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Will Economic Recovery Put a Crimp in Dollar Store Health?

Will dollar stores continue to thrive now that the economic recovery is underway, or are their best days behind them?

The retail channel, whose brands include Family Dollar, Dollar General and Dollar Tree, got its start decades ago, and rapidly expanded both in small towns lacking the population to support a big Walmart, and in urban areas without the space for a very large discounter or supercenter. Dollar stores really hit their stride during the Great Recession, when their business model, characterized by a multitude of smaller stores right in the neighborhoods where their consumers live, offered an appealing, convenient and fuel-saving option for cash-strapped consumers who tended to shop paycheck-to-paycheck and preferred small transaction-size shopping.

Low-income families flocked to the stores for everything from food to clothing to home furnishings instead of making the 10-mile trek out of town to a Walmart Supercenter. From 2008 t0 2013, total store count for the top three dollar store nameplates skyrocketed from 19,000 stores to around 24,000, and total sales have grown from $24 billion in 2009 to over $35 billion last year.

As the Great Recession quickly disappears into the rear-view mirror, however, many consumers no longer need the rock-bottom prices of dollar stores, and have begun shopping elsewhere, challenging this retail segment to find new ways to grow sales and earnings. Aggregated total sales growth for the three retailers in the most recent fiscal year has dipped to 9 percent from its double-digit high in 2011. Annual same-store sales growth peaked for Dollar Tree, Family Dollar and Dollar General in 2011, at 6 percent, 5.5%, and 6.4%, respectively, but has since declined for all three.

Family Dollar Stores recently announced that profit for the quarter ending March 1 plunged 35 percent. Same-store sales for the period fell by 3.4%. Analysts expect first quarter same-store sales for Dollar General and Dollar Tree to rise by only 2.6% and 2.1%, respectively, much lower than in recent fiscal years.

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Family Dollar plans to close 370 underperforming stores, approximately 5 percent of its locations. This will no doubt have an impact on future sales. The other two have reduced expansion plans, though they still plan to collectively open around 1,400 stores in 2014.

While families making less than $40,000 per year have remained faithful to the bargain shops, higher income groups have already started doing more of their shopping in conventional supermarkets, e-commerce merchants, national chains like Kohl’s, and large discounters like Target and Walmart, where the breadth of selection and in-store experience are superior, and where total and same-store sales have started to rebound.

Consumers, especially those on a tight budget, have always been drawn to dollar stores for their wide variety of ultra-low-cost goods. However, given the highly competitive price environment at retail today, it is difficult to maintain the position of low-cost seller without eventually eating into profits. Net income for the three retailers grew by 17 percent between 2011-2012, but that growth dropped to 5 percent in 2013, and now shows signs of falling even further.

Another blow to the channel occurred earlier this year, when Congress cut $8.6 billion in food stamp benefits, reducing the buying power of some low-income customers which, some analysts feel, have hurt the dollar stores more than other merchants.