Please ensure Javascript is enabled for purposes of website accessibility

Amazon's Plan to Crush the Dollar Stores

By Rich Duprey - Updated Oct 22, 2019 at 8:59AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The e-commerce giant is making a big leap into deep-discounter territory.

Because buying an item that cost less than $5 on Amazon.com (AMZN -0.77%) often required purchasing something more expensive to qualify for free shipping, Dollar General (DG -0.04%) and Dollar Tree (DLTR -0.81%) were long viewed as Amazon-resistant, if not Amazon-proof. The economics of offering shipping on these cheap goods by themselves just didn't make sense, because the postage would cost more than each item.

Now Amazon has basically said "economics be damned": It's allowing a flood of merchandise priced below $5 to qualify for free next-day shipping through Amazon Prime. Dollar-store chains are the competitors most likely to be crushed by this change in policy.

Finger pressing a red button reading Free Shipping on a computer keyboard

Image source: Getty Images.

Adding on more growth

This is not the first foray Amazon has made into the deep-discounter end of the pool. Amazon's "add-on" program identified inexpensive items that could be added to an order valued at $25 or more and, if shipped to the same address, qualify for free shipping. Last year the e-commerce giant began adding sections to its site listing select groups of items priced under $10 and $5 that would qualify for free shipping on their own.

The latest maneuver seems to have removed all the barriers for such low-priced items to qualify. However, according to Recode, analysts at Edgewater Research noticed last month that Amazon apparently turned off the add-on program, which should open the floodgates for these low-cost items to be shipped for free on their own.

Cracks in the wall

Dollar stores have thrived despite the retail apocalypse descending on most of the rest of the industry. U.S. retailers have announced 8,642 store closures so far in 2019, 48% more than all of last year, and Coresight Research's analysis suggests that as many as 12,000 will be closed by the end of the year. Yet dollar stores are in expansion mode.

Dollar General opened over 900 stores last year and is more than halfway to achieving its goal of opening 1,000 stores this year. Dollar Tree has opened over 300 of its namesake stores, including a number of Family Dollar locations that were rebannered under the Dollar Tree name, though the company is reducing the number of Family Dollar stores as it seeks to get back on track.

Also threatened by Amazon's move are larger retailers that view such low-priced items as impulse buys adding to the total average ticket. Target (TGT -0.39%), for example, reported that comparable sales grew 3.4% in the second quarter, helped along by an increase of nearly a percentage point in the size of the average transaction. Recode notes that stores from supermarkets to pharmacies also count on these small items to pad their sales numbers.

Pirating sales from all over

There is something still to be said for going to a dollar store and searching out what's new on its shelves; these chains have long prided themselves on the "treasure hunt" atmosphere giving them a competitive advantage. Yet being able to quickly look up a small item online and have it delivered free of charge the next day may be better than the excitement of discovery.

Perhaps the more important takeaway for investors: This shows once again that no business should be considered safe from Amazon's competitive pressure.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$141.00 (-0.77%) $-1.10
Target Corporation Stock Quote
Target Corporation
TGT
$174.66 (-0.39%) $0.68
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
DLTR
$166.82 (-0.81%) $-1.36
Dollar General Corporation Stock Quote
Dollar General Corporation
DG
$255.45 (-0.04%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
395%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.