Can 'Amazon Go' Revolutionize Brick-And-Mortar Retail?

| About:, Inc. (AMZN)
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Amazon has begun publicizing what it calls "Amazon Go," a no-checkout system for, at least, smaller food stores.

This technology is in beta-testing in one Seattle store, and is planned to open to the public early next year.

I analyze the difficulty of developing this technology and express admiration.

I also explain why this could be a game-changer, if successful in the real world, for large retail markets.

If successful, this innovation could be material both for AMZN's bottom line and for its image amongst inventors, and thus converts me from a (theoretical and successful) bear.

Here we go again?

After changing the way people think about purchasing many goods and services, is (NASDAQ:AMZN) going to do it again, this time with the dominant form of shopping, namely in-store or "brick-and-mortar" retail? We had been led to believe, via leaks and supposition, that its grocery store concept would have limited technology advances of the sort one would expect from the leading e-commerce company. But AMZN might have gone to the next level with an important solution to a vexing problem.

If it succeeds in this technological improvement in eliminating checkout lines in markets, using artificial intelligence and sensor technology, it will have created a new profit stream and will have built on the best part of its business, high technology. Amazon Go could join Amazon Web Services and the Kindle/Fire/Alexa proprietary line of high-tech gadgets and increasingly position AMZN away from being an order-taker for and reseller of products designed and manufactured by other companies but as an increasingly important high technology company.

Let's explore, but first...

A little background to this article

Just a quick note on the context of this article. I never expected to be doing anything on AMZN any time soon. However, this is a change of trading view in a company I wrote two "short" (bearish) articles on recently. The first article, which I presume the bots that track financial writers on web use for their performance ratings, came before Q3 results. It was written over a weekend; AMZN had closed that Friday, October 14, at $723. The second article was written and published October 28 with the stock around $780 and commented on Q3 results and weak guidance for the current Q4. So, from a trading standpoint, the short calls did well, given that AMZN closed yesterday at $759, and any short position could easily have been covered after this news broke in the $755 range. (Personally, I rarely short and have had no position in AMZN in any way for years. So any "successful" short here was theoretical in my case.)

The short case against AMZN or retailers in general would appear to be weakened in general, strong self-reported discretionary retail sales data from Gallup, both the ongoing daily data and November's monthly data; plus the news discussed in the body of this article, make me lean toward the bullish side as a trader. Longer term, AMZN has formidable valuation issues. But lots of short sellers have been "right" in the long term and carried out of trading floors (or the electronic equivalent) on stretchers.

Now, to the AMZN news, some of the media coverage, and why this could be a very big deal as AMZN may be moving to be a dominant omnichannel or multi-channel retailer.

Introduction to Amazon Go

At the above link, this is most of what the company says, in the form of FAQs (emphasis AMZN's when cut and paste was done):

What is Amazon Go? Amazon Go is a new kind of store with no checkout required. We created the world's most advanced shopping technology so you never have to wait in line. With our Just Walk Out Shopping experience, simply use the Amazon Go app to enter the store, take the products you want, and go! No lines, no checkout. (No, seriously.)


How does Amazon Go work? Our checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning. Our Just Walk Out technology automatically detects when products are taken from or returned to the shelves and keeps track of them in a virtual cart. When you're done shopping, you can just leave the store. Shortly after, we'll charge your Amazon account and send you a receipt.

No special equipment is needed:

What do I need to get started? All you need is an Amazon account, a supported smartphone, and the free Amazon Go app.

It may be important that this has been a four-year effort:

Why did you build Amazon Go?

Four years ago, we asked ourselves: what if we could create a shopping experience with no lines and no checkout? Could we push the boundaries of computer vision and machine learning to create a store where customers could simply take what they want and go? Our answer to those questions is Amazon Go and Just Walk Out Shopping.

And the final major question:

So I can just shop normally? Yes! Just browse and shop like you would at any other store. Then you're on your way. No lines, no checkout.

This is a 1,800 sf Seattle store, currently in beta testing, limited to AMZN employees only.

This web page also contains an embedded video, which is also viewable on YouTube. It shows slim, attractive, happy shoppers acting normally. There are no checkout counters visible. Just walk in, swipe your phone over a scanner on entry, which verifies your Amazon Prime account, and that's it. No swiping or anything else on leaving. AMZN calls it "Just Walk Out" technology - which is a bit of a head-scratcher, as most retailers want you to "just walk in" and "stop and shop" rather than walk out. But we know just what they mean, and that's irrelevant to the potential game-changing nature of retail.

Here's some of what several hours researching competition to this set of technologies has revealed, and of course, there is no guarantee this is truly ready for prime time (that's a pun).

AMZN may be leapfrogging the industry with "Go"

I found an academic article from, apparently, last year, titled Future of Self Checkout: A landscape study, out of UC Berkeley. This is the abstract:

"People have said when checkout is working really well, it will feel like stealing. You grab a pair of shoes and you just walk out."

‐ Michael Chui, Partner, McKinsey Global Institute

Who would not like an ideal shopping experience - imagine that you walk into a store, browse products, compare pricing, read reviews, drop the products in your cart and walk out. This is not inconceivable in the not‐too‐distant future. This report covers the current state and the future of retail checkout, which is at an inflection point and is ripe for disruptive change in the near to mid-term horizon. It outlines the pain points for the consumer and the retailer, and identifies an existing business opportunity as recognized by industry players. It covers the technologies in action, their potential for disruption, industry players in the game, challenges to overcome, and the authors' opinion on the winners and losers in the retail self checkout industry.

The authors are from the high-tech industry, basically players who would benefit from growth of the Internet of Things but are disclosed as not being from companies discussed in the article. They focus on self-checkout because, and this key, they go on to say this early on in the body of their article:

An ambitious concept, Touchless commerce [2], showcased by Toshiba in NRF's (National Retail Federation) Big Show in New York City in early 2015 combines 3-D and facial recognition to quickly scan consumers face and the content of the basket and immediately charges the consumer. As presented in the show, the scanning would be limited to 8‐10 items in a supermarket basket and is far from achieving the required identification targets to make the technology realizable. Sometime in the future, as such technologies cross the barriers of adoption, we will essentially see an end to the concept of checkout.

So within the past two years, what AMZN has accomplished was considered overly ambitious by these techies, who therefore did a thorough review of the multi-year growth potential for disruptive but known scanning technologies to speed checkout.

NCR (NYSE:NCR) filed a patent application, "Whole Store Scanner," nearly two years ago disclosing something that may have some similarities to AMZN's approach, but is more limited. This is the first claim:

1. A store camera system comprising: a first camera generating digital image data for a first shopping container; a second camera generating digital image data for a first product arranged on a product display; a memory storing location data for the first camera and location data for the second camera; and a processor analyzing the digital image data from the first camera, the digital image data from the second camera and the location data for the first camera and the location data for the second camera to determine that the first product has been taken from the product display and placed in the first shopping container.

This requires a shopping container, such as a cart, which can be imaged. The AMZN video shows one example of a man walking into the store, grabbing a wrapped food item, and just walking out with it, never putting it in a container. Then it shows another example, prominently, of a woman carrying an opaque bag and putting items in it, out of view of a camera.

Whether or not AMZN was speaking to the NCR patent application is not something knowable, but it's interesting. Further interesting is that if NCR's patent is granted (or has been), there could be infringement questions, but NCR is a small-cap stock, and I would assume that if AMZN has big plans for this technology, matters will be worked out one way or another.

AMZN may be solving a major problem

It just may be that self-checkout is unsolvable. NPR ran an article this past October titled Self-Checkout Could Soon Be Checking Out. The article describes an interview with "the guy who invented self-checkout, Howard Schneider." Mr. Schneider's comments basically suggest that self-checkout, or better methods of standard checkout with a cashier after (usually) waiting in line, just are not going to cut down on the problems.

It goes on to conclude with an interview with an NCR employee who touts the above patent as the ultimate solution.

The importance of these problems can be found in various places on the web. From 2013, one source reported on research that found:

  • Close to 50 percent of all customers will purposely avoid a retailer or brand in the future if they had to wait longer than five minutes.
  • One-third of customers forced to wait for over five minutes have abandoned the checkout line.
  • Nearly half of those surveyed avoid a store because of someone else's negative experience.
  • After 2.5 minutes, customers will become frustrated if there is no progress in the line.
  • If a checkout process is being actively managed, customers are more willing to tolerate the wait time.

Another report, from last year, began this way:

A recent Box Technologies and Intel report has examined the question of 'How Long Does It Take To Lose Your Customer,'...

The British study found that 41 percent of shoppers have abandoned a purchase due to long wait times in checkout lines, and 86 percent avoid stores where they perceive the lines to be too long. 74 percent reported that they would shop at a competitor instead. The research suggests that new strategies are needed to improve the overall customer experience by shortening wait times at the registers.

According to the study, the average Brit says that nine minutes is too long to wait in line, and lines more than seven people deep will make them abandon their purchases and shop elsewhere. Almost a quarter of shoppers reported that they will wait less than five minutes in line to make a purchase.

... Three quarters of British shoppers surveyed said that stores need to do a better job of addressing wait times during busy shopping periods. And the study found that supermarkets were the worst offenders... [emphasis added by me].

So, AMZN is being smart about beginning with food. And it may be leading the way into more generalizable solutions beyond food and other simple shopping situations where, as with supermarkets, shoppers simply move through aisles and take items off of shelves.

One of the issues with all this sort of technology is theft. In the AMZN store, what is to stop someone from entering the store, swiping something over the scanner, then filling a bag with food items, then just walking out - but not having an Amazon Prime account?

Presumably, there may well need to be some system to assure someone's status on entry, or within the store just before departure. Whatever is the needed solution, the above examples show that just so they are brief, shoppers will not mind - just so they can be assured in advance that there will not be a five-minute, or five-minute (etc.) wait.

Bloomberg gets the point, and the WSJ adds details

In an article with the anodyne title, Amazon Opening Store That Will Eliminate Checkout - and Lines, Bloomberg News homes in on the strategic importance of this innovation at the end of the article (emphasis added):

Grocers have been experimenting with automated checkout for years...

Amazon Go takes the concept to a new level - much as One Click shopping did when the company introduced it online years ago.

"While it remains to be seen how well the technology works, the experience could be very compelling," said Michael Chui [quoted above], a partner at McKinsey Global Institute. "Completely removing the friction associated with checkout has the ability to be a competitive differentiator."

And for AMZN to break into store-based retail against entrenched giants and well-known local stores, it needs a competitive differentiator.

The WSJ adds details, as suggested most importantly by the title and sub-header of its own reporting:

Amazon Working on Several Grocery-Store Formats, Could Open More Than 2,000 Locations

Amazon Go is just one of at least three formats the online retailer is exploring, sources say.

We shall just have to be observers and, to the extent we want to be, theorizers here. Could AMZN make this technology scale even to large supermarket formats? If so, does it want to compete directly with the Krogers (NYSE:KR) of the world? Or does it want to stay smaller and run its omnichannel of web-based and store-based retailing and license its evolving technologies to retailers it does not want to attack directly?

How important could this be for AMZN?

In any case, this could be significant, even if not determinative given AMZN's 170X or so P/E on TTM EPS. We will just have to see how far the company can take this version 1.0, whether it will be integrating the idea with radio-frequency identification techniques (RFID), and so on.

Assuming the concept is viable, then at the very least, all true believers in AMZN, of whom there are many, can point to this as an unexpected breakthrough that everyone else failed to make happen. And that is worth a lot in preventing selling pressure on a stock.

Summary - what's the bottom line here?

Proportionality in most things is important. All we have so far is a two-minute video, a Q&A on a web page, and some other early details. Yet this announcement resonates with me. It has - for example - neutralized me from being an AMZN bear (on valuation only), and heartens all AMZN bulls, especially the true believer bulls. They can reason that if AMZN is beating (has beaten?) the best and brightest, as I think I've demonstrated above would be the case if this store works well, in such a competitive and hotly-researched area involving artificial intelligence and other high-tech techniques, then what's next? Can AMZN pull away from even Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) in web services, or at least widen its own moat?

Overall, AMZN has severe, perhaps insuperable valuation issues as a stock (my view) until it achieves even more than this. After all, Apple's (NASDAQ:AAPL) iPhone lead lasted a while, and then along roared Android. But stocks move on valuation plus many other things. Given a sunnier trend in retail sales per Gallup, which is my favorite indicator of such matters, AMZN could be in a sweet spot for its general e-commerce business this season, rendering its cautious guidance for Q4 inoperative. A successful store opening in Seattle of this technology early in the year then might just strengthen what could be a wave of enthusiasm for this name.

So I see no case for a short position in AMZN on a short-term trading basis, and maybe a trading long could be interesting - understanding the downside price risk are very high if the company falters fundamentally.

I hope that Amazon Go succeeds and changes the world for the better. If so, the company deserves a profitable cut of the value of that improvement. The world keeps changing, and AMZN continues to be one of the prime agents of change.

Thanks for reading and sharing any comments you may have, including any specialized knowledge within the fields covered or technologies utilized by Amazon Go.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser. Long AAPL.