So far, you can only increase $ 1. This is true, even if it costs $ 1.
But what about the dollar store? Does the truth apply there?
Given how economic challenges, including inflation, will continue as a result of the Covid-19 pandemic, that is a worthwhile question. This has led to an increase in discount stores under construction. In fact, so many investors are worried that they may have reached their limits.
Others are worried that they are trying to destroy their uneconomical competitors.
According to Statista, there are over $ 34,000 stores in the United States.These 17,000 Dollar General (DG) A major US retailer that doubled the number of stores from 2007 to 2020 with installment payments.
in the meantime, Dollar tree (DLTR) operates 15,686 locations in both the United States and Canada. They seem to sprout overnight in the landscape of this current opportunity.
But not everything that shines is gold (as such stores prove). So you may be in trouble in a cheap paradise.
Investors are asking millions of dollars questions when they are sandwiched between rising inflation and legal restrictions: are dollar stores really on their way?
Health food: Not on the discount menu
The public loves dollar store bargains, which is true. They offer a little of everything a regular grocery store has:
・ Canned meal
・ Frozen products
・ Tinfoil and rap
・ Gift cards and gift bags
・ Random toys.
However, their low prices are anti-competitive and can therefore be very detrimental to the local economy.
Regular grocery stores cannot compete, especially in low-income areas. In addition, the types of dollars are often very close to each other and there is no intermediate position to escape them.
Indeed, typical discount stores do not offer fresh produce. But what is that? Processed and packaged foods are cheaper.
This contributes to the creation of food deserts … don’t mistake them for food deserts. The Oxford English Dictionary defines these 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, considers discount stores to be the “number one driver.”
Recognizing this, some communities are cracking down on expansion. Some parts of Atlanta, New Orleans, Oklahoma City, Cleveland, etc. have policies that limit their existence.
One such strategy is called “distributed limitation”. This sets a limit on how close the new dollar store can be to the existing store.
Tulsa, Oklahoma adopted this approach in 2018, headed by city council member Vanessa Hall Harper. In an interview with Fox Business’s Catie Perry, she said:
Mesquite, Texas takes the restrictions one step further and makes discount stores “conditional use.” This means that they need to be screened, obtain special permits to open, and meet the density requirements of distribution limits.
All of these restrictions mean that the growth of discount stores will be limited in the future.
The impact of inflation on discount stores could be significant in the future
Of course, we haven’t gotten clues to discount stores everywhere yet. Therefore, the restrictions of the ordinance itself are restricted.
But there is another challenge to consider: inflation. To explore this, consider the Dollar Tree in detail.
From the beginning, there were critics of that pricing strategy. Co-founder Macon Brock said in his autobiography: $ 1 at a time, “Of all the questions I’ve asked … Over the years, the most persistent one I’ve ever asked is,” How long do you think you can keep the price at $ 1? ” ..
Even when Dollar Tree was founded in 1986, the founders themselves were not confident in their pricing strategies. And while it has been incredibly successful for decades, it now raises more issues.
Peter Keith, a retail analyst at Piper Sandler, explained that Dollar Tree “benefited by operating in a very low inflation environment.” This no longer exists.
Demand remains high, but shipments and manufacturing are still stagnant from the pandemic. So many companies have no choice but to pass on price increases to their customers, if not most.
When an item priced at $ 1 is their main or only attraction, dollar stores can’t do that so easily. If you raise the price, it becomes less attractive.
Next, consider how most of your employees are part-timers. For example, about 70% of Dollar General’s employees work less than 40 hours a week.
The profits of the dollar store will be further reduced as part-time wages are rising due to lack of employment. Piper Sandler’s retail analyst, Peter Keith, predicts:
“The small rollout of Dollar Tree’s current high-priced products is not enough to offset the increase in wages, transportation, and other costs.”
This is a hypothesis that seems to work.
Another day another dollar?
Dollar Tree CEO Michael Whitinsky said the company will still offer most store items for $ 1.
Inflation makes it difficult to buy this bargain, as discount stores typically make a profit by buying items for about $ 0.43 each.
Fortunately, especially for Dollar Tree, most of their products are store brands. Therefore, it is a little more flexible.
For example, the $ 1 gift bag is a top seller. As a result, bags are now packed in 72 boxes instead of 24 to reduce shipping costs.
Management expects inflation-reduced profits to be only temporary. The same is true for last year’s tariff increases, shipping costs and Covid-19 related costs.
Witynski said in an interview with The Wall Street Journal The Dollar Tree “could reach a gross profit of 35%” in 2020 if transportation costs were not so astronomical.
But investors are, of course, still vigilant.
same The Wall Street Journal Although the retail market as a whole has risen since the pandemic, Dollar Tree’s share price has fallen by about 8%. Its expensive acquisition of Family Dollar is partly due to its decline.
“Dollar Tree’s gross profit was … 35.3% of sales in the fiscal year before the acquisition of Family Dollar. It fell to 30.1% in the fiscal year after the acquisition was completed, and that indicator for the entire company did not recover. Since then, it has been around 30% every year. ”
Personally, I don’t think discount stores are destined to die soon. But as the post-pandemic economic changes continue, I keep an eye on them.
I also recommend doing so.