Will same-day delivery pay off for dollar stores?

Discussion
Source: Instacart/Family Dollar
Feb 08, 2021
Tom Ryan

Family Dollar has partnered with Instacart to bring same-day delivery from over 6,000 locations in as quick as an hour. The partnership marks the first by a national dollar store chain and a same-day delivery platform.

Family Dollar, which is owned by Dollar Tree, has seen strong sales during the pandemic as households stock up on pantry items. Same-store sales for Family Dollar climbed 6.4 percent in the third quarter.

“Providing same-day delivery is another example of our efforts to better meet the evolving needs of our Family Dollar shoppers,” Dollar Tree president and CEO Mike Witynski said in a statement.

The partnership builds on a 275-store pilot launched last October. The test also involved Shipt and came alongside a test of in-store pickup.

On its third-quarter conference call in late November, Mr. Witynski said about the same-store test, “We really like the basket size. We like the product that they are buying inside the basket, and we’re excited about offering that opportunity to our customers as they shift in some of their behaviors.”

Mr. Witynski also said the company is planning omnichannel investments for Dollar Tree, as well. “The beautiful thing is, we are a 15,000-store chain, and we’re conveniently located in their neighborhoods. And should they want to buy online and pick up in-store or get it delivered at home, we’re going to have that capability as well. But it’s really early for us.”

Instacart’s roots remain in grocery but it has scored partnerships with a number of non-grocery retailers over the last year as online delivery has become critical during the pandemic. Newer partners include 7-Eleven, Best Buy, The Vitamin Shoppe, Sephora, Bed Bath & Beyond, Staples, Dick’s Sporting Goods and Five Below. With Family Dollar, Instacart now delivers from more than 45,000 stores, up from more than 25,000 in January 2020.

Reports arrived in late December that retailers were growing frustrated with Instacart’s high commission charges (often more than 10 percent of every transaction) as well as their control over customer interactions. Larger grocers like Kroger, Albertsons, Aldi, plus the grocery divisions of Walmart and Target, have also reportedly been shifting to using their own employees to pick and package groceries for online orders.

DISCUSSION QUESTION: Does same-day delivery make sense for Family Dollar and other dollar store operators? How do you see same-day delivery evolving in 2021?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"I understand the implications for customer acquisition, customer retention and customer service. I do not understand all of the underlying math and margin implications."
"Premium service for discount products does not work in any real world I’m familiar with unless you have investors willing to let you lose money to buy market share."
"Now Family Dollar is trying to be like everyone else. The “lemming culture” is far too pervasive in retail. Treasure your uniqueness!"

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29 Comments on "Will same-day delivery pay off for dollar stores?"


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Mark Ryski
BrainTrust

While late to the party, it does makes sense for Family Dollar to offer same-day delivery. At first blush it seems as though this type of premium service may be a mismatch for the Family Dollar demographic, but when you consider all the customers who may be shut-ins or simply have challenges with carrying goods home, this makes good sense. As we have seen with as many other retailers, same-day delivery is becoming a customer expectation and I don’t see why this would exclude the dollar store category.

Neil Saunders
BrainTrust

If Family Dollar were executing this themselves and building out the infrastructure to support it, I would be deeply skeptical. However partnering with Instacart is a relatively easy way to enter the same-day delivery market – provided the margins stack up once the commission is accounted for.

Given the dynamics of dollar stores, which are often local, convenient and used for top-up shops, I don’t see this as replacing in-person shopping any time soon. However it’s reasonable to add the service for those that don’t want to, or can’t, get to the store.

Gene Detroyer
BrainTrust

I have not been a fan of Instacart, but recognize from my BrainTrust colleagues that their service can be great in some parts parts of the country (although it is weak where I live). So I will assume that their service is largely competent.

But I must ask, Instacart charges the shopper 5 percent plus $3.99 — at what point is that charge a value for same-day delivery? That being said, will shoppers opt for participation? Is same-day a need or a comfort?

Jeff Sward
BrainTrust

I totally understand the strategic implications for customer acquisition, customer retention and customer service. I do not understand all of the underlying math and margin implications. Maybe the reference to basket size and content alludes to it, but there are many more moving parts to this picture that need visibility. Sounds like they ran a comprehensive test, so it would be great to know more details.

David Naumann
BrainTrust

While same-day delivery for dollar stores doesn’t appear like a profitable service due to the low price of items, it can work if customers are willing to pay the entire delivery fee from Instacart or other third-party services. The biggest challenge is that most dollar stores don’t have an online presence or accurate real-time inventory.

Suresh Chaganti
BrainTrust

The shoppers at dollar stores know what they are buying into — no name brands, minimal fuss, price meets quality and service. For them Instacart/delivery options will be seen as more convenience and an optional benefit. The slippery slope is when retailers try to use it as a competitive differentiator and let these services eat into their margins.

Dave Bruno
BrainTrust

At first, I was mostly surprised that 15,000 stores aren’t enough to make Family Dollar convenient enough to the vast majority of the people they serve, but when I read the comments from the CEO about basket size and composition, I understood the business value to Family Dollar. It seems that convenience in this 33,000-store category is still a dominant driver – and still has room for growth.

Dr. Stephen Needel
BrainTrust

OK – pandemic concerns aside, do we really need this? The whole point of dollar stores was “cheap” – how do you make money charging minimums and/or delivery fees?

Richard Hernandez
BrainTrust

I understand offering the service, but for a dollar store? I would think the majority of customers would opt out of this option and continue to shop in-store.

Michael Terpkosh
BrainTrust

It is quickly becoming evident that same-day delivery is becoming table stakes for any successful grocery, mass, drug or dollar retailer. With Amazon, Target and Walmart leading the way, the rest of food retailing will be required to keep-up. However once the pandemic is over, we will see if continued growth in same-day delivery is sustainable.

Gary Sankary
BrainTrust

I’m a bit skeptical for a couple reasons:

  • To do this well, you have to have really good inventory tracking and planning capabilities. If that capability is lacking they’re going to wind up with more stock-outs and disappointed customers across both physical and digital channels.
  • Dollar store customers are highly price sensitive and a larger percentage of them pay with cash than in other retail segments. That’s exactly why it’s difficult for these stores to tie baskets to individuals. With margins as low as they are, the cost of delivery will have to shift entirely to the customer and I’m not convinced that enough of them will be willing to absorb that cost.

In their favor, 15,000 locations means they already have potential outlets close to customers.

Raj B. Shroff
BrainTrust

To be competitive there are certain things retailers have to be at parity with. Same-day delivery in today’s environment is one of those things. This makes me think of the Kahn Retailing Success Matrix in which she talks about the importance of being at fair value across her matrix.

It was smart to test and learn, also wise to partner at this stage. It will be interesting to see how this plays out and if, eventually, the timeliness becomes less important and some items just move to subscription delivery.

Gene Detroyer
BrainTrust

Separate from this discussion, but on the topic of third-party delivery — A couple of months ago we discussed the pros and cons and financial challenges of restaurants that use Seamless, UberEats, DoorDash, et. al. There were several suggestions that about giving a discount to the customer who orders directly.

In the past two weeks, when I was ordering from two local restaurants that offer third-party delivery alternatives, they did exactly that. Apparently, RESY has offered the restaurants and customers a win-win.

Both these restaurants use third-party delivery, but they also offer ordering off their own menu for delivery or pickup. If you do, you get a 15 percent discount. Talk about a win-win. 15 percent off the bill for the customer and 15 percent more for the restaurant versus the 30 percent fee from the other third-party delivery guys.

The service is offered by RESY and the customer does pay a $1.50 fee to use it. It’s a no-brainer.

Ryan Mathews
BrainTrust

Gene, I think there is a real danger here that the delivery service may “become” the brand. In the case of all the restaurant delivery services I think that is already starting to happen, i.e., people are going to DoorDash first and then deciding among the selections. Ditto with supermarkets. Who “owns” the customer relationship, Instacart or the retailer? Just asking for an industry.

Gene Detroyer
BrainTrust

You are absolutely right. It is happening. I have heard people say, “Let’s do Seamless for dinner.” A statement like that tells one exactly who owns the customer and it is very bad news for the restaurants.

Andrew Blatherwick
BrainTrust

Family Dollar has a big advantage insofar as it has so many stores that fast same-day delivery is possible. Using Instacart as a first step makes a lot of sense as it provides the technology and knowhow to trial such an initiative. If it works, how long they stay with Instacart will be interesting to see. As other retailers have found, Instacart is not cheap. At this end of the market that is something that is essential and discount retailers really understand costs. The threat here may be more to Instacart, which has the cost of set up and scaling to this number of stores with a likelihood of it not being long term.

Ian Percy
BrainTrust

Like several respondents, I don’t get the same-day delivery math for a dollar store either. The exception, perhaps, is for the house-bound. For the rest of us — how often does one urgently need oven mitts or a ladle? More importantly, it seems to diminish the very experience of a dollar store. Isn’t the joy of finding and purchasing items you had no intention of buying for almost pocket change essential to that experience? One you don’t get anywhere else? Now Family Dollar is trying to be like everyone else. The “lemming culture” is far too pervasive in retail. Treasure your uniqueness!

Gary Sankary
BrainTrust

Ian, one caveat based on my observations: I spend about 1/2 my time living in a rural market in the middle of Wisconsin. In rural America, the dollar store is our primary shopping outlet. People here shop dollar stores for all the basics they used to get at Walmart, a 25 mile drive away. This is where we all go for cleaning supplies, toiletries, household items and convenience grocery items like dry goods and frozen. The prices are really good and while the selection isn’t deep, it’s broad enough that between there and the hardware store (the other store in town) we can get almost everything we need. (Except fresh food which is different problem.)

Ryan Mathews
BrainTrust

It may or may not, but there are bigger issues. First, will customers be willing to eat the price increases necessary to preserve margins under the Instacart model or will Family Dollar just absorb the margin hit? And how will Family Dollar maintain its brand integrity in a world where an increasing number of consumers think that DoorDash, Uber Eats, Instacart, etc., are the brand and branders are relegated to a second slot of product sourcers in the consumer’s mind? It’s a growing concern, and it will get worse before it is resolved.

Shep Hyken
BrainTrust

Why not have same-day delivery? Many retailers are already doing this – and with success. Dollar stores don’t need to be left behind in the convenience game. Obviously they are not early adopters, which does give them the luxury of studying other retailers and how they are doing it right (or wrong). Overall, same-day delivery is becoming ubiquitous. Those that can’t participate in same-day may find themselves at a competitive disadvantage.

Doug Garnett
BrainTrust

This is sad. One would have expected the dollar store execs to be able to remain focused on their strength: discounted products, great prices, etc. Instead, they have been drawn off by the shiny bauble of same-day delivery.

Premium service for discount products does not work in any real world I’m familiar with unless you have investors willing to let you lose money to buy market share. And even then, it’s not clear the strategy delivers a long term strength.

Ian Percy
BrainTrust

My point exactly, Doug, though much better said!

Gary Sankary
BrainTrust

Another argument: these stores are so heavily penetrated in rural markets, they’re going to have a difficult time staffing delivery services. And if they do, the routes are going to be really spread out and highly inefficient from a routing and optimization standpoint.

James Tenser
BrainTrust
Some of us cranky old retail analysts can remember an era at the end of the last millennium, when any public business could score an immediate boost to their share price by announcing a “dot-com strategy.” Right now I get a similar feeling when some retailers announce digital shopping and delivery services. So I guess you can call me a skeptic about this one. Fast delivery does have intrinsic value for some shoppers. I just wonder if those are the same folks who shop at Family Dollar or other dollar store establishments. That can be easily proven by experience. Contracting a third-party order-taking and delivery service offers a way to test interest while controlling capital investment and postponing major changes to store operations. The deeper questions go to fundamental strategy and positioning: Will present FD shoppers opt to pay fees for the convenience of online ordering and delivery? Will this service offering attract more affluent shoppers who have deliberately avoided the store locations (Walmart has reportedly seen some of this effect)? Will FD add higher-ticket… Read more »
Craig Sundstrom
Guest

No.

Richard J. George, Ph.D.
BrainTrust

Family Dollar is facing the choice of build versus buy same-day delivery. The build process can be expensive and time consuming. Instacart is not an inexpensive option but addresses the time, money and expertise requirements of same day home delivery. Plus, it gives Family Dollar an opportunity to learn from Instacart.

Same-day delivery is the new ante for all retailers.