Dollar stores may appear to be reasonable choices for consumers searching for deals. However, Dollar Tree and Dollar General have not seen an increase in sales as a result of this frugal mindset.
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 had leadership changes: Rick Dreiling, the CEO of Dollar Tree, resigned on November 4 and Jeff Owens, the previous CEO of Dollar General, left the company in October 2023. Additionally, Dollar Tree is considering selling off Family Dollar, its brand that focuses more on groceries.
Those outcomes represent a dramatic reversal for the dollar shops, which were once the talk of Wall Street. The two stores, who are scheduled to release their quarterly profits this week, are under scrutiny due to their difficulties.
A difficult combination of issues damaged the businesses, according to Peter Keith, a retail analyst with Piper Sandler. Customers with lower incomes, who frequently buy at the chains, are more 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. Additionally, he noted, competition increased as traditional retailers like Walmart made large investments in e-commerce to adapt to the shifting behaviors of their customers during the epidemic.
He claimed that although dollar stores have several locations and are therefore naturally somewhat convenient, their digital services are lacking. “And in the current environment, 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%.
Customers who are stretched
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 shop banner takes a unique approach to inventory 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 home 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 around 1,000 Family Dollar locations.
Rural consumers are Dollar General’s main target market. In the past, it looked for residential regions 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 cosmetics, candles, and throw pillows that are targeted at middle-class and upper-class consumers.
Both businesses depended on shop openings to boost sales growth, albeit 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 shops. 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 Goldman Sachs’ retail conference in September, CEO Todd Vasos stated that households earning less than $30,000 annually account for around 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 had “a pretty drastic slowdown.” Including its newest locations, he said that the drop-off “occurred across every region, every division that we had, almost the same amount.”
Additionally, 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, households earning over $100,000 annually accounted for the majority of Walmart’s market share increases in the most recent fiscal quarter.
Price-conscious consumers are also being targeted 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, who occasionally take their business.
Stronger competition has been acknowledged by Dollar General. At the September conference, Vasos stated, “The guys in Bentonville [the Arkansas location of Walmart’s headquarters] took a little bit larger piece” of the retailer’s middle-class clientele.
Mike Creedon, the newly appointed interim CEO, stated on Dollar Tree’s earnings call in early September that the company had to lower its full-year estimate in order to account for “how the challenging macro environment continues to pressure our customers.”
Lower-income customers, who make up the majority of Family Dollar’s clientele, “remain weak,” he added. 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 less 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 issue with the shop
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 the federal Occupational Safety and Health Administration has imposed since 2017, Dollar General negotiated a deal 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 deal with federal authorities 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 remarked, “No one wants to shop in what appears to be a kind of dirty, messy environment.”
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 shops ended up having only one employee handling every task, from stocking shelves to checking customers out. This led to disorganized stores that turned off 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 quantities instead of the smaller, more affordable ones offered by dollar stores, according to James.
He said that shoppers were drawn to competitors by those businesses’ out-of-stocks and understaffed areas.
Additionally, Dollar Tree has changed the way it sets prices. The shop introduced products 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 believe will be a long-term growth driver, continues to resonate with our customers,” a spokeswoman for the store said in a statement. The shop is “a solution for families who may be feeling the financial strain of inflation,” he said, including those who don’t live close to a pharmacy or grocery store.
Additionally, both businesses are exposed to a new danger under President-elect Donald Trump’s government. Trump has promised to impose further taxes 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 Christmas buyers. Every day in December, Dollar General will be offering a discount on a selected item as part of their “24 Days of Savings” promotion. Only in-store sales are offered for the specials, which include reduced Christmas mugs and 12-ounce packs of bacon.
