Amazon.com Inc.'s quest to grow its real estate footprint and resolve the enduring last-mile delivery problem may lead it to the most troubled corner of retail real estate — the department store.

In recent weeks, the e-commerce giant's name has been floated alongside private equity shops and real estate investment trusts as a potential buyer for some or all of J. C. Penney Co. Inc., the department store that filed for bankruptcy in May amid the coronavirus-related economic shutdown after more than a century in operation. But if Amazon pursues a deal with J.C. Penney, it likely will target only select real estate assets and probably will not attempt to resurrect the J.C. Penney brand itself, experts said.

"I personally think [a prospective deal] is for the real estate, not because they are interested in resurrecting a brand that's been struggling for a number of years," Dick Seesel, manager and owner of the consultancy Retailing In Focus, said in an interview.

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Speculation about a potential Amazon-J.C. Penney transaction has swelled since a May 18 report by Women's Wear Daily placed Amazon executives on the ground at J.C. Penney's Plano, Texas, headquarters. The Milwaukee Business Journal confirmed June 9 that Amazon will open a distribution center in a former J.C. Penney warehouse in Wauwatosa, citing applications filed with the city.

J.C. Penney, whose physical network includes 11 supply chain facilities, plans to permanently close 242 of its 846 stores as part of its Chapter 11 bankruptcy filing. However, J.C. Penney does not present the same opportunity that Whole Foods Market Inc. and Zappos did when Amazon acquired the latter two, according to Mark Cohen, a professor of business at Columbia Business School and former chairman and CEO of Sears Canada. J.C. Penney's brand equity has been on the decline since 2005, he said.

"I don't think they're going to buy anything except in a liquidation proceeding," Cohen said in an interview. "This is not a going concern of any consequence. ... J.C. Penney doesn't have any expertise in almost anything these days."

A better competitor

What precisely Amazon would do with J.C. Penney storefronts, should a deal materialize, remains unclear. Both companies declined to comment for this story. Experts say the space could help Amazon compete with Target Corp. and Walmart Inc., both of which have touted their brick-and-mortar footprints as distinct advantages in the e-commerce arms race. Amazon's $17.19 billion of physical store sales in 2019, via mostly its 500-plus Whole Foods locations, is still a fraction of what the company makes online, according to S&P Global Market Intelligence data. Amazon's online store sales totaled $141.25 billion in 2019.

Amazon has lately displayed a voracious appetite for all kinds of real estate. The company reportedly looked at buying department store Kohl's and AMC Entertainment Holdings Inc., the movie theater chain, and it has new grocery and convenience store concepts in the works. Amazon also is looking to expand and streamline the crucial last mile of delivery. There is a wide swath of the U.S. population the company would like, but is unable, to reach effectively with its current footprint.

Amazon could utilize J.C. Penney real estate as distribution centers in harder-to-reach rural areas, according to Grant Pruitt, president and managing director at Dallas-based Whitebox Real Estate. Rural consumers would have the option to pick up orders on-site.

"I think it allows them to compete more head to head with Walmart in that space," Pruitt said of a prospective J.C. Penney deal. "Amazon rules the urban areas, not so much the rural areas."

A new hybrid

It is unlikely that Amazon is interested in creating a department store-size showroom, but it may explore a new hybrid of grocery store, retail showroom, fulfillment and distribution center that could, like the department stores before it, attract foot traffic, analysts and experts said. Seesel, of Retailing In Focus, framed a prospective Amazon-J.C. Penney deal as an opportunity to innovate and renew the mall retail landscape.

"[Amazon has] a chance to reinvent the real estate and perhaps provide a new kind of draw to a mall," he said.

James Sullivan, an equity REIT analyst at financial services firm BTIG, said a hybrid grocery store and warehouse fulfillment center could be a "winning combination." In an interview, he noted that the bulk of J.C. Penney's owned and leased real estate is closer to the consumer than Amazon's current warehouse footprint and could serve as effective last-mile delivery nodes.

Last-mile distribution space has been one of the most difficult property types to source in recent quarters, and recent industrial REIT deals have put a high premium on it, he said. "That [last-mile delivery] is where the growth has been the highest and where it's just very tough to get control of real estate."

Tom Forte, a retail analyst with D.A. Davidson, said an 80,000-square-foot showroom is unlikely, but he said Amazon is losing sales to Target and Walmart precisely because of its weaker physical footprint. "Within the portfolio of J.C. Penney, there are some high-quality locations that could give Amazon what I think Amazon needs right now, which is a larger physical footprint," Forte said.

What may become of J.C. Penney's private-label brands is another question. While some doubt the brands retain substantial value at midyear 2020, Jason Goldberg, chief commerce strategy officer at Publicis, said J.C. Penney's value-oriented apparel brands, including Liz Claiborne and St. John's Bay, have a loyal following. They could be added to the Amazon Fashion line alongside brands like Goodthreads and Amazon Essentials.

"Amazon would at least kick the tires on some of those brands if the price was right," Goldberg said.