As more dollar stores pop up around the U.S., Amazon is simultaneously changing its rules to offer more low-cost products to customers.
Some say a battle between the brick-and-mortar dollar stores and the retail giant is brewing. We dig in to the details.
What did Amazon change?
Once upon a time, certain items on Amazon that didn’t meet particular weight requirements could not be priced below a certain threshold. It was typically capped at $8 to $10. Priced lower than that, they became “add-on” items and could only ship with other products.
Naturally, this stopped a lot of Amazon sellers from pricing their products that low. It also offered an advantage to brick-and-mortar stores with lower-priced items.
Recently, however, Amazon did away with its add-on program. Now, Amazon and its sellers can price products for as low as $1 and still have it qualify for Prime/free shipping.
Brick-and-mortar retailers with very low-priced goods such as Dollar Tree and Dollar General once had nothing to worry about regarding the so-called “Amazon Apocalypse” (in which some people attribute to the downfall of brick-and-mortar retailers like Circuit City, Borders and Toys-R-Us to Amazon).
Now, many believe this puts these low-cost chains directly in Amazon’s line of fire.
In this article we explore three reasons why Amazon will win this battle (as they’ve won countless others) and three reasons why Dollar Tree and Dollar General might have nothing to worry about.
3 Reasons Why Amazon Wins over Dollar Stores
1 – Amazon has plenty of capital to back up this move.
Already, Amazon boasts one of the largest market capitalizations in the industry. As of this writing, Amazon’s market cap is at $871.86 billion. That’s just a little bit shy of the trillion dollar milestone which it hit in late summer 2018 (New York Times).
Compared to Dollar Tree and Dollar General, which have market capitalizations of $28.03 billion and $42.62 billion, respectively, Amazon doesn’t only beat both of these large players in the low-price product space, but is a larger company than both combined… times 10 (Y-Charts Amazon, Dollar Tree, Dollar General).
2 – It’s a loss leader for Amazon, plus it attracts more Prime memberships.
Before Amazon did away with add-ons, many consumers would only buy products that cost $10 or more from the store. But with this change, buyers can now purchase single, low-cost items.
Batteries. Chargers. Even a set of plastic forks can be delivered in one to two days without combining orders or getting charged additional shipping.
While it’s possible that Amazon is losing money on those transactions, the low-cost items could entice people to add more to their carts. Further, free shipping is only available with a Prime membership. Shoppers have to pay the annual Prime membership of $119 to reap those specific benefits.
Not to mention, it also puts buyers in front of Amazon’s digital platforms, such as Prime TV and Kindle Direct.
3 – Amazon will save money in other places.
Amazon’s sellers who had slow-moving inventory before used to liquidate their items through Amazon at a cost of $0.50 per unit. Now sellers can lower the prices on their own slow-moving products and potentially earn back some of their investment.
Not only does this still guarantee revenue for Amazon — which gets a cut of the sale regardless of the price — Amazon may no longer need to employ workers to remove and liquidate these products.
3 Reasons Why the Dollar Stores Could Stand Up to Amazon
1 – Even with 1-day shipping, Amazon can’t beat “RIGHT NOW”… yet.
Amazon’s products ship quickly and usually arrive within one to two days. However, they still can’t beat the “right now” convenience that brick-and-mortar retail offers.
Many products offered by dollar stores are impulse or immediate-need buys. People go there for things like toiletries, extra socks, or an over-the-counter painkiller.
Until Amazon can deliver a product within 15 minutes of ordering, the low-price stores will always have that edge.
2 – Discount stores cater to a much different market than Amazon
Perhaps the largest advantage stores like Dollar Tree and Dollar General have over ecommerce stores like Amazon is right there in the name—dollar.
Discount brick-and-mortar stores still take cash. That appeals to lower-income shoppers who may not have the resources to open the bank account or credit card necessary to purchase products online.
Furthermore, according to Moody’s, dollar stores reach a key demographic by nature of being “easier and faster to shop in,” making their products accessible to consumers. (RetailDive).
In fact, there are more Dollar General stores than McDonald’s restaurants in the U.S., and 75 percent of Americans live within five minutes of a Dollar General (Forbes). (See previous point about getting what you need “right now.”)
3 – Discount stores have incredible financial strength
This is not a trait that discount stores like Dollar Tree and Dollar General possess. As of this writing, both Dollar Tree and Dollar General stocks are up.
And according to a January 2019 eMarketer article, both Dollar Tree and Dollar General planned on opening 500+ and 900+ stores respectively. Also, Dollar Tree saw an outstanding 10.64% EBIDTA in 2018. Dollar General saw 10.10% (eMarketer, Market Watch Financials).
So who wins?
Today, there seems to be room for many in the low-cost goods market. However, it’s a competitive marketplace. We’ll have to keep an eye on how the dollar stores and Amazon share that low-cost products pie.
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