Photo: Dollar General
Will dollar stores be the biggest post-COVID-19 winners?
Dollar stores appear to have outperformed essential retail in the first quarter and are poised to benefit as the economy struggles in the months ahead.
“When people are unemployed and they don’t have that source of income, they will need value more than ever,” Mike Witynski, enterprise president at Dollar Tree, which owns Dollar Tree and Family Dollar, told analysts last week. “And we should be in a great position to provide that for them.”
Said Todd Vasos, Dollar General’s CEO, last week “We do very good in good times and we do fabulous in bad times.”
Of the two major dollar store chains, Dollar General performed better in the first quarter as same-store sales grew 21.7 percent, about double the comp gains of 10.0 percent at Walmart U.S. and 10.8 percent at Target. At Dollar Tree, same-store sales expanded seven percent as a 15.5 percent hike at the Family Dollar banner offset a 0.9 percent dip at Dollar Tree due to a soft Easter selling season.
Beyond low prices, Dollar General believes it is benefiting because families are staying close to home. Mr. Vasos said the retailer’s 16,000 locations are within five miles of more than 75 percent of the U.S. population. The stores also offer a “convenient small-box format providing for quick in and out access and limited crowds, both of which are conducive to social distancing.”
Mr. Vasos said that consumers are already trading down to the format,as they’ve done in past downturns, and that the new customers are embracing the chain’s recent upgrades, including an expansion of cooler doors and healthier food offerings. “I’m very bullish that we’ll continue to hold onto those customers for the long term,” he said.
Mr. Witynski likewise said consumers that are trading down are discovering the H2 renovations at Family Dollar that have added Dollar Tree $1 merchandise sections, a larger party assortment and also an expanded freezer and cooler sections. He said, “With customers and communities needing us more than ever, they are being introduced into a format that has a better shopping experience when they need it most.”
- Dollar Tree, Inc. Reports Results for the First Quarter Fiscal 2020 – Dollar Tree
- Dollar General Corporation Reports First Quarter 2020 Results – Dollar General
- Dollar Tree Inc (DLTR) Q1 2020 Earnings Call Transcript – The Motley Fool
- Dollar General Corporation (DG) Q1 2020 Earnings Call Transcript – The Motley Fool
- High unemployment rates will continue to drive budget-conscious consumers to – MarketWatch
Discussion Questions
DISCUSSION QUESTIONS: Do you agree that dollar stores are now better positioned to gain market share in the months ahead? How might competing formats learn from the advantages at dollar stores that are making them popular in the current environment?
Poll
BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
Lisa Goller
B2B Content Strategist
Dollar stores’ success in many ways is a sad reflection of the state of the economy. Based on the current economic conditions, with some 40 million Americans out of work, I have no doubt that dollar stores will flourish over the coming years. But like any successful format, new competitors will emerge and other existing players will trade down to capture share from the dollar stores. The tragic and compounding circumstances the U.S. economy is facing will be a headwind for retail in general and a tailwind for dollar stores and discounters.
Dollar stores are recession-proof and they have prospered during the pandemic as they are considered essential retail and value-conscious consumers have been loyal to their local dollar stores. With the unemployment rate soaring, consumers are looking for ways to save and dollar stores are helping them stretch their dollars. Even before the pandemic, dollar stores and off-price retailers were the hottest retail segments and the new consumers they added during the pandemic will propel their success in the future.
Beyond the obvious gains from the current economic situation, the key advantage for dollar stores is their store size and the agility it affords. The value proposition is also so clear and there is no confusion internally or externally as to what to expect.
Before the dollar store, it was flea markets and “Five and Dime” stores. People always want to find bargains. The dollar store has evolved into a hugely successful retail industry, one that is recession-proof. There is no doubt that the dollar store will find great success when the lockdowns are removed, and people all over the country can return to stores. Off-price stores will also do exceptionally well for the same reason. The simple reason is that money will be tight for many people and, although everyone likes a bargain now with nearly 40 million people out of work, bargains will be a necessity for many Americans.
It’s not just due to the discount — it’s the product. Although c-stores were on the rise pre-COVID-19.
We’ve seen a major shift in consumer behavior as they place purchases into two major classifications: ESSENTIAL AND NON-ESSENTIAL items. If dollar stores can guarantee to stock essential weekly pantry items like detergent, paper goods, wipes, dry food, etc, they will be in a very good position to do well.
Dollar stores are becoming stock up destinations for customers that cannot find the normal items (bath tissue, cleaners, etc.) at the big chain stores. A lot of the dollar stores have been adding a lot more perishables to their assortment in the past few years making them more shoppable for their customer base. I see them taking a bigger piece of the retail grocery pie moving forward (more than they have been).
Dollar stores and off-price chains like TJX and Ross.
Dollar stores have two things going for them. One, as the economy has cratered, the value they bring obviously has huge appeal. Two, their operational costs are far lower than other segments. They are not making big investments in curbside pickup or delivery (both of which smacks down margins) and e-commerce is close to non-existent. They can just focus on optimizing their store revenues and that is done at a lower cost than other formats.
Americans who were squeezed during the Great Recession discovered discount stores. Now, with the economy in free fall it only makes sense to discover dollar stores. Buy a package of 12 combs for $1. A bag of frozen tater tots is $1 (and pretty darn good.) I’m a snob about a lot of things, but not dollar stores.
It’s dollar stores’ to screw up – you got people to come because you had stuff and you had stuff cheap. Don’t mess with the format and keep on trying to retain the new people you brought in.
In addition to the previously made comments supporting dollar store growth in these times, I think there are two additional factors fueling this growth: 1.) Private label, abundant in dollar stores, has become a go-to option for most shoppers, 2.) Overall, dollar stores appear to have done a better job than supermarkets and supercenters in maintaining stock in many of the product categories that were decimated in these more traditional formats. This latter point (in stock) should resonate with consumers post-pandemic.
In general, dollar stores will be net winners from this crisis. The format gained more customers during the pandemic and many of them will stick around for the low prices as we enter the recovery period. The convenience aspect should also not be overlooked, as many dollar stores are very local, especially in rural areas. However, the spoils will not be equally shared. Dollar General did far better during the pandemic because of its food and consumables offer. Dollar Tree did far less well as it sells more discretionary products that consumers can easily trim their spending on.
The math is simple: 40 million people out of work + one pandemic = dollar store growth. Dollar stores will continue to flourish for the foreseeable future, and if their supply chains can outperform bigger box competitors they will have a legit chance to grab even more share.
It all depends on what happens in the months ahead — something none of us know. If the economy continues to crater and unemployment remains high, the answer is yes. If there is a “recovery surge” with all the pent-up demand Trumpian economists predict, may not so much. If there is a second peak to this wave of the pandemic or a second wave of pandemic in the fall that creates additional lockdowns they will do well. As to the second question: curate inventory, lower prices, improve access.
Dollar stores will do well as people struggle with their finances due to COVID-19 and some because of the riots. The new items for sale will also attract new customers. Competing formats might compete by having sales on items similar to ones sold at dollar stores and attracting the value shopper.
During difficult economic times, consumers look to maximize the value for their dollar – exactly the formula dollar stores deliver. Until we reach the other side of the pandemic crisis, many consumers will look for social distancing when they shop. An easy in and out access to the store, close to home locations, and smaller store footprints are all conducive to these needs. So long as people are insecure about their financial position both dollar store chains will be in a good position for growth. The key for these stores will be to maintain stocked shelves and prevent any perception that they cannot deliver the products consumers want.
Value retailing in the food space, in general, will do well, short term and perhaps into the longer term depending on how things unfold. This will include dollar stores but also retailers like Aldi who have a strong value for money spent offering an improved quality over the last major recession, in addition to continued growth and remodels. Dollar stores that have a reasonable breadth of products and can keep the essentials in stock should do well.
Value was in vogue even before the pandemic. In 2019’s boom times, the dollar channel expanded while mid-market chains went bankrupt. Now COVID-19 is making economic disparity irrefutable, to dollar stores’ advantage.
Research shows dollar stores’ appeal extends across age groups and income levels. Between 2011 and 2019, the number of U.S. dollar stores rose by 50 percent, as chains like Dollar General, Dollar Tree and Family Dollar dominate rural areas and lower-income cities.
Dollar chains’ strengths are affordability, variety and groceries, including fresh produce. Dollar General even invested in a BOPIS strategy, which will pay off in a pandemic as consumers seek the convenience and minimum time in stores. That’s why Walmart and discounters like Aldi should view dollar chains as credible threats.
Dollar stores and off-price retailers were already emerging as “winners” before the COVID-19 pandemic hit. Unfortunately, the great acceleration and economic disruption caused by the pandemic will only drive more business to the dollar stores out of necessity. With so many people’s lives disrupted, global uncertainties, and unemployment levels at all-time highs, we should expect to see the continued proliferation of the discount retail space.
Just as on the other end of the spectrum, luxury retail will rebound quickly as their core customers are not so susceptible to economic disruption, the dollar store sector business model is recession-proof.
if a new retail category leader emerges stronger post-pandemic, then other smart retailers will add or augment those categories in their stores to take share. It’s not rocket science.
Dollar stores are going into places where the customer has no choice but to shop there – food deserts in urban cities and rural towns where Walmart won’t even go. When you are the only game in town, you are going to win no matter what.
Let’s not try to read into the current success of dollar stores as something terribly strategic. As Jame Carville said, “Its the economy stupid.”
Dollar stores will hold or grow market share if the economy rebounds slowly and they will lose share if and as the economy improves.
Although dollar stores will continue to do well, the opportunities to gain market share will be on hold for a while. The dollar store is not focused on opportunities like apparel or other non-essentials, the places where the greatest market share can be gained. They will still compete with strong players like Target and Walmart and grocers, and the downward trend in employment and similar may be offset by stimulus and some recovery. They still might come out as the big winners in growth and sales, but not at the expense of some of the other winners in terms of market share.
For question two, there’s not much to take advantage of. Chains with other store formats would be hard pressed to make the same changes from a format perspective and the underlying growth for dollar stores is still heavily tied to price. Going low cost will be difficult for those not already there.
I’m not sure “learn” is really the right term. Sure, small size and minimal service — not to mention a spartan appearance that discourages any thought of lingering — help for “social distancing,” and low prices will be helpful if the country sinks into a depression.
But the conditions that make this lesson helpful: I’m not going to invite doom by assuming they’ll be around too long. So — with no ill-feeling intended — let’s all hope their boom is short-lived.
A recession, the pandemic and widespread unemployment make for a perfect storm for the success of dollar stores. It’s that simple.
Dollar stores are easily one of the best positioned for the crisis. In a market downturn, consumer behaviors shift: more begin to “act” like price sensitive shoppers, which leads to a heavy trade down within the portfolio as the market bottoms out; afterward, customers are slow to adapt to the market recovery, and some never leave behind the price sensitive attitudes they picked up. During all three phases, here’s how others can compete with the dollar store format:
Market downturn – Adapt to shifting preferences with customer segmentation, assortment mix, and pricing optimization that takes into account the price sensitive segment.
Market bottom – Accelerate execution toward low prices with on-shelf availability of cheaper items and promotional strategies that resonate.
Market recovery – Recraft your value proposition to the new normal with a redefined brand strategy and portfolio architecture.
Dollar stores are popular to all income levels, some as a fun novelty shopping experience and others as a destination for their essentials. As overwhelming amounts of people lose their jobs, we should all learn from this format. Value is important. It’s not just that it’s inexpensive, we also see the cost savings and it makes us buy. How can you show value in your brand every day? How can you make your offering so compelling that your customers can’t say no? That’s the key to tapping into the current environment and beyond.
Dave Bruno said it all above! Bad times, little money, a great answer and helper for the regular customer.
I actually was wondering the other day about Dollar General’s ongoing expansion. I am glad they are doing well and they are helping people out in these bad times, but could they actually be heading to an over-stored position? I do not know — maybe where they are opening doors there is not another door close by. I hope so.
(Going from my Church to my home, I pass 4 Dollar Generals, one Dollar Tree, 1 Family Dollar!)