Inflation is putting pressure on the rapidly expanding dollar store in the U.S.
Since the Great Depression, dollar stores have spread rapidly in the United States. Through the 21st century’s transformation of Woolworth’s “five cents” model that was popular a century ago, it has attracted cash-strapped consumers.
Dollar General now operates nearly 17,800 stores, while Dollar Tree has more than 15,900 stores, and Wal-Mart has 4,740 larger stores in the United States.
According to data from Coresight Research, it is expected that nearly 2,000 new dollar stores will be opened this year. This accounts for almost half of the planned opening of retail stores in the United States, and is bucking the trend in an industry shaken by Amazon, Covid-19 and empty shopping centers.
This growth rate has raised the total market value of the two largest chain stores Dollar General and Dollar Tree to $75 billion.
But it coincides with a period of mild inflation, making it easier for products with a price of as low as $1 to obtain a gross profit margin of more than 30%.
These circumstances have suddenly changed. As all retailers are struggling to cope with transportation bottlenecks and staff shortages, consumer prices in July experienced the biggest one-year increase in 13 years.
Inflation has created a special dilemma for stores charging $1 for goods. “When you have to be a two-dollar store, this is a real challenge,” said John Strong, a professor of business at the College of William and Mary.
In their earnings announcement last week, Dollar General and Dollar Tree attributed rising freight and payroll to pressure on profit margins. The earnings prospects of both companies disappointed investors.
Dollar General, which sells most of its products for less than $5, has responded by raising some prices. But CEO Todd Vasos admitted that its core customers “cannot afford many price increases”.
This raises questions about whether Yiyuandian can continue to find affordable products and employees to achieve its positive growth goals.
Dollar General stated that freight costs have become an “increasing resistance.” Dollar Tree clarified the scale of the challenge, saying that its freight rate will be between US$185 million and US$200 million higher than expected in May.
Columbia Business School professor and former Sears Canada CEO Mark Cohen said that maintaining a stable number of stores when the supply chain is tight is challenging, but adding hundreds of new stores while doing so is even more so.
Opening these stores also requires finding thousands of new employees in economies where workers are scarce and labor is scarce Wage expectations are risingDollar General alone will hire another 50,000 employees between July and September.
Competitors such as Wal-Mart have raised wages. UBS analysts found in October that among the 25 retailers they studied, Dollar General paid the lowest hourly wage, with an average of about $9.68. Amazon warehouses now offer $15 an hour, which is twice the federal minimum wage, and dollar stores may have difficulty competing.
Michael Witynski, chief executive of Dollar Tree, said labor shortages have prompted the company to provide $1,000 in recruitment bonuses at its distribution centers and higher salaries in certain markets. In May of this year, the company estimated that this year’s increase in state and local minimum wages could cost $50 million.
Cohen observed that enhanced federal unemployment benefits introduced to alleviate the economic impact of the pandemic exacerbated this challenge, but will end in September.
John Garrett, the chief financial officer of Dollar General, pointed out that his company has received a large number of applications after some states ended these benefits early.
Chuck Grom, an analyst at Gordon Haskett, said that as the school reopens, the prospect of more parents returning to work may also provide some respite.
Strong said that if competitors raise wage expectations, dollar stores are still vulnerable, but compared with other chain stores, they are “light labor”, usually requiring only 15 to 20 employees per store. “They will definitely be affected by Wal-Mart’s salary increase, but they will not be affected like other retailers,” he said.
From the fundamentals of the business model to the record of adapting to cost-cutting, these chains have other reasons to hope they can overcome inflation headwinds.
For a long time, they have been “people who go where Wal-Mart will not go,” Strong said, noting that their target market is too small to maintain a super center.
Cohen said that because three-quarters of the U.S. population is less than 5 miles from Dollar General, these stores can still steal market share from local supermarkets and “mom-and-pop stores” without conflicting with the financially rich Wal-Mart.
Ken Fenyo, Coresight’s president of research and consulting, said that at the same time, the success of the dollar store reflects “economic divergence.” The economic downturn caused by the pandemic last year brought more budget-conscious shoppers, and this year’s rise in the prices of many consumer goods has attracted more new customers.
Middle-class shoppers who once regarded the nearby dollar store as the “retailer of last resort” found that “it is much better than that,” Strong said, pointing out how the chain can upgrade the store and expand its range.
In the process, they have become masters of bargaining with suppliers, because, as Dollar Tree’s Witynski told analysts, “When you sell something for a dollar, pennies are important.”
Since we don’t need a full range of inventory, “If we think we shouldn’t pass on some price increases to [consumers], We will give up [item] And continue to do other things,” said Vasos of Dollar General.
At the same time, the chain store has turned to a familiar strategy of adjusting the packaging size, Strong said, so “in the past you had six toilet papers, now you have four.”
Dollar stores are also adapting by adding fresh produce with higher profit margins, testing new formats, and adding more expensive products. Dollar General has opened 16 Popshelf stores, providing home furnishings and household necessities for middle-income shoppers. Similarly, Dollar Tree has added Dollar Tree Plus to hundreds of stores, stocking products that cost far more than $1.
Cohen said that due to the year-on-year decline in same-store sales in the most recent quarter, both chains are facing the problem of how much their growth depends on opening new stores, but inflation alone should not reduce their competitiveness.
“I didn’t know they could open 1,000 stores a year, but people said years ago that they would run out of headroom, but that didn’t happen.”