This was supposed to be their glorious time. When shoppers are feeling stressed about prices and want to start trading down in their purchases, it has historically led them to one place: dollar stores. But not this time. We’ve pinpointed five reasons dollar stores are failing.
The traditional dollar store customer is now going to Walmart. That detour may not be a first choice, but certainly, Walmart is squarely in their purchasing paths. Bottom line? Walmart is making the sales that used to occur at all those thousands and thousands of Dollar General and Family Dollar outposts.
Dollar Under Siege
The dollar store sector – led by the two giants in the field, Dollar Tree/Family Dollar and Dollar General – is under virtually unprecedented turmoil, closing stores, looking at divestiture plans and desperately trying to find a new formula for their businesses. Whether they will figure it out during this retail downturn when the conditions are most ripe for their turnaround is the great unknown. And while the retailers’ own execution is often cited as the big reason for their lackluster performance – and, make no mistake about it, it is a major factor – it’s a far cry from the only one that is causing the dollar doldrums. Here are the five key factors for why dollar stores are underperforming.
1. In-Store Execution, or Not
Lack of execution is the most obvious reason dollar stores are doing so poorly these days. As a whole—but particularly Family Dollar – the 20,000 or so dollar-format locations operated by the two big chains are looking pretty downtrodden. Some of this is because of the age of the fleet which has some very, very tired stores.
But it’s a lot more about investing in the resources each company needs to make these stores presentable. And that’s all about their employees. Over the past decade or so both companies have cut back their staffing levels to the bare bones, squeezing every …er, dollar…out of their SG&A to make their bottom lines as black as possible. The result is that minimal numbers of workers per location results in minimal levels of housekeeping, merchandising and general appearance.
Extra security measures to counter the rash of shoplifting and theft rampant in the retail sector are not helping either. Some stores look like maximum security prisons designed to intimidate and impugn the overwhelming number of honest shoppers just trying to get a bag of Doritos and a six-pack of Mountain Dew.
And about those Doritos. Merchandising assortments geared towards male 17-year-olds just don’t cut it anymore. Dollar stores are trying to bring in better mixes of goods, especially in the food and consumables categories, that are more attractive to female and more health-conscious consumers. That said, it’s been a slow process that faces many challenges from existing store footprints that are designed to showcase salty snacks and Double AA batteries.
Inflation has also impacted these stores so that the cheap clothing, home and housewares and general merchandise categories have become limited to what they can put on sale. Even stretching the pricing ceiling hasn’t been enough when prices of some goods have increased 30 or even 40 percent over the past two years. While each brand has its own individual problems, the big overall takeaway is that dollar stores as a whole have serious merchandising problems that they seem incapable of fixing.
2. Walmart Is Much, Much Better at Attracting this Shopper
Walmart is still on its constant march upmarket to try to outflank Target, but over the past few years under the brilliant leadership of CEO Doug McMillon, Walmart has worked to protect its “Low Prices Always” positioning better than at any time since the days of Mr. Sam 40 or 50 years ago.
Its relentless push to keep price points approachable for the most-price-sensitive shoppers has been wildly successful — to the point that when consumers hear the word “rollback” they have a Pavlovian response and head to their nearest Walmart.
This is especially true on the grocery side of Walmart’s business, which now accounts for close to 60 percent of its overall U.S. volume. The company has learned that offering low prices (or at least the perception of low prices) in food, consumables and other staples has the halo effect of getting shoppers to wander across the wide drive aisle and pick up that shirt, sheet or Shop-Vac they never knew they needed.
Simply stated, the traditional dollar store customer is now going to Walmart. That detour may not be a first choice, but certainly, Walmart is squarely in their purchasing paths. Bottom line? Walmart is making the sales that used to occur at all those thousands and thousands of Dollar General and Family Dollar outposts.
3. Aldi Is Taking Market Share
If Walmart is the Big Box that is taking share, then Aldi is the Mid Box that is grabbing some of that business as well. During the Great Recession of 15 years ago, Aldi was still an unknown startup just getting its footprint planted in the U.S. Now it is the third largest grocery retailer by number of stores in this country – 2,350 and counting. When it comes to budget shopping for food and consumables, its selection, presentation and prices are exceptional, especially when compared to dollar stores’ haphazard and meager assortments.
And here’s the key thing: These Aldi stores are in the same strip centers near or adjacent to dollar stores, so consumers don’t need to go out of their way to shop there. They pass these shopping centers every day on the way to work, their kids’ schools or soccer practice. There may not be quite as many Aldi locations as there are dollar stores but there are enough to skim off a decent percentage of sales. Even if you’re not part of this consumer demographic, ask yourself this question: Where would you rather shop? At a dollar store or an Aldi? Enough said.
4. Online Is Offline
None of the big three-dollar chains has much of an online presence. Frankly, snooping around their sites seems to be more about billboards for “Here’s what we sell in our stores.” Only Dollar Tree looks to be doing ecommerce. That makes sense as its assortment – sometimes unknown to Urbans who tend to group all three dollar brands into one big mosh pit – is more about gifts and home décor rather than consumables and household staples that define the other two nameplates.
It’s clear that ecommerce is a severely underdeveloped business at all three retailers. That may have made sense ten years ago when online was still viewed as an elitist channel that lower-income shoppers didn’t use because of a lack of credit cards or internet connections. But that’s certainly not the case anymore.
The big grocery chains have all learned how to make online work for them and with third-party services like Shopify there’s no excuse for any retailer in America not to be selling online. Dollar shoppers who want the online option are therefore turning elsewhere. Walmart has to be getting a big chunk of that along with Shein and Temu, which appeal to the same demographic and have prices that would make a dollar merchant green with envy. There’s a direct connection between the success of these Chinese-derived online sellers and the market share drops of dollar stores. Make no mistake about it.
Without ecommerce these dollar chains are missing out on somewhere between 15 and 18 percent of retail sales in the country right now and that’s a huge reason they are underperforming. Call it omnichannel, call it unified retailing, call it whatever you want but without online, the dollar stores are just not competitive – and it shows in their financial results.
5. This Economic Squeeze is Different than 2008-2009
There’s a tendency to compare what’s going on with the economy right now with what we all experienced during the Great Recession in 2008. Over 16 years ago, dollar store executives knew they were in the sweet spot, and they may figure they have that advantage in today’s inflationary marketplace. But this one is different. Last time, housing prices plunged, and the single biggest asset Americans had was suddenly worth a third less than it had been the year before. The concurrent cascade of falling employment rates, reduced retail sales and a general economic crash took no hostages and shoppers frantically traded down to the lowest-priced guy on the block – and that was dollar stores. Maybe they didn’t have the lowest prices, but the optics were clear with the dollar logo over the front door.
Today we have a housing market with escalating prices and homeowners have increased equity that they can borrow against. Wages are up, employment is up, and more people have better-paying jobs than they’ve had in a very long time. The black cloud is of course inflation and it’s had a big impact on shoppers’ psyches. Election day was a clear indication of inflation anxiety. When you’re paying so much more for the proverbial carton of eggs and gallon of gas every week you tend to reprioritize your shopping habits.
Not all economic downturns are created equal. What’s changed now is that more consumers may be trading down in what they buy but they aren’t necessarily trading down in where they buy it. Walmart and Aldi (Lidl to a lesser extent only because of its much smaller footprint) have been extremely successful in getting new price-conscious consumers to spend more of those precious disposable dollars with them rather than at the dollar retailers. Image can be everything in attracting a new, discretionary shopper.
Dollar Downers
Dollar stores are not going away as previous generations of variety five-and-dimes and catalog showrooms did. The dollars will figure it out. Maybe there’ll be fewer of them…although it’s quite possible there could be even more. They will clean up their acts – not to mention their stores too – and remerchandise their footprints the way convenience stores are now doing. There will be some rearrangements too; don’t be shocked to see Dollar Tree shed its Family Dollar division if private equity buyers have the appetite.
And then secondary players in the sector – Five Below particularly – will also rework their formulas to adapt to the changing consumer. It’s what good retailers do. And bad retailers? What do they do? They go out of business.
