FedEx (NYSE: FDX) knows where consumers are shopping, and it wants to be there for them. This summer, the package carrier will add pickup and drop-off service at 1,500 Dollar General (NYSE: DG) stores, and plans to expand it to 8,000 stores by 2020, meaning 90% of the country's population will live within five miles of a FedEx access point.
The carrier is making a concerted effort to become more tightly enmeshed in e-commerce. By severing its ties with Amazon.com (NASDAQ: AMZN) for its Express delivery service, launching seven-days-a-week delivery, and lowering Express delivery fees, it's putting itself in one of the largest retail footprints in the country and vastly expanding its reach.
Image source: FedEx.
Meeting customers where they live
With almost 15,600 stores stretched across 44 states, Dollar General has an expansive footprint. It opened 900 stores last year and another 240 in the first quarter, and plans to open a total of 975 new stores in 2019.
That's a much more impressive touchpoint for FedEx than Amazon has with Kohl's (NYSE: KSS), where the department store chain serves as a return center for packages purchased on the e-commerce giant's website. Because Kohl's operates around 1,100 stores nationwide, many of which are located in strip malls in urban centers in the Midwest, it's a much more limited network of locations.
Dollar General also targets low-income neighborhoods and rural towns that are traditionally overlooked by big-box merchandisers and national retailer. Its customer demographic includes people typically making less than $35,000 a year and living in towns with fewer than 20,000 people. In fact, three-quarters of the country's population lives within a five-mile drive of one.
This focus helps explain why the dollar store enjoys sales and earnings that regularly exceed expectations and why it's a smart partner for FedEx.
Ready for e-commerce's growth
The carrier notes that regardless of where they live, consumers want convenient options for package delivery and returns. While a physical store isn't a necessity for an e-commerce operation, by adding thousands of Dollar General locations, it helps retailers provide more options to better serve their customers. And with a third of people returning what they buy online, being able to drop it off at the local dollar store improves upon the convenience.
On the company's blog announcing the partnership, FedEx noted, "When it comes time for returns, 47 percent of customers prefer to make them in-store. With the addition of more than 8,000 Dollar General stores... online merchants can enjoy the perks of a physical store without having to invest in building one."
The partnership also seems to be part of a plan FedEx is developing to counteract the growing threat of Amazon. Although it insists dropping Express deliveries for the online retailer had nothing to do with Amazon building its own delivery service that may one day challenge FedEx and UPS, by doing so it opens up more delivery capacity for other e-commerce players.
FedEx seems to be rolling out the red carpet to online retailers that are also worried about Amazon and making drop-off points for purchases available to communities that otherwise might not have them reinforces how the carrier is focusing on their needs.
Hit 'em where they ain't
Adding Dollar General's 8,000 stores brings to over 62,000 the number of retail locations that can be used as pickup and return centers. FedEx has also said it will be putting 500 offices inside of Walmart, and Walgreens and Kroger are also participating retailers with FedEx access points.
Yet it's the dollar store network that vastly expands the program's reach as previously just 55% of the U.S. population was within five miles of a FedEx center, so these stores are going into places that were especially underserved by the carrier.
The partnership is also good business for Dollar General as it has the chance to bring in a more diverse customer, who may also stay and shop at its stores, particularly as it adds more fresh food and produce.
Reaching a wider universe
Where Kohl's is dealing only with Amazon purchases -- admittedly Amazon dominates the online marketplace -- Dollar General and FedEx have a much broader universe of retailers to profit from -- basically everyone not named Amazon.
Coupled with its new year-round delivery schedule that will reach most of the U.S. beginning in 2020, FedEx may become a more competitive carrier for online retailers seeking closer ties to their customers.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and FedEx. The Motley Fool has a disclosure policy.