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As Reports Swirl, What Could Amazon Want From JCPenney?

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Last Friday after business hours, the story broke on JCPenney’s chapter 11 bankruptcy filing, which few were particularly surprised about. On Monday of this week, WWD broke the story of a cadre of Amazon executives in meetings at JCPenney offices in Plano, Texas. The latter nearly overshadowing the bankruptcy news itself.

Naturally, conjecture abounds around the interest or interests that Amazon might have in acquiring some or all of JCPenney’s assets. These run the gamut from a means of fortifying Amazon’s distribution needs, to giving Amazon storefronts to boost their private label fashion brands which have not fared well against other Amazon apparel offerings.

This speculation doesn’t necessarily jibe with the well-documented “knife catching” strategy of JCPenney, attempting to turn the crippled business around through the financial “forgiveness” that the chapter 11 filing would offer. Which according to Penney’s would “put JCPenney back on its turnaround path with a clean balance sheet.” I reached out to both Amazon and JCPenney for a comment on my story; the former would not respond, and the latter said they don’t comment on rumors.

The Hail Mary Pass

Besides giving the troubled retailer financial “running room,” the bankruptcy protection plan filed on May 15 includes the closing of about 240 stores. Also in discussion is the possibility of creating a real estate investment trust (REIT) to convert their unencumbered real estate assets, valued at between $704 million and $1.4 billion, which would allow for lease back provisions. There are also a whole host of court stipulations and deadlines required to meet the financing criteria, say nothing about any plan to “fundamentally reinvent the brand.” If this sounds complex and/or convoluted, you’re not alone, as my Forbes.com colleague Steve Dennis recently suggested.

So, what could Amazon actually need and want from JCP? There is no question that there are assets to be had on the cheap, but there are hard realities regarding those assets that make assessing Amazon’s reported intent rather difficult. But let’s postulate, anyway.

Satellite Distribution Centers

Much is being written about the high costs being incurred by Amazon, particularly during the coronavirus pandemic. Amazon’s shipping costs increased 49% in the first quarter of 2020, while prime delivery jumped from one to four days on essential items. At the same time Amazon has been taxed by the struggles of its last mile delivery partners in meeting consumer demands.

It is quite likely that Amazon’s interest in some of Penney’s real estate assets could be to create satellite distribution centers, closer to more customers, and do it economically. Penney’s is said to have about 30 freestanding locations on larger sites that could be converted to warehousing and distribution.

Fashion and Private Label Exposure

Here is where things get a bit dicey and more complex. If, for the sake of argument, there is some validity in utilizing some JCPenney stores, or carve-outs as a means of boosting Amazon’s fashion retailing business, then you start down an awfully expensive path of risk/reward, even for Amazon. That path may also be at odds with the publicized objectives of CEO Jill Soltau.

I cannot imagine any scenario where Amazon would want to purchase, or partner with JCPenney in a turnaround. There’s no there, there. And of the 600 odd JCP stores that would be left, assuming they can get through a bankruptcy filing (which many question), there are probably only 200 or so of those stores that are in A or B+ rated malls, whose futures are not in immediate jeopardy.   

Low-risk Exposure

I could conjure up a scenario where Amazon cuts a deal with JCP to carve out small (1,500-2,000 square feet) Bonobos-like guide shops with separate entrances, to feature a dozen or so of Amazon’s leading fashion brands, in order to build awareness around new product introductions. This kind of approach, with a strong assist from Amazon’s social media influencer network could be a viable in a 200-location roll-out, assuming JCP survives chapter 11. However, Amazon could certainly combine the same strategy in the following scenario.

Replacing the Last Mile

Much has been written about the high cost of the last mile in e-commerce. If, for the sake of discussion, Amazon decides to buy JCP out, lock, stock and barrel, I could imagine a strategy where they begin to utilize a new hybrid “last mile solution” for both delivery and return of goods, on the sites of pre-existing Penney’s stores.

COVID-19 has made curbside pick-up a new and highly desirable way for people to receive goods, in an efficient and contactless manner. Imagine the savings that Amazon could leverage by having their customers (by choice) solve the expensive “last-mile” delivery, by visiting the local Amazon-Drive-up. A highly automated, contactless pick-up and drop-off facility (think drive-through banking) could begin to “localize” one’s relationship with Amazon.

Such a solution would solve the delivery/theft problem taking place in neighborhoods, while cutting our dirty dependency on corrugated cardboard, by utilizing new reusable containers. The methodology may even enable a new “off-Prime” price structure for a new category of Amazon shoppers, for whom Prime may be out of reach.

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