Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Will Amazon Go Kill Dollar Stores??

The retailers most threatened by the automated store concept Amazon Go might be dollar stores such as Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR).

Much of the appeal of Dollar General; Dollar Tree, and Dollar Tree’s subsidiary Family Dollar, is that they are small, in the neighborhood, and convenient. Amazon Go seems to have many of the same characteristics. It might be small, in the neighborhood, and very convenient.

In other words, Amazon Go is a small-box discounter just like the dollar stores. Yet it has a couple of huge advantages over chains like Dollar General. The most obvious of these would be Amazon’s (NASDAQ: AMZN) resources which included yearly revenues of $177.866 billion reported on 31 December 2017.

How Amazon Go Threatens the Dollar Stores

Beyond that, there’s Amazon’s technology; which includes machine learning, artificial intelligence, robots, and Amazon Web Services (AWS). Amazon Go is part of AWS’s machine learning and artificial intelligence initiatives.

An even bigger advantage would be a direct connection to Amazon’s online ecosystem. Customers would presumably be able to pick up or return Amazon orders at Amazon Go. The consumer can collect that new X-box and underwear he ordered, and grab a half gallon of milk and a loaf of bread at the same time.

Another advantage Amazon Go has would be lower labor costs since it would not require cashiers. The only employees needed would be stockers, managers, and perhaps a greeter at the door or somebody to man the customer service counter.

An inherent edge Amazon Go would have is the ability to hire higher-quality employees because it would be in a position to offer bigger salaries. A related benefit is fewer expenses from training, hiring, and retention. Another benefit would be less of a threat from laws requiring a $15 an hour minimum wage which are spreading fast around the country.

One of the biggest problems and expenses facing dollar stores is a high turnover rate. This occurs because of low pay and poor working conditions. Some dollar stores; like the Family Dollar in my community, have a difficult time filling positions and in some cases keeping the doors open because of the turnover.

Another difficulty is keeping shelves stocked and the store clean. The aisles of Family Dollars and Dollar Trees I have visited have often been blocked by carts full of unopened boxes. Amazon Go might avoid this problem because its employees could spend most their time stocking.

An Advantage that the Dollar Stores Might have over Amazon Go

Dollar stores have a few advantages over the Amazon Go business model such as the ability to take cash payments. Cash was still the most frequently used retail payment medium in 2015, making up 32% of all transactions, the San Francisco Federal Reserve reported.

Taking payments at Amazon Go would be a simple matter of installing a cash register or an automated register. Kroger (NYSE: KR) supermarkets and Walmart (NYSE: WMT) stores already feature automated registers that take cash. All Amazon Go would need to take cash is a register at a service counter or one automated register.

A potential development would be that some Amazon Go locations; such as those in working-class or rural areas, might accept cash while others will not. It is hard to see large segments of the American public supporting a store that does not accept cash.

Eliminating cash from retail stores does make a lot of sense because it would cut down on labor costs and the risk of robberies. A Google news search will tell you that dollar stores are a frequent target of robbers because they have cash and limited security. Getting rid of cash would also eliminate the need to have a person to count it; or a cash-counting machine on premises, a safe, and regular visits from an armored car.

Strangely enough, armored-car guards might be among the classes of people put out of work by the widespread adoption of the Amazon Go business model. There would be less need for armored cars because fewer retailers would be delivering and picking up cash. Robbers would also be out of a “job” or forced to seek new targets such as drug dealers.

Can Dollar Stores compete with Amazon Go?

Dollar stores are at a huge disadvantage when compared with Amazon. Dollar General reported a quarterly net income of just $252.53 million and quarterly revenues of $5.903 million for 4th Quarter 2017.

Amazon reported a quarterly net income of $1.857 billion and quarterly revenues of $60.453 billion for the same period. Dollar Tree reported quarterly revenues of $5.316 billion and a net income of $239.90 million on 31 October 2017.

Neither dollar store operator has the resources to keep up with Amazon. Dollar Tree had $3.972 billion in assets and $400.10 million cash and short-term investments on 31 October 2017. Dollar General reported $4.153 billion in assets and $226.19 million in cash and short-term investments on the same day.

Amazon reported $69.197 billion in assets and $30.986 billion in cash and short-term investments on 31 December 2017. The Everything Store has the resources to roll out Amazon Go nationwide or convert an existing chain to the concept fairly quickly if Jeff Bezos wants to.

Dollar Tree and Dollar General simply lack the resources to add the new technology to their stores. One has to wonder how Dollar General or Family Dollar can compete with something like Amazon Go.

Automated Walmart might be a Bigger Menace

Nor is Amazon Go, the only nightmare. Walmart is also moving to adopt the same technology.

The retail giant has tested a convenience store concept, lockers for pickup of merchandise, pickup counters, and widely deployed self-service checkout in its stores. News stories indicate that Walmart is planning its own automated store and testing robots in some of its locations.

Walmart is a far greater threat to dollar stores than Amazon because that company has far more experience in deploying automation in its stores. Amazon is just testing the concept, while Walmart has been utilizing automated devices in stores for decades.

Walmart certainly has the resources for a large-scale rollout of automated stores. It reported $65.368 billion in assets, $7.026 billion in cash and short-term investments, $1.749 billion in net income, and $129.179 billion in revenues on 31 October 2017.

Will Dollar Stores get caught in the Squeeze between Automated Walmart and Amazon Go?

A true nightmare for dollar stores would be caught in the squeeze between Automated Walmart and Amazon Go. Dollar stores are already caught in the increasingly brutal crossfire between and

The No-Man’s land between Automated Walmart and Amazon Go would be far worse. A true nightmare for dollar stores would be both retailers using their automated stores as neighborhood fulfillment centers for same-day delivery.

It would work like this, the Amazon or Walmart truck would drop the orders off at the local store. Then an Uber, Lyft, Deliv, or Parcel driver; or an Amazon or Walmart van, would pick up the merchandise and take it to the customer.

Neither Dollar General nor Dollar Tree would last long in such a retail environment. My prediction is that the high share prices for these chains; $103.40 for Dollar Tree and $94.79for Dollar General on 1 March 2018, cannot last. Investors should stay away from these stocks because they are headed for a big fall thanks to Amazon Go.