You can only stretch a dollar so far, a fact if there ever was one.
But what about dollar stores? Does the truism apply there?
That’s an interesting question considering how the economic challenges – including inflation – continue in the wake of the Covid-19 pandemic. This has led to an increase in the number of dollar stores being built. So much so, in fact, that some investors are now worried about being stretched to breaking point.
Others fear destroying uneconomic competitors.
According to Statista, there are over 34,000 dollar stores in the United States. A whopping 17,000 of them are General dollar (DG), a major US retailer that doubled its number of stores from 2007 to 2020.
During this time, Dollar tree (DLTR) operates 15,686 locations in the United States and Canada. They seem to sprout overnight in this current landscape of opportunity.
However, not all that glitters is gold (as these stores prove). So there might be some trouble in cheap paradise.
As they are stuck between rising inflation and limiting legislation, investors ask the million dollar question: Are dollar stores disappearing?
Healthy food: not on the dollar menu (store)
The public loves dollar bargains, it’s true. They offer a bit of everything regular grocery stores have:
Â· Frozen products
Aluminum foil and plastic wrap
Gift cards and gift bags
Â· Random toys.
But their low prices are anti-competitive and therefore potentially very damaging to local economies.
Regular grocery stores can’t compete, especially in low-income areas. In addition, the dollar variety is often located so close to each other that there is no intermediate status to escape them.
Granted, typical dollar stores don’t carry fresh produce. But then what? Processed and prepackaged foods are cheaper.
This contributed to the creation of food dessertsâ¦ not to be confused with food desserts. The Oxford English Dictionary defines them as areas where “residents’ access to healthy and affordable food is severely restricted”.
And Stacy Mitchell, co-director of the Institute for Local Self-Reliance, sees dollar stores as their “number one driver.”
Recognizing this as well, some communities are cracking down on their expansion. Parts of Atlanta, New Orleans, Oklahoma City, Cleveland and others have adopted policies to limit their presence.
One of these strategies is called “dispersal restriction”. This puts a limit on how close new dollar stores are to existing stores.
Tulsa, Oklahoma, took this approach in 2018, with City Councilor Vanessa Hall-Harper leading the charge. In an interview with Catie Perry of Fox Business, she said, “This proliferation makes it harder for healthy full-service stores to set up and operate successfully.”
Mesquite, Texas took the restrictions a step further, making dollar stores “conditional use.” This means that they must be screened and given a special permit to open, as well as meet the density requirements of the dispersal restriction.
All of these restrictions mean that dollar store growth will be limited in the future.
The effect of inflation on the dollar store could be significant in the future
Of course, Everywhere has yet to get the dollar store index. Thus, the limitation of the prescription itself is limited.
But there is another challenge to consider, and that is inflation. To explore this, consider Dollar Tree in particular.
From the start, its pricing strategy had its detractors. Co-founder Macon Brock states in his autobiography, One dollar at a time, “Of all the questions I’ve been asked … over the years, the most persistent by far is, ‘How long do you think you can hold the dollar price?’
Even when Dollar Tree was founded in 1986, the founders themselves were less than confident about this pricing strategy. And although it has been incredibly successful for decades, it now presents a lot more problems.
Peter Keith, retail analyst at Piper Sandler, explained that Dollar Tree “has benefited … from operating in a very low inflation environment.” Which no longer exists.
Shipping and manufacturing are still behind schedule due to the pandemic, while demand remains high. So many companies – if not most – have no choice but to pass price increases on to their customers.
Dollar stores can’t do it that easily when the $ 1 items are their main or only attraction. If they increase their prices, they lose their appeal.
Then consider how most of their employees are part-time. Almost 70% of Dollar General employees, for example, work less than 40 hours per week.
As the shortage of jobs leads to higher part-time wages, dollar store profits will be further reduced. Piper Sandler retail analyst Peter Keith predicts:
âDollar Tree’s current small rollout of more expensive products will not be enough to offset increases in wages, shipping and other costs. “
This is a valid and probable hypothesis.
Another day, another dollar?
Dollar Tree CEO Michael Witynski said the company still plans to deliver most of the dollar store’s items.
Typically, dollar stores make a profit by buying products for around $ 0.43 each, so inflation makes that difficult.
Fortunately for Dollar Tree in particular, the majority of their products are store brands. So there is a little more flexibility.
For example, his dollar gift bags are a bestseller. So, to reduce shipping costs, she started packing the bags in boxes of 72 instead of 24.
Executives hope that the benefits of inflation will only be temporary. The same is true of last year’s tariff increases, rising shipping costs and spending related to Covid-19.
Witynski said in an interview with The Wall Street Journal that Dollar Tree “could have reached the gross margin of 35%” if the shipping costs had not been so astronomical in 2020.
However, investors are understandably suspicious.
That even the Wall Street newspaper states that although the overall retail market has grown since the pandemic, Dollar Tree’s stock is down about 8%. Its costly acquisition of Family Dollar is partly responsible for this decline.
âDollar Tree’s gross marginâ¦ was 35.3% of sales in the year preceding the acquisition of Family Dollar. It fell to 30.1% in the year following the closing of the acquisition, and that company-wide metric has never recovered, hovering around 30% every year since.
Personally, I doubt dollar stores are going to be gone anytime soon. But I will be keeping an eye on them as the economy continues to change after the pandemic.
I suggest you do that too.