To The Moon

$Dollar Tree(DLTR)$ $Dollar General(DG)$

Today we cover the Dollar company, there are now over 36,000 dollar stores across the U.S.—more than one for every 10,000 people. These retailers have long been favorites on Wall Street, with Dollar General and Dollar Tree standing out as top performers during the Great Recession of 2009 and 2010. Between 2008 and 2022, the stock prices for both Dollar Tree and Dollar General surged over 1,500%, significantly outpacing the S&P 500.

However, in the past two years, both companies’ stocks have sharply declined, and the near-term outlook remains uncertain. After decades of strong growth, the number of stores has increased by about 50% in just the last decade, creating several new challenges. Both Dollar General and Dollar Tree recently cut their guidance, raising concerns among investors.

So, what’s behind the recent struggles of dollar stores, and what steps do these companies need to take to get back on track?

Inflationary pressure

Dollar General, Dollar Tree, and Family Dollar are the three largest players in the dollar store market, with Dollar Tree owning both Family Dollar and its flagship brand. Together, in fiscal 2023, Dollar General and Dollar Tree generated nearly $70 billion in revenue. Although all three brands have thousands of locations nationwide, they target different regions and customer demographics.

Dollar Tree, which sells mainly seasonal and discretionary items like wrapping paper and toys, is typically found in suburban strip malls. Family Dollar, acquired by Dollar Tree for $9 billion in 2015, is located primarily in urban areas, while Dollar General focuses on serving rural communities.

Dollar stores originated in rural America and in suburban areas lacking major value retailers. Their key mission is to offer budget-friendly options that fit within limited budgets rather than necessarily providing the best value per unit. For example, while a box of 15 dryer sheets at a dollar store costs $1.25, a larger pack of 240 dryer sheets at Target for $10 may offer a better deal per sheet. However, for shoppers with a limited budget, the smaller pack can make more sense.

From 2019 to 2023, Dollar Tree's and Dollar General's sales grew by about 30% and 40%, respectively, with the addition of more than 5,000 new stores. Although new locations boost overall revenue, they can mask slower sales growth at existing stores. While both companies report increasing revenues and claim to be gaining market share, on a per-store basis, there are signs that they may be losing some traction.

High inflation has had an outsized impact on lower-income consumers, who make up a significant portion of Dollar General’s customer base—households earning under $35,000 annually account for around 60% of its sales. While the overall job market remains strong, providing stability for middle- and upper-income shoppers, low-income customers are becoming more selective, focusing on essential items like food, which yield lower profit margins. Food and household items are increasingly critical to dollar store shoppers; for instance, Dollar General reported a 13% decrease in non-consumable inventory in its second-quarter 2024 earnings.

Rising inflation has also affected Dollar Tree’s traditional strategy of a $1 price point, which changed in 2021 to $1.25. While this shift may seem minor, it affects the simplicity and appeal of the shopping experience, as customers can no longer expect their basket total to be a straightforward multiple of $1, impacting the “magic” of the store.

Operational challenges

The recent financial challenges facing dollar stores reflect the pressures of inflation and changing consumer habits.

Dollar General, Dollar Tree, and Family Dollar stores are becoming less appealing to shop at. While convenience is a big part of their draw, that appeal fades when customers encounter long checkout lines with just one register open or find aisles blocked by boxes, making the experience frustrating. Cluttered stores, frequent out-of-stock items, and overcrowded stockrooms have become noticeable, and customers are increasingly likely to go elsewhere. These operational issues, combined with inventory and staffing challenges, have weakened the dollar store experience and added to the companies’ economic struggles.

During the pandemic, supply chain disruptions affected dollar stores particularly hard, as manufacturers deprioritized smaller, low-cost items typically stocked at these stores. Even well-run stores had reduced product variety, undermining one of the main reasons people visit dollar stores. Meanwhile, staffing shortages have worsened, partly due to dollar stores’ lean labor model, which has long been problematic. The pandemic and government subsidies led many employees to leave, exacerbating these operational issues.

In addition to operational challenges, Dollar Tree and Dollar General have faced numerous safety violations in recent years. Family Dollar, for example, was fined over $41 million for rodent-infested warehouses in early 2024. Since Dollar Tree acquired Family Dollar in 2015, it has struggled to turn the brand around, partly due to Family Dollar’s outdated technology, aging infrastructure, and neglected distribution centers. These longstanding issues have held back Family Dollar’s profitability and growth, leading Dollar Tree to consider selling the chain. Family Dollar has seen a decline in foot traffic from 2019 to 2024, unlike its competitors.

Beyond internal challenges, Walmart’s recent resurgence is also hurting dollar stores. During the Great Recession, dollar stores performed well partly because Walmart struggled with same-store sales, and some customers shifted to dollar stores. But today, Walmart is experiencing strong growth, drawing in both lower-middle-income shoppers and new middle- and upper-income customers. With 90% of Americans living within 10 miles of a Walmart, its recent U.S. sales increase of $4.5 billion in one quarter is significant, nearly half of Dollar General’s total quarterly sales and about 60% of Dollar Tree’s.

Walmart’s investments in e-commerce have been another factor in its recent success. Many major retailers, like Walmart, Home Depot, and Best Buy, fast-tracked e-commerce development during COVID-19, making up years of digital investments in a matter of months. Dollar stores, which require significant resources to expand online operations, have struggled to keep up. Middle- and upper-income customers, increasingly shopping online, are no longer trading down to dollar stores as frequently. Competing discount grocery chains, like the rapidly expanding Aldi, have also intensified competition. With around 1,000 new stores in the U.S. in the past decade, Aldi and other European discount grocers like Lidl have become strong players in markets where dollar stores operate, despite having a lower profile than Walmart or Amazon.

What’s next

Even as inflation levels off, dollar stores are not in a strong position to capitalize. If consumer conditions improve next year with lower interest rates and more disposable income, spending will likely shift toward discretionary goods, where other retailers stand to benefit more due to their merchandise mix. For instance, Dollar General and Family Dollar focus heavily on consumable items, making up about 80% of their inventory, while Dollar Tree carries more discretionary products.

The incoming tariff policies are another challenge, particularly for Dollar Tree, which imports over 40% of its products from China—more than its Family Dollar brand and competitor Dollar General. With Dollar Tree’s $1.25 price model, higher import costs would put further pressure on already slim margins. To boost sales, Dollar Tree is introducing more multi-priced items, potentially raising average transaction amounts. However, this shift also increases competition with mainstream retailers like grocery stores and Walmart that offer similar products.

Additional regulatory changes are set to impact costs. Starting January 1, 2025, the minimum salary threshold for overtime eligibility will increase, which could raise expenses for dollar stores, especially in lower-cost areas where managers often make less than the new threshold of $59,000.

Leadership transitions also add uncertainty. Dollar General’s CEO is serving a second term, while Dollar Tree’s CEO announced his departure in early November 2024. According to a Dollar Tree spokesperson, the company is committed to “providing high-quality, low-priced items” and aims to strengthen its position in workplace and associate safety under new leadership. Dollar General declined to comment.

Dollar stores face a mix of self-imposed and external challenges. Economic pressures disproportionately affect their lower-income shoppers, who feel every economic shift. To regain momentum, dollar stores need a multi-faceted strategy. Addressing store upkeep and management will be essential to rebuilding customer loyalty and drawing shoppers back.