There are over $36,000 stores across the US.
That's more than one store for every 10,000 people.
These companies have long been in Wall Street darlings.
During the Great Recession in 2009, 2010, both Dollar General
and Dollar Tree were two of the best performing stocks
in the S&P 500.
In those two years, the share price for Dollar Tree
and Dollar General, the two biggest players in the space,
far outpaced the S&P 500, jumping over 1500% between 2008
and 2022.
But over the past two years, the stocks of both
companies have plummeted, and the outlook, at least in the
near term, isn't showing promising signs of recovery.
We had this this pretty good growth over a period
of decades, but in the last decade we've added about
50% more stores, and that's brought a number of challenges.
Dollar General and Dollar Tree have both cut guidance recently,
which set off alarm bells for investors.
So what's happened to dollar stores and what do these
companies need to do to get back on track?
Dollar General, Dollar Tree and Family Dollar are the three
largest brands in the space.
Dollar Tree owns both Family Dollar and its namesake brand.
In fiscal 2023, the two companies brought in nearly $70
billion in combined revenue.
All three brands have thousands of stores across the country,
but target very different areas and demographics.
Dollar Tree sells a lot of seasonal and discretionary items.
Think wrapping paper and toys, typically in suburban strip malls.
The Family Dollar chain, which the company acquired in 2015
for $9 billion, is generally found in more urban areas.
Meanwhile, Dollar General focuses on a primarily rural customer base.
The roots of dollar stores were in rural America, outer
suburbs of metro markets.
It was sort of the places where there wasn't sort
of the big established value retail presence.
A key thing to understand about dollar stores is that
their main goal is to be an affordable place to
shop with whatever set budget you have, not necessarily the
best value for your money.
For example, this box of 15 dryer sheets is $1.25.
It's a better quote UN quote deal to go up
the road to Target and get a box of 240
of them for $10.
But if $10 is your entire budget for the trip
to the store, it makes more sense to go to
the dollar store.
On the outside, these types of stores may not look
so bad.
From 2019 to 2023, sales have increased by about 30%
for Dollar Tree and about 40% for Dollar General.
In the same time period, these companies have added over
5000 stores.
New stores will naturally increase revenues, but that can mask
slow sales growth at existing locations.
The companies can say, you know, well, we're still growing
revenues nicely.
Both companies are saying that they're taking market share and
these are all true statements.
But when you really drill down to where you're taking
share, like at a per store basis and that's where
you would suggest that perhaps they are, that they're losing
some share.
High inflationary times disproportionately affect lower income consumers.
Dollar General Score customer base, which is households earning less
than $35,000 per year, contribute to about 60% of its
overall sales.
We're in a strange time where the jobs market is
still relatively strong and that means middle and upper income
households don't feel that same level of pressure to turn
to a different store or to shop dramatically different than
their everyday habits.
At the same time, the core customer, those lower income
customers that rely on dollar stores, are getting even more
selective and tending to buy needs versus wants.
Things like food that just tend to be lower margin.
Lower margin means they are less profitable.
But food and household items have become increasingly important to
the dollar store customer.
In its 2024 second quarter earnings call, Dollar General said
it's decreased its non consumable inventory by 13% versus last
year.
The effect of inflation is also apparent at Dollar Tree
stores, whose long differentiated strategy was a storewide $1.00 price
point.
In 2021, that changed.
Even if you just take a step back and you
think about sort of the magic around a retail box
where everything is a dollar and if you have 8
items in your basket, it's going to cost you 8-8
dollars and now you move to $1.25, it reduces some
of that magic overall.
And it's sounds silly, but it it confuses the shopping
experience, makes it a little more complex.
Some of the dollar stores lackluster financial results can be
pointed to the conditions of its physical stores.
It's just a less desirable place to shop.
I mean, the whole idea is the dollar stores are
convenient.
But if you go there and there's only one cash
register open and there's eight people in line, that takes
10 to 15 minutes to check out that that you're
losing your convenience angle.
Or sometimes there's boxes in the eyes.
You can't even get down the aisle because it's it's
blocked.
So my stock room is literally overflowed and look like
this.
So tell me, does your Dollar General look like this?
Customers notice when a company is not minding the store.
They see that there are boxes that are cluttering aisles.
They notice that the item they want is out of
stock, and so they may decide to go elsewhere.
And Dollar Tree and Dollar General haven't been having execution
problems that have contributed to a tougher economic backdrop.
Inventory challenges were especially apparent during the pandemic.
The smaller sized, more affordable products normally found at dollar
stores were deprioritized by manufacturers.
Customers that were then going into the stores, even if
they found a store that was operationally OK, the store
was now very different and didn't have some of the
items that were the reason that they went to the
discount channel.
That this was understaffing also became more apparent.
The dollar store playbook has historically operated on a lean
labor model that has long created problems for both companies.
But during the pandemic, those issues were exacerbated.
And totally did.
And the government was paying our subsidies.
And that the situation where lots of lots of employees
just opted out.
Did you go to work?
Did it, Pete?
So then you got into this situation where, you know,
the stores started to fall over.
Dollar General and Dollar Tree have also faced numerous worker
safety violations in their stores over the past decade.
In the beginning of 2024, Family Dollar was fined over
$41 million for rodent infested warehouses.
Family Dollar has been a burden for the Dollar Tree
brand ever since its acquisition back in 2015 was really
supposed to be sort of the Dollar General fighter.
The challenge was that Family Dollar had always been the
weakest of the dollar stores.
It was never as profitable.
It never grew as much.
And because the management of Family Dollar knew that it
was going to be sold, they stopped investing in lots
of things.
So even today, I mean, you're seeing outdated technology systems,
outdated distribution centers, DCS that don't have air conditioning, HVAC
systems that stores that are falling apart.
So these are long legacy issues that Dollar Tree just
didn't make the proper investments.
And despite now, you know, in their 9th year of
ownership, Family Dollar is the only one of the three
brands that has seen a decline in foot traffic from
2019 to 2024.
And now Dollar Tree wants to get rid of it.
But aside from the internal struggles that these companies are
grappling with, Walmart has also become a major problem for
them.
When you go back to the Great Recession and the
dollar stores were doing well, Walmart was not putting up
same strong, same store sales growth.
I think that's where there was trading away from Walmart
and moving more to the dollar stores.
The opposite seems to be happening today.
Whereas Walmart is putting up terrific same store sales growth.
They're gaining share of that lower middle income wallet and
they're bringing in newer middle and upper income consumers.
Walmart is keenly aware of how good these dollar stores
have been for a long time and have learned a
lot from them as well.
90% of Americans live within 10 miles of a Walmart
store.
To put the impact of Walmart into context, the retail
giant increased its U.S.
sales by about four and a half billion dollars in
its most recent quarter.
That's about 4% higher than the year prior.
It's also about half the amount of Dollar General's total
sales last quarter and about 60% of Dollar Tree's total
sales.
A big part of the retail giant's recent success is
due to its investment in e-commerce.
A lot of legacy brick and mortar companies like a
Walmart, Home Depot, Best Buy, I'd like to say they
made about five years of E com and digital investments
in about 12 to 18 months.
Kovid.
So the digital capabilities of a lot of companies have
also gotten a lot better in recent years.
Dollar stores, because of the investments you have to make
to pull off a larger online business, have not been
able to move as quickly in those ways.
Dollar General says that the middle and upper income consumers
have become more engaged in e-commerce and those customers may
not be trading down to dollar stores like they used
to.
Beyond e-commerce, another consideration is dollar stores heavy investment in
its grocery offering.
At the same time, discount grocery companies like the European
chain ALDI are growing rapidly.
In the US, it's location count has increased by about
1000 stores over the past decade.
I think Audi and Lidl are a lot more important
than the financial media tends to think they are because
they're privately owned and they're small stores and and they
don't have the the profile that Walmart or Amazon has.
But there are thousands of Audis, and those are almost
always in the same markets that the dollar stores are.
Even as inflation normalizes, dollar stores are not well positioned
to benefit.
We have lower interest rates and the consumer is better.
Next year, the consumers will be buying more discretionary type
of goods.
So maybe the the fundamentals could get a little bit
better for the dollar stores with consumer spending, but we'll
see other retailers outperform because they're more exposed to the
discretionary merchandise.
Look at the merchandise breakdown for the three major dollar
store brands.
Dollar General and Family Dollar are both about 80% consumable
items.
Dollar Tree has far more discretionary products.
president-elect Donald Trump ran his campaign pushing for higher tariffs
on goods imported from China.
That will affect Dollar Tree, especially as the chain imports
over 40% of its merchandise, mostly from China.
That's much higher than its other brand, Family Dollar, and
its competitor Dollar General.
Plus its fixed price Dollar 25 model means margins would
be squeezed even tighter.
The chain is focused on introducing more multi priced items
to increase spending at its stores.
That core Dollar Tree model has a really nice niche
that everything's $1.25.
So you get smaller pack items, you get special deals
from suppliers.
You start selling branded items at 234 dollars.
So those are the same items that are at grocery
stores or at at Walmart.
And so maybe a sales lift, but also maybe longer
term competition.
The minimum salary threshold to qualify for overtime pay is
set to increase on January 1st, 2025.
The Dollar stores store managers small box often times in
rural lower cost of living locations often times make less
than $59,000 on a salary basis.
So if this rule change goes through it would cause
expense pressure on on the dollar store for both banners.
Another consideration for future success is leadership.
Dollar General's CEO is on his second stint running the
company.
Dollar Tree CEO announced he was stepping down at the
start of November 2024, a Dollar Tree spokesperson told CNBC.
Dollar Tree and Family Dollar play a vital role in
providing high quality, low priced items that help our shoppers
do more for less.
With new leadership, we are continuing on our journey to
transform the business and position ourselves as a leader in
the workplace and associate safety through meaningful investments.
Dollar General declined CNB CS request for an interview or
comment.
With succession planning and economic uncertainty a question mark for
both companies, it's increasingly clear that getting the dollar store
businesses back on track is going to require a multi
faceted approach.
Dollar stores are contending with a mix of self-inflicted problems
and also problems that they're contending with because the macroeconomic
environment is just a lot tougher.
You know, people who shop at dollar stores tend to
have less income and so they are going to feel
every push and pull of the economy.
But at the same time, these retailers have to get
their stores back in line and to draw back shoppers
and build more loyalty.
They need to mind the store.