The Cashier-less Amazon Go Store

June 16, 2019

The Cashier-less Amazon Go Store

What are Amazon Go Stores?

Amazon Go Stores are Amazon’s cashier-less physical retail stores. These stores leverage the same technologies employed in self-driving cars (computer vision, deep learning, and sensor fusion) to create a store experience where customers can walk in, grab their items, and walk out without interacting with anyone. After you walk out, you’ll get a receipt on the Go app. The charges will be paid from your Amazon account.

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Figure 1: Nondescript array of cameras and sensors, installed on the roof, tracking your every move.

This means that, for the technology to work, Amazon Go must be able to identify individual customers as he/she enters, track the individual throughout the store, figure out what items are taken off the shelves and charge the individual accordingly. Amazon’s engineers must also able to determine who to charge when customers are shopping as a group, or overcoming inaccuracies when a family enters the store with a child that grabs items off the shelves.

Amazon’s Plan for Go stores

Since opening its first store in Seattle 2016, the company has opened 13 additional stores in major urban centers in the US: Seattle, San Francisco, Chicago, and New York. Amazon has announced a very aggressive expansion plan to open more than 3,000 cashier-less stores by 2021. According to analysts at Morgan Stanley, this may cost the company between US $0.5 billion to US $3 billion (still a drop in the ocean compared to the company’s US $200 billion retail operating expenses but not an insignificant investment). It is estimated that the 1st Amazon Go store cost the company more than US $1 million in hardware alone.

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Figure 2: Locations of all 13 Amazon Go stores. They are all located in major urban centers in the US: Seattle, San Francisco, Chicago, and New York.

Amazon has announced a very aggressive expansion plan to open more than 3,000 cashierless stores by 2021. According to analysts at Morgan Stanley, this may cost the company between US $0.5 billion to US $3 billion (still a drop in the ocean compared to the company’s US $200 billion retail operating expenses but not an insignificant investment). It is estimated that the 1st Amazon Go store cost the company more than US $1 million in hardware alone.

What is the motivation?

It is unlikely that the goal is cost savings. Yes, the “Grab and Go” experience will eliminate the need for human cashiers, but these stores will still need human staff to make fresh food and manage inventory. For a store size of 1,300 sqft (121 sq meters, which is the size of a small convenience store), Go stores can eliminate 1-2 cashiers. Assuming each store requires 2 cashiers with wages at US $18 per hour, and that each store is open 24×7 (which means that there will be 178 hours per week required), the annual wage expenditure is US $314,496 per year for two cashiers. With a hardware cost of US $1 million (for the 1st Seattle store), the expected breakeven period is over three years.

It is likely that Amazon’s motives are highly strategic in nature. As dominant as the company is in E-commerce (about 49% market share), it only has a 5% share of the overall retail market (E-commerce and physical). It could be that Amazon is creating a frictionless retail experience by merging offline & online purchases and integrating data it has from its customers’ online behavior.

The benefits of removing Friction

Amazon knows that removing friction can alter consumer behavior and promote more sales. Take Amazon Prime membership for example. Amazon Prime costs US $120 per year in the US. The program guarantees one day shipping for all items – removing friction in the purchasing process and reducing wait times. These have the effect of increasing sales. On average, Amazon Prime members purchase US $1,400 worth of items, while non-prime members buy US $600. That is more than a 2X lift. Not only do prime members pay for the membership, they also spend more. In the US, Prime membership is very popular. About 60% of households in the US have Prime, and this penetration number is even higher (80%) in the affluent household segment.

By removing friction in the check out process, Amazon can potentially generate more revenue and increase sales efficiency from its Amazon Go stores. Early studies by analysts at RBC suggest that Go stores can generate 50% more revenue. Note that this study might be reporting inflated numbers due to the novelty and newness of these Go stores. The true numbers might be lower in the future.

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Figure 3: Annual revenue per square foot, based on store size. Note that larger store is less efficient. Source: RBC capital and Recode.

It’s all about the data

The most important aspect about Go expansion might be the data. By merging offline purchasing information with customers’ online preferences, Amazon can better anticipate customer’s needs. It can improve its recommendations on Amazon.com. It can satisfy your purchases better when you buy via Alexa voice commands. It can potentially create a seamless end-to-end shopping experience. Not to mention that the additional data can be used to better advertise to you – further strengthening its burgeoning ad business.

Oh, also do not forget that these Amazon Go stores can serve as mini logistical hubs for picking up or return shipping – further improving online delivery efficiency.

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

Our team members at Vested may own investments in some of the aforementioned companies. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.

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