The American dollar store has fallen on hard times

Ruth Colvin-Graves, 76, of Columbus, Ohio, used to make Family Dollar her go-to destination for snacks, paper towels, and cleaning products. 

“These were all things that I wouldn’t have to choose between feeding me and my son or keeping a roof over our heads,” Graves said.

Like many customers, the discounts and convenience enticed her. 

But now, she says, she stays away from all dollar stores.

“They lost their focus on who exactly their customer base was,” Colvin-Graves said. 

She says prices have increased, expired goods are on shelves, there are chronic staff shortages, and an unpleasant shopping experience.

“On any given day, you had to maneuver around boxes in aisles, and items were not placed where they should be,” Colvin-Graves says.

She isn’t alone in her shift in attitude about dollar stores. 

Ellen Forroux of Medford, Oregon, finds herself running into Walmart, which is sprawling in size and less conveniently located, instead of the smaller format neighborhood dollar stores she used to frequent. Forroux is disabled and lives off her Social Security income, so stretching dollars and avoiding big box stores is important to her.

“I really depend on Dollar Tree,” Forroux says. And dollar stores like Dollar Tree depend on customers like Forroux.

However, Family Dollar recently announced that it shuttered 1,000 stores, and the Los Angeles-based 99-cent Only chain filed for bankruptcy — though there is an investor-led attempt to save the store brand underway. These events point to problems in the sector that have been turning off customers like Graves and Forroux. Even Dollar General is not immune to problems. It’s growing sales, but slower than previous projections, and over the past year, its shares are down over 30%.

What’s causing store closures

A convergence of competition and customer factors are causing turbulence in the sector, according to William & Mary business professor John Strong, who studies dollar stores. 

The 99 Cents Only chain, with 371 stores primarily in the West, needed — but lacked — the scale and capability to counter far larger rival Dollar General, which began rapidly expanding into its core market. Meanwhile, the Family Dollar closures represent the continuing fallout from Dollar Tree’s purchase of the discount chain a decade ago.

Strong said that Dollar Tree and Family Dollar are two very different stores with vastly different customer bases, and trying to merge them has proven challenging.

“Dollar General and Family Dollar are neighborhood consumable stores, while Dollar Tree is a modern version of the old-fashioned variety stores,” Strong said.

Dollar General and Family Dollar have an 80 percent consumable merchandise mix: food, cleaning supplies, and healthcare. Dollar Tree sells more seasonal and impulse buys in more affluent suburban strip malls: wrapping paper, gift items, and toys. While Dollar General caters to a primarily rural clientele, Family Dollar stores are generally in urban areas.

Family Dollar, Strong said, has never been able to gain the following of its larger rival.

“Family Dollar was never as good a business as Dollar General,” Strong said, citing revenue numbers.

Family Dollar is roughly $15 billion in annual revenue, while Dollar General is $39 billion. Dollar General generates $275 per square foot compared to $225 at Family Dollar. Dollar Tree — which itself does close to $17 billion in revenue — has invested hundreds of millions in Family Dollar since purchasing it, trying to counter the effects of its worse locations and more unkempt stores, but it has not been enough.

“Family Dollar has always been the weak child of the sector,” Strong said, and closing stores is an attempt by Dollar Tree to strengthen it. While 1,000 stores are shuttering, Dollar Tree is also opening 219 new stores this year, a blend of Dollar Tree and Family Dollar, so there is still at least some room for growth, he added.

The weakness, however, is being increasingly exploited by competitors, adding that a reinvigorated Walmart has been closing the vise on dollar stores with its supermarket growth. Aldi has also become a serious player in small towns, and the value retailing space in general is much more competitive now than it was a decade ago.

Strong says that Dollar General has been conducting many experiments and trials. There are larger-format Dollar General stores, food-focus stores branded as Dollar General Market, and a Popshelf, a new concept store focusing on items that rival Dollar Tree is better known for (think wrapping paper and party favors). Some stores even sell gas.

“There are a lot of trials going on; the gasoline story is an effort to see whether you can take traffic away from supermarkets,” Strong said.

While inflation has sent more American consumers in search of off-brand and lower-cost staples, a trend that the dollar stores should benefit from, the sector has been hammered by inflation’s bite into profits, forcing stores to raise prices. In recent years, supply chain snarls also kept shelves bare and a tight labor market has made employees a rare sight in many stores.

Dollar Tree and Dollar General did not respond to requests for comment.

Low prices, high stress

Angela Rogers of tiny West Alexandria, Ohio, started as a shift leader and became assistant manager at a Dollar General nearby. She says the employees enjoyed their customers, who were lured in by lower prices, but she says the low prices came at a price.

“It was impossible to get tasks done; there was never enough time to do them,” said Rogers, between stocking shelves, directing customers who needed to use the restroom, and ringing up the register, all with a high turnover staff.   

Rogers thinks Dollar General should open fewer new stores and instead focus on existing stores.

“They should have stopped at around 17,000 stores and invested in what they already had, reinvested in employees with retention bonuses and more hours, cleaned up stores, and made them presentable,” Rogers said.

Dollar General has 20,000-plus stores and plans to open 800 more this year as competitors stumble. But that’s a less aggressive expansion plan than it had contemplated, Strong said, noting that Dollar General had envisioned 1,500 new stores a year before inflationary economic headwinds slowed the pace.

Michael Della Penna, chief strategy officer of New York City-based InMarket, which studies consumer buying habits, says that Rogers has a point. “Dollar stores have to figure out how to improve the customer experience. Understanding your customers’ needs and how to service those needs is marketing 101,” Della Penna said.

Dollar General is trying to mimic Walmart in places by adding gas pumps, and Walmart is trying to copy Dollar General’s success by trying smaller-format stores. Eventually, it may be difficult to differentiate the brands, so Della Penna says that one of the few ways left to do that is through investing in creating a better customer experience.

The future of Dollar General vs. Dollar Tree

Strong said the industry’s future will be shaped mainly by economics but partly by personalities.

“Nobody in an industry wants to tell you they are running out of runway, but I think they are running out of runway,” Strong says. “The whole sector got enamored of growth and lost focus on operation,” he said.

“There used to be this idea that there could be 50,000 Dollar General stores, no one thinks that anymore. 30,000 is more realistic,” Strong said. “There are too many dollar stores.” 

Dollar General has recognized that the new stores they are opening to do not have the attractive economics they had in the past, according to Strong, forcing the brand to get back to basics. He says to expect more store brands to appear in Dollar General to help keep down the costs, while still having a handful of name brands, like Coke and Bounty paper towels, to bring customers in the door.

“I expect the percentage of private label companies to grow from 40 percent to 70 percent, and they’ll use known brands in a targeted way,” he said.

And look for personalities to come into play.

The new head of Dollar Tree, Rick Dreiling, is the former CEO of Dollar General. Another former head of Dollar General, Todd Vasos, has come out of retirement to helm the company again.

Strong expects Dreiling to implement some ideas from his days at Dollar General at Dollar Tree.

“There’s now a personal dimension to the competition,” he said.

But consumers like Forroux want the products and their value to return, like the denture tablets she needs.

“I finally brought up the issue in February as I was checking out at Dollar Tree. When I asked about the lack of denture tablets, the cashier dropped her voice and added that she noticed that toothpaste also wasn’t on the shelves, but didn’t offer too much else.”