How Dollar Tree Sells Almost Everything For $ 1, Even When Inflation Is Hiding

Dollar Tree Inc. is famous for selling most of its products – from a pair of flip flops to a small bottle of detergent – for a dollar a piece.

The strategy, which attracts loyal shoppers looking for bargains, left the discount chain less room than its competitors to handle rising costs this year. The Covid-19 pandemic has pushed up transport prices, workers’ wages and the prices of some raw materials.

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“We will always deliver at dollar cost, as our customers have been expecting for over 30 years,” said Michael Witynski, a grocery store veteran who joined Dollar Tree in 2010 and took charge of it a year ago. year. The challenge, he said in a recent interview, is to keep finding ways to buy products like holiday decorations, snacks, and craft supplies for around 43 cents and then charge $ 1. $ to buyers.

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Prices are rising for a range of goods and services as shipping and manufacturing remain hampered by the pandemic and other factors. At the same time, demand for many products is high as American consumers continue to emerge from the lockdowns of last year. In many cases, consumer goods companies such as Procter & Gamble Co. and General Mills Inc. pass these price increases on to consumers. For a chain that attracts buyers with mostly $ 1 products, adapting can be more difficult.

The majority of Dollar Tree’s products are store brands, which gives it flexibility in an inflationary environment. Last year, Dollar Tree changed the packaging of a successful metal hanger, Witynski said, switching to a smaller, less expensive cardboard hook for off-the-shelf display. The retailer started shipping $ 1 gift bags, another big seller, in boxes of 72, up from 24 to save on shipping costs, he said. Cartons of fresh eggs vary between 18, 12 or 6 packs, depending on cost.

The company is also experimenting with higher prices. It adds products, such as basketballs and travel pillows, for $ 3 and $ 5 at select Dollar Tree stores. He’s also building what he calls “combo stores,” a location that combines a Dollar Tree with a Family Dollar, a chain the company bought in 2015 that sells products at many prices. In total, the company has nearly 16,000 locations in the United States.

Some investors fear this year will be different from previous decades. Dollar Tree has “benefited for the majority of the 35 years, and certainly 25 years as a public company, from operating in a very low inflationary environment,” said Peter Keith, retail analyst at Piper Sandler, who downgraded his rating. on the action per month.

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According to financial documents, around 70% of Dollar Tree workers are part-time, leaving the company at risk as part-time wages rise amid competition for hourly staff and laws that raise the minimum wage, Mr. Keith said. Dollar Tree’s current small rollout of more expensive products won’t be enough to offset increases in wages, shipping and other costs, he predicts.

A spokesperson for Dollar Tree said wage pressure was not new to the company. “We have succeeded and will continue to do so,” he said.

During the pandemic, Dollar Tree’s sales grew more slowly than those of other discount competitors such as Dollar General Corp. and Walmart Inc. That’s because the chain sells more discretionary items such as party supplies in an era when people didn’t have parties and instead spent more on food and housewares, Mr. . Witynski.

Dollar Tree stores are mostly located in the suburbs and target middle-income shoppers who browse trinkets for fun. Its Family Dollar chain, like its rival Dollar General, targets low-income families and sells items at different prices. Dollar General stores are concentrated in rural areas, while nearly half of Family Dollar stores are located in urban areas.

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Dollar Tree stock has fallen around 8% so far this year, as the overall market has climbed, including many retail competitors who have benefited from pandemic buying trends. Dollar General shares have risen around 15% so far this year.

Part of Dollar Tree’s challenges dates back to a bitter battle against Dollar General to acquire Family Dollar in 2015. Since buying $ 9 billion in cash and stocks, Dollar Tree’s profits have plummeted, dragged down by profits. Family Dollar’s comparatively less profitable – and until the pandemic – slower growing business.

In 2019, activist investor Starboard Value LP took a stake in Dollar Tree, then pushed the retailer to sell Family Dollar, add more expensive products, and appoint new board members. Dollar Tree added more expensive items, mainly food and household items, and convinced Starboard that it would be difficult to sell the struggling Family Dollar chain.

Dollar Tree’s gross profit, the amount of money a business earns after cost of goods sold, was 35.3% of sales in the year prior to the acquisition of Family Dollar. It fell to 30.1% in the year following the closing of the acquisition and this company-wide metric has never recovered, hovering around 30% every year since.

Now, as costs go up, profits go down on the Dollar Tree side of the business. It’s temporary, say Dollar Tree executives. Rate increases last year, along with Covid-19 spending and rising shipping costs are “three unique incidents,” said Mr. Witynski, CEO. If it hadn’t been for the skyrocketing shipping costs, “I think we could have hit the 35%” gross profit for the Dollar Tree side of the business, he said.

Dollar Tree’s pricing strategy has long had detractors. “Of all the questions I’ve been asked about Dollar Tree over the years, the most persistent by far is, ‘How long do you think you can hold the dollar price down?’ Dollar Tree co-founder Macon Brock said in his 2017 autobiography, “One Buck at a Time.” “We weren’t confident about this at first either,” he said of the creation of the channel in 1986.

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The strategy offers both operational and consumer benefits, Dollar Tree executives said. Store workers don’t have to spend time changing prices on shelves or stocking items in specific locations. Buyers know they are getting a good deal, and this is a way to differentiate themselves from the competition. “How could we avoid being crushed by Walmart, which would still be able to sell us at a lower price on general merchandise?” Mr. Brock wrote in his book.

Dollar Tree’s merchandising teams purchase products approximately six months in advance with a target of total margin for the entire assortment, Witynski said. “There is never a quick fix,” he said. “We mix it up as we need it.” In the past this has meant making a hand towel with microfiber instead of cotton or adding more craft items, which are usually higher margin.

The majority of Dollar Tree’s products are store brands or one-off selections, with approximately 37% of nationally branded products. When large consumer goods companies raise their prices, as many have done in recent months, the chain may replace those items with a new assortment, he said. “It gives us the opportunity to say, ‘No, I’m not going to wear it,’” Mr Witynski said.

As Dollar Tree has experienced, its traders have learned that selling larger packages of household items at higher prices, say a package of three paper towels instead of a single roll for $ 1, does not attract not its buyers, he said. For now, the company has gone for $ 3 and $ 5 items, focusing on products like seasonal decorations that look like deals at those prices, he said.

Jordan Simmons, 17, was shopping for his graduation party at a Dollar Tree in Hudson, NY recently. “There are a lot of random things here that you wouldn’t think you could get for a dollar,” he said. she says, filling her cart with cardboard plates and decorations from the 2021 graduates. The store is smaller than a Walmart, so more fun to browse, Ms. Simmons said. She walks past a Family Dollar closer to her home, she said, because there “it’s cheap, but not a dollar.”