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Dollar stores have spread rapidly in the United States since the Great Recession, luring cash-strapped shoppers with their 21st-century version of the “five-and-dime” model that Woolworth had popularized a century earlier.
Dollar General now operates nearly 17,800 stores and Dollar Tree has more than 15,900, compared to the 4,740 largest Walmart stores in the United States.
Nearly 2,000 new dollar stores are expected to open this year, according to Coresight Research. This represents nearly half of the store openings planned in the United States and goes against the trend in a sector rocked by Amazon, Covid-19 and the emptying of shopping malls.
That pace of growth brought the combined market capitalization of Dollar General and Dollar Tree, the two largest chains, to $ 75 billion.
But it coincided with a period of contained inflation, which made it easier to achieve gross margins of over 30% on products selling as low as $ 1.
Those conditions changed abruptly, with consumer prices registering their biggest year-over-year jump in 13 years in July, with all retailers grappling with shipping bottlenecks and staff shortages.
Inflation poses a particular dilemma for stores that charge $ 1 for their merchandise. “It’s a real challenge when you have to be the two dollar store,” said John Strong, professor at the College of William & Mary’s School of Business.
In earnings announcements last week, Dollar General and Dollar Tree blamed rising shipping costs and payroll for weighing on margins. The earnings outlook for both companies disappointed investors.
Dollar General, which sells most items for less than $ 5, has raised some prices in response. But Todd Vasos, managing director, admitted that his main customer “can hardly afford very many price increases”.
This has raised questions about whether dollar stores can continue to find the affordable products, and the staff, to meet their aggressive growth goals.
Transportation costs, Dollar General said, had become “a growing headwind.” Dollar Tree explained the scale of the challenge, saying its transportation costs would be $ 185 million to $ 200 million more than it expected in May.
Stocking a stable number of stores when supply chains are strained is difficult, said Mark Cohen, a professor at Columbia Business School and former managing director of Sears Canada, but doing so while adding hundreds of new outlets. ‘is even more.
Opening these stores also requires finding thousands of new employees in an economy where workers are scarce and salary expectations are rising. Dollar General alone will hire another 50,000 employees between July and September.
Rivals such as Walmart have raised wages, and UBS analysts found last October that Dollar General was paying the lowest hourly rates of the 25 retailers surveyed, averaging around $ 9.68. With Amazon warehouses now offering $ 15 an hour – double the federal minimum wage – dollar stores can struggle to compete.
Michael Witynski, managing director of Dollar Tree, said labor shortages prompted the company to offer hiring bonuses of $ 1,000 in its distribution centers and higher wages in some markets. . In May, the company estimated that national and local minimum wage increases could cost it $ 50 million this year.
Improved federal unemployment benefits, introduced to mitigate the economic effects of the pandemic, have contributed to the challenge, Cohen observed, but will end in September.
John Garratt, chief financial officer of Dollar General, noted that his company had already received an influx of requests after some states ended the benefits earlier.
The prospect of more parents returning to the workforce when schools reopen may also provide some respite, said Chuck Grom, analyst at Gordon Haskett.
Dollar stores are still vulnerable if their competitors raise wage expectations, Strong said, but they are “low-manpower” compared to other chains, typically only needing 15 to 20 employees per. store. “They are certainly going to be affected by the increase in wages at Walmart, but it will not reverberate like it would with other retailers,” he said.
There are other reasons for chains to hope that they can weather the headwinds of inflation, from the fundamentals of their business models to their ability to adapt to reduce costs.
They’ve long been “the guys who’ve gone where Walmart wouldn’t go,” Strong said, noting that they had targeted markets too small to support supercenters.
With three-quarters of the US population within five miles of a Dollar General, these stores can still take market share from local supermarkets and “mom and pop” stores without clashing with the deeper-pocketed Walmart. , Cohen said.
The success of dollar stores, meanwhile, reflects a “bifurcation of the economy,” said Ken Fenyo, president of research and board of Coresight. Last year’s pandemic-induced slowdown attracted a wider range of budget-conscious buyers, and this year’s inflation in the prices of many consumer goods attracted more new customers.
Middle-class shoppers who once viewed the nearby dollar store as “the retailer of last resort” have found that “it’s much nicer than that,” Strong said, noting how the chains have modernized their stores and expanded their range.
In the process, they’ve mastered the art of negotiating with suppliers because, as Dollar Tree’s Witynski told analysts, “pennies matter when you sell things for a dollar.”
Without needing to stock a full range, “if we have price increases that we don’t think we have to pass on to [consumers], we will drop the [item] and move on, ”Dollar General’s Vasos said.
In the meantime, the chains have turned to a familiar tactic of adjusting the size of packages, Strong said, so “where you had six rolls of toilet paper you now have four.”
Dollar stores are also adapting by adding higher margin fresh produce, testing new formats, and adding more expensive products. Dollar General has opened 16 Popshelf stores, offering home decor and essential household items for middle-income shoppers. Dollar Tree, likewise, has added Dollar Tree Plus sections in hundreds of stores, stocking items costing well over $ 1.
With same-store sales dropping year-over-year in their most recent quarter, both chains are questioning how much of their growth depends on opening new stores, Cohen said, but inflation alone should not make them less competitive.
“I don’t know if they can keep opening 1,000 stores a year, but people said years ago that they ran out of margins and that didn’t happen.”
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