While many CRE sectors and product types have stalled after the COVID-19 success, one industry continues to thrive.
In the second quarter, cap rates for dollar stores fell 12 basis points year over year, according to The Boulder Group.
There are some long-term concerns for the sector, particularly housing developments. According to Randy Blankstein, president of Boulder Group, while e-commerce is a mess for some retailers, it is not a short-term threat. The main reason is that dollar stores are indispensable in small towns and rural areas.
"Amazon is a very developed network in the top 25 to 40 metros," says Blankstein. "Once you get into rural areas, they stop offering the same services the next day. And they're unlikely to build huge distribution centers in the middle of Montana. I think Amazon won't enter some of those markets. I am not sure if economies of scale [for Amazon] make sense in rural markets, but that's for them to compete with the dollar stores and they have the immediate needs problem. "
Chris Pappas, assistant director of the Net Lease Division of Marcus & Millichap, agrees. "Dollar stores currently give customers access to inexpensive goods while Amazon has to deliver, which takes time," he says. “According to the latest data from GlobalData Retail, 75 percent of Americans are within five minutes of a Dollar General. In addition, a critical mass of New Dollar stores is opening up in secondary and tertiary markets where Amazon does not have the logistics infrastructure to profitably deliver low-cost goods the next day. "
According to Pappas, Amazon serves other customers than dollar stores.
"Dollar stores attract lower-income customers, while Amazon shoppers tend to be wealthier," says Pappas. “For example, many customers in dollar stores do not have the resources to open a bank account, which prohibits them from making online purchases. Low-income customers often find Amazon Prime membership too expensive, which is required to qualify for expedited shipping. "
There is also an element of surprise that can make dollar stores attractive. "Dollar stores are experimental and people will continue to be social beings," says Pappas. “Similar to Marshalls and TJ Maxx, dollar stores rotate products, which creates unpredictable inventory levels. This “treasure hunt” experience ensures that customers keep coming back to find a lot. Amazon is going to have a very hard time generating that kind of shopping excitement. "
Blankstein wonders if where you live affects how you think about Amazon. Just because people in major cities can get same-day service from Amazon, they can assume that everyone will enjoy this convenience.
"Many of us live in large metropolises," says Blankstein. “We automatically see Amazon trucks all day and think it's everywhere. Well, it's only on big metros. It's not in cities of 4,000 people that are five miles from another city. There is for Amazon simply no efficiency in delivering same day delivery to very remote locations. "