Dollar stores may appear to be reasonable choices for consumers searching for deals. However, this frugal approach hasn’t been sufficient to increase Dollar Tree and Dollar General’s sales.
In 2024, the deep discounters’ stock has already plummeted. Due to lower-than-expected sales, the retailers have separately lowered their full-year projections. Additionally, both have experienced leadership changes: Dollar Tree CEO Rick Dreiling resigned on November 4 and Dollar General and its former CEO Jeff Owens parted ways in October 2023. Dollar Tree is also considering selling off its more grocery-focused brand, Family Dollar.
Those outcomes represent a dramatic reversal for the dollar stores, which were once the talk of Wall Street. The two stores, who will release their quarterly earnings this week, are under investigation due to their difficulties.
A difficult combination of issues damaged the businesses, according to Peter Keith, a retail analyst for Piper Sandler. Customers with lower incomes, who frequently buy at the chains, are particularly susceptible to changes in the economy, including inflation. According to him, untidy aisles and a bad customer experience were caused by razor-thin operating methods, such as cheap hourly pay and tight personnel. And while traditional merchants like Walmart made large investments in e-commerce to keep up with consumers’ shifting preferences during the epidemic, competition increased, he said.
Due to their numerous locations, dollar stores are naturally somewhat convenient, but he claimed that their digital products are lacking. And in the current climate, I believe that has turned into a disadvantage.
While the S&P 500 has increased by more than 26% this year, Dollar Tree and Dollar General’s shares have both dropped by more than 40%.
Stretched shoppers
Dollar stores have attracted customers for decades by providing a large selection of goods at low rates and in smaller quantities that are affordable for a limited household budget. However, every dollar store banner takes a unique approach to assortment and marketing.
The two shop brands that make up Dollar Tree are Family Dollar and its namesake. At its locations in suburban strip malls, Dollar Tree offers a wide variety of seasonal and luxuries, including toys and party supplies.
Family Dollar, which Dollar Tree purchased for about $9 billion in 2015, sells more food and household goods and is more prevalent in cities. The weakest aspect of Dollar Tree has been Family Dollar. The corporation is considering a possible sale of the company and intends to liquidate roughly 1,000 Family Dollar locations.
Rural consumers are Dollar General’s main target market. In the past, it looked for residential areas or small towns where customers would otherwise have to travel far to get a Walmart or grocery store. Popshelf, a new store concept that appeared in recent years, sells additional luxuries like makeup, candles, and throw pillows that are targeted at middle-class and upper-class consumers.
Both chains relied on shop openings to boost sales growth, despite using distinct tactics. Based on the number of stores, the two merchants are the biggest in the United States. In the United States, Dollar General has around 20,000 locations, whilst Dollar Tree has over 16,000 stores. For every 10,000 Americans, there is more than one dollar store between the two brands.
They have a lot more stores than their competitors: Target has around 2,000 locations nationwide, while Walmart has about 4,600.
However, their business strategies have been put to the test by soaring inflation. At the Goldman Sachs retail conference in September, CEO Todd Vasos stated that households earning less than $30,000 annually account for about 60% of Dollar General’s total sales.
When the economy is struggling, those regular consumers usually bear the brunt of the hardship first.
In September, Vasos stated that for the three months ending August 2, Dollar General saw a rather sharp slowdown. He claimed that the drop-off occurred in almost the same quantity of locations, including its newest stores, in every division and region that we had.
According to Keith of Piper Sandler, the effects of the recent two years of high inflation differed from those of the Great Recession. In an effort to stretch their finances further, middle- and upper-class households began to spend more at dollar stores between about 2007 and 2009.
According to Keith, those middle- and upper-class consumers have been drawn to Walmart and other value-focused businesses since unemployment has stayed low this time around.
According to CFO John David Rainey, the majority of Walmart’s market share gains in the most recent fiscal quarter came from households earning above $100,000 annually.
Price-conscious consumers’ business is also being contested by warehouse clubs like Costco and Walmart-owned Sam’s Club, internet retailers like Amazon and Temu, and private label supermarkets like Aldi and Trader Joe’s.
Stronger competition has been acknowledged by Dollar General. During the September conference, Vasos stated that the men in Bentonville, Arkansas, where Walmart’s headquarters is located, stole a slightly greater portion of the middle-class consumers.
Mike Creedon, Dollar Tree’s recently appointed interim CEO, stated during the company’s earnings call in early September that the store had to lower its full-year outlook to reflect the ongoing impact on its customers from the difficult macro climate.
He claimed that Family Dollar’s primary clientele, those with lower incomes, is still weak. However, he noted that as the effects of inflation, high interest rates, and economic pressures grew, Dollar Tree, a company that attracts a more varied mix of customers, observed a withdrawal from middle-class and upper-class shoppers in the most recent quarter.
As consumers purchased fewer home décor, seasonal, and cosmetic items, discretionary merchandise items—which are typically more profitable than food or necessities for the home—were among the worst-selling items at Family Dollar in the most recent quarter, Creedon stated on the results call.
The store problem
However, some of the dollar retailers’ problems are more self-inflicted.
Both businesses agreed to pay millions of dollars in fines to federal inspectors for the state of their stores and warehouses, which included obstructed fire exits and congested aisles, after receiving criticism on social media. In addition to the more than $21 million in fines that the federal Occupational Safety and Health Administration has imposed since 2017, Dollar General negotiated a settlement with the U.S. Department of Labor in July to pay $12 million in penalties for workplace safety issues.
After accruing more than $13.1 million in OSHA fines since 2017, Dollar Tree reached a settlement with federal regulators in 2023 to enhance worker safety. After inspectors discovered live and dead rodents in an Arkansas warehouse that held food, medications, and cosmetics, it entered a guilty plea in February and agreed to pay around $42 million.
Customers who see such news headlines and observe when staff appear tired and shelves are messy may be put off by those safety infractions, Keith added.
He claimed that no one wants to buy in what appears to be a filthy, disorganized setting.
According to Alasdair James, who served as Dollar Tree’s chief customer officer from early 2021 to early 2022, some of the issues stem from the Covid epidemic. Retailers found it difficult to fill positions at their establishments as the Covid infection spread and the government disbursed stimulus monies.
According to him, some Dollar Tree locations ended up having just one employee handling every task, from stocking shelves to checking customers out, leaving the establishments disorganized and discouraging customers.
Additionally, during the epidemic, suppliers and consumer packaged goods businesses gave priority to big-box retailers by producing commodities in the more common bulk sizes instead of the smaller, more affordable ones offered by dollar stores, according to James.
He claimed that shoppers were drawn to competitors by those stores’ out-of-stocks and understaffed areas.
Additionally, Dollar Tree has changed the way it sets prices. The retailer introduced merchandise at higher price points, such as $3, $5, and $7, and increased the price of the majority of its things to $1.25 during the epidemic.
The multi-price expansion at Dollar Tree, which we think will be a long-term growth driver, continues to resonate with our customers, a spokeswoman for the store said in a statement. He characterized the business as a way to help families that could be struggling financially due to inflation, such as those who don’t live close to a pharmacy or food store.
Additionally, both businesses are exposed to a new danger under President-elect Donald Trump’s government. Trump has promised to impose more tariffs on imports from China, which supplies a large number of the items found in dollar stores.
Regarding the difficulties facing the business, Dollar General chose not to comment.
However, it recently promoted one tactic meant to increase the number of visits from holiday buyers. Every day in December, Dollar General will be offering a discount on a featured item as part of its 24 Days of Savings promotion. Only in-store sales are offered for the specials, which include reduced holiday mugs and 12-ounce packs of bacon.
This item was contributed to by Ryan Baker of CNBC.
More from CNBC:
-
BlackRock expanding in private credit, buys HPS Investment for $12 billion
-
Winter weather blast to bring more snow to Northern states making travel hazardous
-
Everyone wins except the IRS with this legal charitable donation strategy, advisor says
Note: Every piece of content is rigorously reviewed by our team of experienced writers and editors to ensure its accuracy. Our writers use credible sources and adhere to strict fact-checking protocols to verify all claims and data before publication. If an error is identified, we promptly correct it and strive for transparency in all updates, feel free to reach out to us via email. We appreciate your trust and support!