Amazon is a company known for its innovative ideas and its successful business decisions. In 2013, Amazon’s CEO, Jeff Bezos, first spoke about Amazon Prime Air. This service plans to use drones to deliver lightweight packages to buyers in less than half an hour, assuming the buyers are within a close radius of an order fulfillment center.
In November 2015, Amazon opened its first physical bookstore in Seattle, and the company plans to open 300-400 bookstores across the country. This business move seems to be completely opposite of the drone-related ordering service plans released years ago.
In terms of technology, it almost seems backwards. People are questioning this practice for two reasons: first, they feel it is a threat to existing bookstores, and, second, “brick-and-mortar” bookstores don’t tend to do well in our current economy. Borders closed permanently years ago, and Barnes and Noble is doing extremely poorly at this time.
However, bookstores could be beneficial to Amazon because the company would have to ship less products individually to buyers.
This would affect the balance sheet in that less shipping supplies would need to be purchased, so, during a given period of time, there would be a less significant increase in liabilities in terms of accounts payable due to less necessary assets in terms of supplies. Less supplies would have to be purchased overall.
Another potential benefit is related to sales and therefore revenue. Economists state that online retail sales are only about 9% of all retail sales. If Amazon had retail stores, it could potentially increase sales, which would increase assets and retained earnings on the balance sheet, and thus increase revenue and net income on the income statement.
That being said, physical bookstores require buildings. The rising cost of rent in many areas is a significant factor in the failures of brick-and-mortar bookstores. Amazon bookstores plan to be about one-tenth of the space of the average Barnes and Noble, though, so less physical space required means less expenses in terms of rent. In terms of accounting, rent is usually paid for up-front for a year of monthly rent, and at the end of each month, after receiving the benefit of the physical business space, the month’s rent is accounted for by decreasing assets (cash) and increasing assets (prepaid rent). This type of accounting is considered deferral accounting.
In terms of rent, online retail only requires distribution warehouses. Adding physical stores would increase the amount of rent paid each year (and therefore increase expenses and potentially decrease net income on the income statement) because it would increase the amount of buildings needed for operation. Brick-and-mortar retail stores would also require more staff, which adds to expenses. Paying more staff would decrease cash and decrease retained earnings on the balance sheet.
At the end of January, Amazon released its 2015 income statement. 2015 net income was $596 million, meaning revenues were significantly higher than expenses, whereas in 2014, Amazon experienced a net loss of $241 million, meaning expenses were higher than revenue on the year-end income statement. The net effect of brick-and-mortar stores on Amazon’s financial success is currently unknown.