People are looking for lower prices, but that doesn’t mean dollar stores are booming

That’s a stark contrast with how dollar stores fared in other tough environments. In the early days of the pandemic, dollar stores expanded heavily as shoppers avoided long lines at grocery stores, per NPR. During the 2008 recession, when Dollar General’s sales soared; same-store sales grew 9% in fiscal 2008 and another 9.5% in 2009. The chain has yet to see that happen this cycle, which Dollar General’s CEO attributed to a still-decent job market that hasn’t seen a huge spike in unemployment.

Analysts and executives believe people are taking their spending elsewhere as other retailers have seen growth. Walmart’s revenue, for example, increased by almost 5% year-over-year last quarter.

“The guys down in Bentonville are doing a pretty nice job in garnering the available traffic that’s out there from other retailers,” Dollar General CEO Todd Vasos told investors in an earnings call Aug. 29, presumingly referring to Walmart. “While we got some of it, we didn’t get our fair share, at least what I would consider to be our fair share.”

In a recent note, Telsey Advisory Group analysts wrote they believe the more affluent customers are increasing their spending at Walmart and other discounters, value grocers and closeout retailers like Aldi, Lidl Grocery Outlet and Ollie’s Bargain Outlet, rather than Dollar General. Sales at Five Below, a smaller but newer player in the space, grew 9.4%.

Dollar General, Dollar Tree and Family Dollar, though they share similar names, each serve different customer bases: Dollar General and Family Dollar skew more toward lower-income customers, while Dollar Tree has a broader customer base that includes more middle- and upper-income households.

While sales forecasts were softer all around, the retailers vary in performance and face unique challenges based on who they serve.

Low-income people are especially struggling

Dollar General’s core customers are households earning less than $35,000 annually. They make up about 60% of its overall sales.

More than 60% of these households claimed they have had to sacrifice on purchasing basic necessities and have also had to pay more for expenses such as rent, utilities and health care due to inflation, Vasos said to investors.

Sharing a similar picture of Family Dollar customers, Dollar Tree COO Mike Creedon said in an earnings call that more than 40% of Family Dollar’s customers are eligible for some form of government assistance, including SNAP benefits.

According to Vasos, Dollar General’s core customers have been less confident of their financial position, citing internal customer data and survey work: the majority of them said they feel worse off financially than they did six months ago because of higher prices, softer employment levels and increased borrowing costs. “While middle- and higher-income households are seeking value as well, they don’t claim to feel the same level of pressure as low-income households,” he said.

Additionally, Vasos said more of its customers have said they are now using credit cards for basic household needs, and about 30% have at least one credit card that has reached its limit. Twenty-five percent of its customers said they expected to miss a bill payment within the next six months.

“Notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months,” Vasos said. “This pattern suggests that our customers are less able to stretch their budgets through the end of the month.”

Dollar Tree executives saw more mid-to-upper-income households pull back in the second quarter — something they hadn’t expected when forecasting their sales outlook earlier in the year. Customers making more than $125,000 are now buying more for need than for want, Creedon said.

“This started with sensitivity on big-ticket items and has come all the way now to us as people have maybe changed how they celebrate a party this summer; fewer guests, fewer parties,” Creedon said. “They’re really tightening their belts, and the macroeconomy is driving them to behave a bit differently.”

Winning them back with value, better operations

Despite the worse-than-expected results, dollar store retailers have diverging strategies to win back shoppers.

While Vasos said Dollar General feels good about its price position, it is still investing in markdowns and promotions, which have ramped up throughout retail.

Walmart temporarily lowered the cost of about 7,200 products this summer and Target cut prices of 5,000 frequently purchased items in May. Kassi Socha, director analyst at research firm Gartner, said dollar stores may want to adopt a similar strategy.

“When you have mass retailers like Walmart and Target lowering the price of goods, they’re going to take market share away from every socioeconomic bracket,” Socha told Modern Retail. “The average consumer is focused on price and value over almost anything else right now.”

Meanwhile, a key focus of Dollar Tree is to add more higher-priced items to diversify its product selection. In 2021, the company raised the base price of items from $1 to $1.25 and has since expanded its “multi-price” model — including products priced up to $5, more like its Family Dollar or combination Dollar Tree/Family Dollar stores — to 1,600 stores.

“Over time, our expanded discretionary multi-price offerings will help us overcome some of the macro-driven weakness we’re seeing elsewhere in the portfolio,” said Dollar Tree’s Creedon.

Executives announced last year they would raise the maximum price in those “multi-price” Dollar Tree stores to $7.

“Whenever you increase a price max in a competitive environment like this, the consumer may not come along with you,” Socha said.

Dollar General is focusing on what it calls a “back to basics” strategy centered around its supply chain, store experience and merchandising. The company has taken steps such as increasing the employee presence at the front end of stores, focusing on perpetual inventory management, simplifying operations and increasing markdown activity to drive traffic and stay competitive. These changes, according to Vasos, have created a better customer experience, year-over-year improvements in inventory and lower employee turnover.

“We are pleased with the operational progress we’re making and feel good about the actions we are taking to build on that momentum,” he said. “We need to be at our best for our customers in times like this.”