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Amazon Is Going to Offer Fast Delivery in Rural Areas. Should Dollar General Investors Be Worried?
Targeting rural areas has enabled Dollar General (NYSE: DG) to generate solid growth for years. Going into markets big-box retailers avoided has allowed it to be the one-stop shop for consumers in those areas.
But what if shoppers had a different option to consider for low-priced consumer goods? That could soon be a reality as e-commerce giant Amazon (NASDAQ: AMZN) is looking to offer fast delivery options to many rural markets across the country.
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Amazon to triple its delivery network by next year
Online shopping is not a new phenomenon or threat to Dollar General by any means. Rural shoppers can shop for goods online just like anyone else -- but delivery may take longer. If you need something right away, buying online is not going to be a realistic option in those cases, which is why Dollar General has been able to succeed even amid a flurry of online shopping options.
But Amazon isn't just planning to offer delivery in more areas next year, it's going to offer same-day and next-day delivery to 4,000 small cities, towns, and communities. This means that in some rural communities, customers could receive deliveries within hours. That's the kind of competition Dollar General hasn't had to worry about from online marketplaces. And this is why the Amazon threat is a considerable one.
Amazon is also utilizing artificial intelligence (AI) to help predict which items it needs to stock in specific communities, which can better position the company for success as it expands into small towns.
Is Dollar General in trouble?
Dollar General offers same-day delivery to its customers, so it won't exactly be caught flat-footed with Amazon's latest expansion plans. But it's now facing a mammoth competitor in Amazon, which could conceivably take market share.
The dollar store retailer may lose sales and it may need to become more aggressive in price, which would cut into its already thin margins.
DG Profit Margin data by YCharts
Dollar General has already been struggling with declining margins in recent years, and now, potentially heightened competition could exacerbate the current situation.
Amazon is investing billions to build its network in a fairly short time frame and that isn't going to be easy for Dollar General to compete with. With Amazon's attention to detail and AI-powered analytics, odds are it's going to go after the most profitable and lucrative rural markets, which could hit Dollar General the hardest. That's why I definitely think the retail stock could be in deep trouble in the future.
I'd steer clear of Dollar General stock
Dollar General's core customer has been struggling to even buy the bare essentials of late. And while higher-income shoppers are spending more at Dollar General in light of worsening economic conditions, the company's growth prospects don't look great in the near term. For the current fiscal year (which ends in January), Dollar General is anticipating comparable sales growth between 1.5% and 2.5%.
And now, thanks to Amazon, even its long-term growth prospects may not be all that strong.
There isn't much room for error in Dollar General's operations given its thin margins. And the business could feel the squeeze once Amazon starts rolling out faster delivery options to rural areas. It introduces a new risk for an already risky stock in Dollar General. I don't like its odds of success in competing against Amazon, which is why I'd avoid Dollar General stock as its fundamentals could get even worse in the years ahead.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
