As shoppers look for value, dollar stores seem like a logical destination. But that penny-pinching mentality wasn't enough to increase sales Dollar tree And Dollar general.
Shares of the deep discounters have plummeted so far in 2024. The retailers each lowered their full-year forecasts due to weaker-than-expected sales. And both have undergone 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 exploring sales of Family Dollar, the more grocery-oriented brand.
These results mark a sharp turnaround for the dollar stores, once the darlings of Wall Street. The struggle has takes a closer look at the two retailers, who will report their quarterly figures this week.
Dollar General and Dollar Tree stores
Getty Images
Peter Keith, retail analyst at Piper Sandler, said a challenging mix of factors was hurting retailers. Lower-income customers, who tend to shop at chain stores, are the most vulnerable to economic changes such as inflation. Paper-thin business models, such as limited staffing and low hourly wages, contributed to sloppy aisles and a poor customer experience, he said. And competition became fiercer, as older retailers like Walmart has made significant investments in e-commerce to keep up with changing consumer habits during the pandemic, he said.
“Dollar stores are inherently convenient because they have a lot of locations but not a very strong digital offering,” he said. “And I think that has become a disadvantage in the current environment.”
Shares of Dollar Tree and Dollar General are both down more than 40% this year, while the S&P 500 is up more than 26% over the same period.
Stretched shoppers
For decades, dollar stores have attracted shoppers by offering a wide variety of items at simple prices and smaller sizes that fit a limited household budget. Still, each of the dollar store banners has a different twist on strategy and assortment.
Dollar Tree consists of two store brands, its namesake and Family Dollar. Dollar Tree sells many seasonal and discretionary items, such as party favors and toys, at stores in suburban malls.
Family Dollar, which Dollar Tree acquired for nearly $9 billion in 2015, is in more urban areas and sells more food and household goods. Family Dollar has been the weaker part of Dollar Tree. The company plans to close approximately 1,000 Family Dollar stores and is exploring a possible sale of the company.
Dollar General focuses primarily on rural customers. Historically, it sought out small towns or residential areas where shoppers would otherwise have to drive a long distance to get to a supermarket or a Walmart. In recent years, it debuted a new store concept, Popshelf, which sells more exclusive items aimed at middle- and upper-income consumers, such as makeup, candles and throw pillows.
Although they employed different strategies, both chains relied on store openings to drive sales growth. The two retailers are the largest in the US by number of stores. Dollar Tree has more than 16,000 stores, while Dollar General has nearly 20,000 locations in the US. Between the two brands, there is more than one dollar store for every 10,000 people in the US.
They have many more stores than their rivals: Walmart has about 4,600 stores and Target has nearly 2,000 locations nationwide.
Yet high inflation has tested their business models. 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 Goldman Sachs' retail conference in September.
These regulars tend to be the first to feel the pinch during challenging economic times.
Vasos said in September that Dollar General saw “a pretty dramatic slowdown” in the middle of the three-month period ending Aug. 2. He said the decline “happened in every region, in every division we had, almost in the same way. amount” — including the newest stores.
And the past two years of high inflation have played out differently than during the Great Recession, says Piper Sandler's Keith. During the period from roughly 2007 to 2009, middle- and upper-income households began shopping more at dollar stores to further stretch their budgets.
This time, unemployment has remained low and other value-oriented retailers, including Walmart, have attracted middle- and upper-income shoppers, Keith said.
In the most recent fiscal quarter, most of Walmart's market share gains came from households with annual incomes above $100,000, according to CFO John David Rainey.
Warehouse clubs like Costco- and Walmart-owned Sam's Club, online players like Amazon and Temu, and private-label-focused grocers Aldi and Trader Joe's are also competing for price-conscious consumers (and sometimes stealing them away).
Dollar General has acknowledged stronger competition. “The boys in Bentonville [the Arkansas home of Walmart’s headquarters] has acquired a slightly larger share of the retailer's middle-income customers, Vasos said at the September conference.
During Dollar Tree's earnings call in early September, Chief Operating Officer Mike Creedon, who was recently named interim CEO, said the retailer had to lower its full-year guidance to reflect “how the challenging macro environment is putting pressure on our customers.” continues to set.”
He said Family Dollar's core customer, who has lower incomes, “remains weak.” Still, he said Dollar Tree, a chain that attracts a more diverse mix of customers, has seen a decline among middle- and upper-income shoppers in the past quarter as the toll of inflation, high interest rates and economic pressure increased.
Discretionary merchandise items, which are typically more profitable than food or household goods, were some of the worst sellers at Family Dollar in the most recent quarter as shoppers bought fewer home decor, seasonal and beauty products, Creedon said on the earnings call.
The shopping problem
But some of the challenges facing dollar stores are becoming more self-inflicted.
Both companies faced backlash on social media and agreed to pay millions of dollars in fines to federal regulators over conditions in stores and warehouses, including cluttered aisles and blocked emergency exits. Dollar General reached a settlement with the U.S. Department of Labor in July to pay $12 million in fines over workplace safety concerns, on top of more than $21 million in fines from the federal Occupational Safety and Health Administration since 2017.
Dollar Tree agreed to improve worker safety in a 2023 settlement with federal regulators after collecting more than $13.1 million in OSHA fines since 2017. In February, it pleaded guilty and agreed to pay nearly $42 million after inspectors found live and dead rodents in an Arkansas warehouse where food, medicine and cosmetics were stored.
These safety violations can deter customers who see news headlines and notice that employees appear overworked and the shelves are untidy, Keith said.
“No one wants to shop in what appears to be a dirty, cluttered environment,” he said.
Some of these issues date back to the Covid pandemic, says 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. .
At some Dollar Tree locations, there was just one employee who had to juggle all the tasks from checking on people to stocking shelves — resulting in cluttered stores that turned off shoppers, he said.
Additionally, suppliers and consumer packaged goods companies favored big-box stores during the pandemic by making the more typical bulk sizes of items rather than the smaller, budget-friendly sizes sold by dollar stores, James said.
He said out-of-stock and poorly staffed stores were driving customers to rivals.
Dollar Tree has also shaken up its pricing approach. During the pandemic, the retailer raised the price of most items to $1.25, and has launched products at higher prices, including $3, $5 and $7.
In a statement, a Dollar Tree spokesperson said the “multi-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 feeling the financial pressure of inflation,” including families who don't live near a supermarket or pharmacy.
Both companies also face a new risk under the administration of newly elected President Donald Trump. Trump has promised to impose additional tariffs on imports from China, a source of many goods sold in dollar stores.
Dollar General declined to comment on the company's challenges.
However, a strategy aimed at attracting more visits from holiday shoppers was recently touted. Dollar General is advertising a “24 Days of Savings” event in December, offering a deal on a featured item each day. The promotions, such as discounted holiday mugs or 12-ounce packs of bacon, are only available in stores.
— CNBC's Ryan Baker contributed to this story.