With shoppers looking for a good value, dollar stores seem like the logical choice. But this cheapskate mentality hasn't been enough to boost sales Dollar tree And Dollar General.
The shares of deep discounters have plummeted so far in 2024. Retailers have each lowered their forecasts for the full year due to weaker than expected sales. And both have experienced leadership changes: Dollar General and its former CEO Jeff Owens parted ways in October 2023, and Dollar Tree CEO Rick Dreiling resigned on November 4. Dollar Tree is also considering selling Family Dollar, its more grocery-focused brand.
These results represent a drastic turnaround for the dollar stores that were once the darlings of Wall Street. The fights have We take a look at the two retailers due to report quarterly results this week.
Dollar General and Dollar Tree stores
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Peter Keith, retail analyst at Piper Sandler, said a challenging mix of factors hurt retailers. Lower-income customers who tend to shop at the chains are most vulnerable to economic changes like inflation. He said razor-thin operating models such as lean staffing and low hourly wages contributed to sloppy aisles and a poor customer experience. And competition became tougher as long-established retailers like Walmart He said he has made significant investments in e-commerce to keep up with changing consumer habits during the pandemic.
“Dollar stores are inherently convenient because they have many locations, but they don't have very strong digital offerings,” he said. “And I think that has become a disadvantage in the current environment.”
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Shares of Dollar Tree and Dollar General have both fallen more than 40% this year, while the S&P 500 has gained more than 26% over the same period.
Stretched buyers
For decades, dollar stores have attracted shoppers by offering a wide selection of items at modest prices and smaller sizes that fit a limited household budget. But each of the dollar store banners has a different strategy and a different assortment.
Dollar Tree consists of two retail brands, its namesake and Family Dollar. Dollar Tree sells many seasonal and discretionary items, such as party supplies and toys, in suburban mall stores.
Family Dollar, which Dollar Tree acquired for nearly $9 billion in 2015, has a presence in more urban areas and sells more groceries and household staples. Family Dollar was the weaker part of Dollar Tree. In March, the company announced plans to close about 1,000 Family Dollar stores. A possible sale of the company is also being examined.
Dollar General focuses primarily on rural customers. Previously, shoppers went to small towns or neighborhoods where shoppers would otherwise have to travel long distances to get to a grocery store or Walmart. In recent years, Popshelf has introduced a new store concept that sells more discretionary goods aimed at middle- and upper-income shoppers, such as makeup, candles and throw pillows.
Although they pursued different strategies, both chains relied on store openings to spur sales growth. The two retailers are the largest in the United States in terms of number of stores. Dollar Tree has more than 16,000 stores, while Dollar General has nearly 20,000 locations across the United States. Between the two brands, there is more than one dollar store for every 10,000 people in the United States
They have many more stores than their competitors: Walmart has about 4,600 stores and Target has nearly 2,000 locations across the country.
But high inflation has put their business models to the test. About 60% of Dollar General's total sales come from households with annual incomes of less than $30,000 a year, CEO Todd Vasos said at the Goldman Sachs retail conference in September.
These regular customers are usually the first to feel the crisis in difficult economic times.
Vasos said in September that Dollar General experienced “a pretty drastic slowdown” in the middle of the three-month period that ended Aug. 2. He said the decline “was almost the same amount in every region, in every division that we had” – including his most recent deals.
And the last two years of high inflation have played out differently than the Great Recession, Piper Sandler's Keith said. Around 2007 to 2009, middle- and upper-income households began shopping more at dollar stores to further stretch their budgets.
This time, unemployment remained low and other value-oriented retailers, including Walmart, attracted middle- and upper-income shoppers, Keith said.
In its most recent fiscal quarter, most of Walmart's market share gains came from households with annual incomes above $100,000, said CFO John David Rainey.
Warehouse clubs like Costco and Walmart-owned Sam's Club, online players like Amazon and Temu, and private-label grocers Aldi and Trader Joe's are also competing for price-conscious shoppers — and sometimes stealing their business.
Dollar General acknowledged the tougher competition. “The boys in Bentonville [the Arkansas home of Walmart’s headquarters] “has taken a slightly larger share of the retailer’s middle-income customers,” Vasos said at the September conference.
At Dollar Tree's earnings call in early September, Chief Operating Officer Mike Creedon, who was recently named interim CEO, said the retailer had to trim its full-year outlook to reflect “how the challenging macroeconomic environment continues to pressure our customers.” “exercises”.
He said Family Dollar's core lower-income customer “remains weak.” Still, he said Dollar Tree, a chain that attracts a more diverse mix of customers, saw a pullback from middle- and upper-income shoppers last quarter as inflation, high interest rates and economic pressures increased.
Convenience items, which tend to be more profitable than groceries or household items, were among the worst sellers at Family Dollar last quarter as shoppers bought fewer home decor, seasonal and beauty products, Creedon said in the earnings release.
Daniel Acker | Bloomberg | Getty Images
The store problem
But some of the challenges facing dollar stores are more self-inflicted.
Both companies faced backlash on social media and agreed to pay millions of dollars in fines to federal regulators over the conditions of stores and warehouses, including crowded aisles and blocked emergency exits. Dollar General agreed in July with the U.S. Department of Labor to pay $12 million in penalties over workplace safety concerns, in addition to more than $21 million in federal Occupational Safety and Health Administration fines. dollars since 2017.
Dollar Tree agreed to improve worker safety in a 2023 settlement with federal regulators after the company incurred more than $13.1 million in OSHA fines since 2017. In February, the company pleaded guilty and agreed to pay nearly $42 million after inspectors found live and dead rodents in an Arkansas warehouse that stored food, medicine and cosmetics.
These safety violations can turn off customers who see these headlines and notice when employees appear overworked and shelves are sloppy, Keith said.
“Nobody wants to shop in what appears to be a dirty, messy environment,” he said.
Some of these issues stem from the Covid pandemic, said Alasdair James, who was Dollar Tree's chief customer officer from early 2021 to early 2022. As the government disbursed stimulus funds and the Covid virus spread, retailers struggled to fill jobs in their stores.
Some Dollar Tree locations ended up with a single worker left to handle all duties, from checking people out to restocking shelves — resulting in messy stores that turned off customers, he said.
Additionally, consumer packaged goods sellers and companies gave preference to big box stores during the pandemic, producing the more typical bulk sizes of items rather than the scaled down, budget-friendly sizes sold at dollar stores, James said.
He said sold-out inventory and poorly staffed stores were driving customers to the competition.
Dollar Tree has also changed its pricing approach. During the pandemic, the retailer increased the price of most of its items to $1.25 and introduced merchandise at higher prices, including $3, $5 and $7.
In a statement, a Dollar Tree spokesperson said the “price expansion at Dollar Tree, which we believe will be a long-term growth driver, continues to resonate with our customers.” He described the retailer as “a solution for families, who may be suffering from the financial burden of inflation,” including families who do not live near a grocery store or pharmacy.
Both companies also face new risks under the administration of President-elect Donald Trump. Trump has promised to impose additional tariffs on imports from China, where many goods sold in dollar stores come from.
Dollar General declined to comment on the company's challenges.
However, a strategy aimed at attracting more holiday shopper visitors was recently announced. Dollar General is hosting a “24 Days of Savings” event in December, offering a deal on a special item each day. The special offers, like discounted holiday cups or 12-ounce packages of bacon, are only available in stores.
— CNBC's Ryan Baker contributed to this story.
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