It’s no secret that retail is on the ropes. Scores of huge chain stores that once dominated the U.S. landscape have gone bankrupt and many more were downsized to a mere shadow of their former selves. But there are still a few bright spots in the industry and dollar stores are among them. Practically every year, they draw more customers, grow profits, and open new stores.
How do they thrive where so many others have failed? How have they withstood the challenge of online rivals? What is their secret? The answers to these questions are actually very simple: While most retailers see financially stressed consumers as a challenge, these stores view them as a great opportunity to seize the moment.
Dollar stores are unique in that they offer something for everybody: spaghetti and sauce, cookies and soda, stationery items, personal items, greeting cards, toys, detergents, shampoos, slippers, and, increasingly, food.
The large selection is just one of several reasons customers flock there. Another is price: All of these products are very inexpensive and many cost just one dollar. Moreover, shoppers can purchase many of the items they need in just one trip, which is not only a convenience, but can also be another money-saving benefit, because fewer car trips means using less gas.
Dollar stores have several inherent advantages that protect them from rivals. For example, their prices are so low that online competitors like Amazon underprice them. “So far, these discount stores have been e-commerce-immune,” said Garrick Brown, a vice president at Cushman & Wakefield, which studies the retail sector. “It will never make economic sense for Amazon to compete with them.”
Another advantage they have is that they target towns with low populations. CNN Business reports that 75 percent of Dollar General’s stores are located in towns that have less than 20,000 people. Usually, this means they are the only game in town. It also means that it’s difficult for competitors to open stores in these areas.
Many of the items sold at dollar stores are made in countries where labor is very cheap, and in some cases, in company-owned factories. As a result, they can sell their wares at very low prices and still make a respectable profit. According to one analyst, for every dollar a customer spends at Dollar Tree, the company makes a gross profit of 35 cents; by comparison, Wal-Mart makes only 24 cents per dollar.
In both good times and bad, customers shop at these stores. “Sales at Dollar General are always on the upswing,” CEO Todd Vasos said. “Even in a good economy our core customers are still looking for value and convenience.”
Dollar General’s financials give support to the theory that by hitting a lot of singles, it’s possible to score a lot of runs. Both revenues and net income keep growing - not by huge leaps and bounds, but steadily, and over time those keep adding up. And Dollar General is by no means alone: Other companies in the industry, including some that are privately-owned, have also been experiencing this.
From Coast To Coast
A study made by Cushman two years ago found that on average, a new dollar store had opened somewhere in the U.S. every four and a half hours in the four previous years.
According to Mark Kaplan, COO at Ripco Real Estate, a New York area firm that represents Dollar Tree and other discount stores, “The appeal of dollar stores during the Great Recession was fairly obvious,” he says. “Shoppers were jobless and cash-strapped and desperate for bargains. But despite an improving economy since then, the number of customers who shop there has swelled.”
The reason, Kaplan explained, is that most of the population still considers themselves in a precarious financial situation. “80 percent of U.S. consumers cannot really buy anything discretionary and are drawn to these kinds of stores. For people who are price-sensitive, price is the No. 1 value.”
Surprisingly, even affluent shoppers patronize them. The last recession changed shoppers’ thinking; they’ve come to expect a discount on everything.
Not all of the products dollar stores sell are bargains - despite the low price tag. Some clearly are not, since the quantities contained in bottles and packages may be surprisingly low. Moreover, quality is another problem. The Washington Post reports that small parts often break off toys and present a danger, as younger children may put them in their mouths. Other products also are made of cheap materials that can break soon after purchase. But customers apparently are not annoyed when that happens; they simply return and purchase a new item.
While the industry has reason to be optimistic about the outlook, continued expansion is not guaranteed. For example, a spurt in inflation could present a major problem. So, too, could new tariffs if any are imposed. And at some point, markets may be saturated with these low-priced stores, limiting future growth.
But for the time being, dollar stores enable their cash-strapped customers to get by and generate hefty profits at the same time. That’s a winning combination in anybody’s book.
Sources: cbinsights.com; cnn.com;
How dollar stores really make their money.