The dollar stores’ struggles are one more show then of the widening inequalities that the pandemic has wrought. (Source: Bloomberg)
There’s an adage in retail that dollar stores do well in economic downturns. Not this downturn.
A line of retail executives from Home Depot Inc to Target Corp and Costco Wholesale Corp have recently intoned on the reluctant shopper. Consumerconfidence is at its lowest in six months and about half of Americans say
they are switching to cheaper brands to save money. Dollar Tree Inc, Dollar General Corp and Five Below Inc, which generally serve low-income households, should thrive in this environment where they can keep their core shoppers and pick up new customers seeking bargains. Instead, the dollar stores cut their earnings outlooks, anticipating a challenging year. If dollar stores are a barometer for recession, the economy seems far from one. That is, unless you’re poor.
Historically, dollar stores do well when the economy doesn’t. Dollar Tree’s stock price soared during the financial crisis. As the unemployment ratepeaked near 10 percent in 2009, its same-store sales rose more than 7 percent. The Great Recession meant penny-pinching customers traded down to stretch their wallets.
But this time around confidence has been punctured by inflation, not lost jobs. Economists forecast data on Tuesday to show core consumer prices rose 5.2 percent in May from a year earlier, more than twice the Federal Reserve’s 2 percent target. Food inflation on a two-year basis is over 20 percent, Walmart Inc’s Chief Financial Officer John David Rainey said last month. That’s concentrated the economic pain coming out of the pandemic among low-income households, where wage gains haven’t kept pace. Dollar General CEO Jeff Owen said this month that such shoppers are relying more on food banks, savings and credit cards. They are expected to remain under pressure for the “foreseeable future.”
While the dollar stores have been expanding into groceries, helping bring in shoppers focused on the essentials, the shift away from higher-margin goods such as toys and party decorations is eroding margins. For Dollar General, a large footprint in the South and in towns with less than 20,000 people puts it at an additional disadvantage. More than half of those living in persistent poverty are in the South, according to the Census Bureau, and wealth tends to be concentrated in the types of large cities Dollar General avoids. The company has also stumbled with inventory and supply chain management.
So what about the boost from consumers trading down to stretch their budgets? Higher-income shoppers aren’t immune to inflation, but they have bigger buffers. These households hold the majority of excess savings built during the pandemic, which now amount to about $500 billion. With the labor market surprisingly robust, that money is being spent on travel and dining out, keeping inflation stubbornly high. Unlike during past downturns, Dollar General and Five Below say they aren’t seeing too many trade-down shoppers. Although Dollar Tree has seen more of these in the $80,000 income range, they’re mostly coming in for lower-margin consumables. Such shoppers also have the option of buying cheaper store brands at the likes of Walmart and Target to stretch their budgets.
Investors have taken note. Dollar General’s shares are down 38 percent so far this year; while Dollar Tree has lost nearly 6 percent. Five Below has advanced about 5 percent, though it’s off its 2023 highs. If you throw in the performance of off-price chains TJX Cos Inc and Ross Stores Inc, you see the trade-down group splitting off from an equal-weighted S&P 500 Index as economists grow less pessimistic about the economy’s near-term prospects.
The dollar stores’ struggles are one more show then of the widening inequalities that the pandemic has wrought. Sure, that may mean the economy escapes a recession off the back of the resilient middle- and upper-income consumer. In that sense, it’s a positive. But, it also tells us that many millions of Americans are at a breaking point — and that should worry us all.
Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg