After years of strong growth, US dollar stores, including Dollar Tree and Dollar General, have recently hit a rough patch. Dollar Tree shares plummeted 20% after cutting its outlook, attributing the struggles to immense pressures facing their low- and middle-income customer base. This decline follows Dollar General slashing its forecast, marking their worst day on record. The companies, which have traditionally seen rapid growth through new store openings, are now facing challenges as low-income customers struggle financially and cut back on spending. Investors previously believed dollar stores were immune to broader economic challenges, but recent events suggest otherwise.
The economic downturn facing dollar stores stems from a variety of reasons, including higher prices, a softer job market, and rising borrowing costs affecting low-income customers. Dollar General, with a majority of stores in rural towns, stated that customers earning less than $35,000 annually are feeling the pressures of inflation on basic necessities. Dollar Tree, which primarily caters to middle-income consumers, has also noticed a change in customer behavior as inflation and macro pressures impact their buying habits. Both companies are seeing a decline in essential item sales as customers struggle to stretch their budgets to the end of the month.
In addition to economic challenges, both Dollar General and Dollar Tree have made strategic errors that have further impacted their businesses. Dollar General’s focus on growing the discretionary side of its business with non-consumable products led to excess inventory and markdowns as these items failed to sell. Meanwhile, Dollar Tree’s acquisition of Family Dollar in 2015 has been a burden, with the company announcing closures and exploring a sale or spinoff of the struggling chain. These strategic missteps have added to the challenges facing dollar stores as they try to navigate the changing retail landscape.
Competition from larger retailers like Walmart, Target, and others is also encroaching on dollar stores’ market share. These competing chains have lowered prices on certain items to attract shoppers affected by inflation, impacting trips to dollar stores. Dollar General CEO Vasos acknowledged Walmart’s success in appealing to shoppers looking for low prices, with affluent customers also increasing spending at Walmart instead of trading down to dollar stores during times of financial stress. The proximity and density of Walmart and Dollar General locations in the southeast have made this competition particularly challenging for the dollar stores.
Overall, the turmoil facing dollar stores is rooted in a combination of economic challenges, strategic missteps, and increased competition in the retail sector. While these chains have traditionally been seen as a safe haven for customers looking to save money during tough times, recent events have exposed vulnerabilities in their business models. Dollar General and Dollar Tree are working to address these issues, but the road to recovery may be long and complex, especially as they navigate the fallout from past decisions and the changing retail landscape.
