to Good E-Reader, making it the first major online retailer to jump from an Internet Protocol address to actual zip code.

Since its birth in 1995, Amazon grew into one of the exemplars of success during the late-1990's online boom. In fact, it remains impossible to detach the Amazon from dotcom, which is as vital as its smirking logo.

So why would a foray into the physical realm, with all the added expenses and overhead it entails, make sense for a company that has lived off high-volume and low margins retail? Could it possibly succeed?

Good E-Reader posits the retailer will give its first physical foray a shot in its homebase in Seattle, with a boutique that sells little more than its Kindle e-Readers and books from Amazon's in-house publishing imprint.

A rumor deserves to be taken with a grain of salt, and Jim Friedland, an analyst for Cowen and Co., remains bearish on the mythical Amazon store's chances of becoming a reality.

We think it is highly unlikely that Amazon would pursue a traditional physical retail distribution strategy, he wrote in a recent client note. It is hard to envision a strategic justification since Amazon would not be able to leverage many of the competitive advantages that it enjoys in the online retail business, including vast selection and convenience. In addition, a significant retail presence would weigh on ROIC and hurt the company's favorable working capital dynamic.

The analyst went on to describe three scenarios for a physical store: pick-up locations, where Amazon deliveries can be scooped up within the confines of a participating retail location; kiosks distributing Amazon-exclusive products; and an actual brick and mortar shop.

Friedland considers the last option the least likely.

It is hard to envision a strategic justification since Amazon would not be able to leverage many of the competitive advantages that it enjoys in the online retail business such as vast selection and convenience, he said.

The brick-and-mortar rumors come as the company posts weakening results. Its fourth-quarter earnings fell 57 percent, with net income falling to $177 million from $416 million in year-on revenue. Adding the burdensome existence of a physical store at a time when investors have a right to be skittish may seem silly.

But retail gurus see much to gain in a physical presence, envisioning the stores as pseudo-portals to Amazon's online inventory. Conceptually, it's simple: snag a Kindle or book and order your paper towels while you're there. Robin Lewis, a retail consultant and CEO of the Robin Report, expects the company to leverage its vast database of customer's shopping habits to predict inventory orders ahead of time.

This is just another distribution point for Amazon, he said. They've got a databank bigger than the Pentagon. So they know what the working mom in Illinois is eating for breakfast and what jeans she wears. My prediction is they're going to open up brick and mortar showrooms, would be a better word to use than stores.

The transition from online to retail, though largely untested, remains rife with possibilities, said Stephen Baker, vice president of industry analysis for NPD Group, a consumer market research firm.

Clearly what's fueling it is you need to be in multiple channels to reach all your customers, he said. There's a reason Kindles are distributed in places like Best Buy.

Concerns about ballooning overhead are overblown, Baker added.

They can manage the size of the store; they can manage the products they sell there, he said. The economics work pretty well.

Lewis posits the next step in the eCommerce evolution is a step back to classic shops.

It's not just distribution, he said [Amazon] can't really provide an experience online, whereas it can in the physicality of a store.