In April, the discount chain 99 Cents Only announced it will close all 371 of its locations and liquidate its merchandise. These closures are just one example of how many discount retailers have been struggling to profit amid a fiercely competitive retail landscape and rising inflation.
The first 99 Cents Only store opened in 1982 in California. It changed the image of dollar stores from junk shops to places where shoppers could find low-cost but “name-brand” consumable and general merchandise. At its 1982 opening, hundreds of shoppers lined up as the store sold TVs for just 99 cents to the first nine customers – a brilliant marketing tactic.
But dollar stores operate on notoriously thin margins. This has put pressure on them in recent years, with a shifting economy and global forces at play. Dollar Tree, which has more than 16,000 locations, will be closing 600 of its stores under the Family Dollar banner, and plans to shut another 370 Family Dollar and 30 Dollar Tree stores in the next few years.
Dollar Tree is also raising prices. After rolling its $1.25 prices back down to $1 last year, it announced that it will be adding more above-one-dollar products to its inventory lineup this year (some of which could cost as much as $7).
What is causing these retailers that serve an incredibly important purpose to struggle? Here are four factors behind dollar store difficulties:
- The COVID-19 Pandemic
The interim CEO of 99 Cents Only, Mike Simoncic, cited the “unprecedented impact of the COVID-19 pandemic” as a factor in its decision to close its stores.
The COVID shutdowns forced many retailers to take on more debt to survive the drop in their revenues, and many still struggle with their debt load. In addition, supply chain problems during the pandemic hit smaller retailers particularly hard, as costs skyrocketed and inventory was delayed. They couldn’t keep up with companies like Costco, which were able to charter their own ships to help keep costs predictable.
- Inflation
Costs for goods have increased considerably over the past few years. In turn, this has made keeping prices affordable more difficult for retailers of all sizes, but especially for dollar stores.
As prices rise, lower-income shoppers also change their buying habits. As Consumer Affairs notes, “Many consumers are passing up things like balloons, greeting cards and craft supplies because they need money for the essentials.” Dollar stores usually offer these non-essential products at more affordable prices than standard retailers, so they have a high level of inventory as their consumer base changes their buying habits. And as discount retailers continue to struggle in earnings reports, investors are beginning to turn away from them.
- Overseas Competition
While dollar stores have long faced local competition from brick-and-mortar stores like Walmart, the Chinese e-commerce platform Temu is now a major competitor, and their prices often beat dollar stores’ prices. While consumers have concerns about Temu’s quality, the labor conditions of their workers, and long delivery times, many feel the low prices are worth the tradeoff.
- Theft
Discount stores have been facing increasing theft. The problem is particularly pronounced at Family Dollar stores, executives said during a March earnings call. Theft is a major factor in what is known as “retail shrink”, which also includes damaged inventory and products that expire.
An Outlier: How Dollar General is Growing
Yet dollar stores actually made up more than a quarter of the U.S.’s total store openings in 2023 – mostly because of Dollar General.
Amid its competitors’ closures and price increases, Dollar General plans to expand in 2024. The brand, which is the largest discount store with 20,000 locations, plans to open 800 stores and remodel 1,500 locations this year. The chain also expects 2024 sales to increase between 6.0% and 6.7%.
Why is Dollar General faring so much better? First, according to The Wall Street Journal, “the dollar-store showdown comes down to real estate.” Dollar General stores are located predominantly in rural areas, where consumers have fewer options. Rival discount stores are more concentrated in urban and suburban areas.
Second, Dollar General has made an aggressive effort to add more frozen, refrigerated and fresh produce to their stores. This has kept customers coming back even when their budgets tightened.
Still, despite these successes, consumer struggles have negatively impacted their sales. The chain’s executives said in March that they expect margins to come under pressure as shoppers spend their money on essential items instead of more-profitable items like clothes and decor.
Americans continue to name inflation as their top financial problem, according to May 2024 data. Some believe inflation may fall this year, which would allow consumers’ spending power to grow. But lower-income households, who are most impacted by inflation, will be the last to see an increase in spending power. This would place continued stress on discount retailers. Policymakers must consider the impact across the retail sector as they make decisions that will keep finances tight for low-income Americans.