In recent years, dollar stores in the United States have experienced a thriving growth, especially during economic downturns. However, they have recently begun to decline due to rising costs, unstable financial conditions of customers, and competition from large chain stores like Walmart.
According to reports from CNN and the Financial Times, on September 11th, the stock price of Dollar Tree plummeted by 20% after the company revised down its performance expectations for the fourth quarter of this year, citing “significant pressures” faced by low and medium-income customer groups. Dollar Tree owns the struggling Family Dollar chain.
Similarly, Dollar General has faced similar circumstances, having just lowered its full-year performance expectations, leading to the worst day for its stock price ever last week.
Dollar General and Dollar Tree have been among the fastest-growing retailers in terms of new store openings in recent years, profiting from many low-income areas, shrinking middle-class, and closures of competitors in the United States. Investors had driven up the stock prices of these two companies, believing that dollar stores would be immune to broader economic challenges, as customers flock to them to save money during tough times.
However, the tide has now turned. Dollar stores underestimated the economic hardships faced by Americans.
With over 20,000 stores primarily located in suburban towns, Dollar General stated last week that inflation, a weak job market, and rising borrowing costs have put pressure on low-income customers. The Tennessee-based company sells various food and household items at low prices, many of which are priced at $1. Their customers are often the first to feel the negative impacts or uncertainties of economic conditions and the last to feel the improvements, according to the company’s documents.
More than 60% of the company’s sales come from households with an annual income of less than $35,000.
Dollar General’s CEO Todd Vasos stated in an analyst conference call, “Inflation continues to impact these households negatively, with over 60% claiming they have had to make sacrifices in their purchases due to higher prices of essential goods.” He added that customers were also paying more for rent, utilities, and healthcare costs.
“They mostly feel that their economic situation is worse than six months ago, as rising prices, declining job levels, and higher borrowing costs have negatively impacted the confidence of low-income consumers,” he said.
With over 8,000 stores mainly targeting medium-income consumers in suburban markets, Dollar Tree also mentioned that its customers are facing pressures.
Other companies have recently noted the weakening purchasing power of low-income customers, including McDonald’s.
Economic challenges are not the only reasons these two chains are struggling, as reported by CNN. Both companies have made strategic errors.
Historically, the majority of Dollar General’s sales come from essential items, but in recent years, they focused on developing non-essential businesses. They added products like pillows, candles, home decorations, gift bags, and wrapping paper, which ended up forcing the company to discount prices to clear inventory.
Meanwhile, Dollar Tree has been under pressure due to its acquisition of Family Dollar.
In 2015, Dollar Tree spent $8.5 billion to acquire its rival chain Family Dollar, believing that the acquisition would help compete with larger companies. However, Dollar Tree misjudged this transaction.
Earlier this year, Dollar Tree announced the closure of over 900 Family Dollar stores.
Retail analyst Neil Saunders from GlobalData stated in a report to clients on Wednesday, “Dollar Tree has been ensnared in a series of issues with Family Dollar, and pulling out of this predicament won’t be easy.”
The largest retailer in the U.S., Walmart, and its competitor, Target, reported robust sales growth in the latest quarter. These large chain stores and others have lowered prices on certain goods to attract shoppers struggling with inflation, affecting the foot traffic at dollar stores.
Walmart has stated that it has grabbed market share from competitors.
Dollar General’s CEO Vasos admitted last week that Walmart has been successful in attracting shoppers seeking low prices from other chain stores. Walmart has seen rapid growth, with an increase in customers with annual incomes over $100,000 and an increase in market share. Slightly more affluent families are choosing to shop at Walmart to save money rather than Dollar General.