Dollar Tree’s Strategy, 3 Actions its Taking to Stay on Top
Are you making more trips to your local dollar store? If you are you are not alone. Dollar stores continue to be one of the fastest growing segments in retail. With low prices dollar stores are even bringing in higher income consumers. By the end of the third quarter of 2023 Dollar Tree acquired 4.3 million customers over a 12 month period while Family Dollar acquired 2.3 million new customers in the same time period. Most of those newly acquired customers are from higher income families which have household incomes of over $125,000. If you are curious about the moves Dollar Tree is making to lure customers in then consider these three elements of its strategy.
1. Pricing. By now we know that everything in a dollar store doesn’t sell for a dollar. But Dollar Tree held on to selling most things for a dollar for 35 years. But at the end of 2021 in the face of rising inflation Dollar Tree decided to increase its average price point to $1.25. Raising prices not only allowed Dollar Tree to manage rising costs but it also allowed Dollar Tree to sell a broader range of merchandise, luring in new customers. “Our consumable sales continued to decline quarter after quarter because of the product availability and the assortment we just couldn’t provide for the customer at that $1 price,” said Mike Wytinski, Dollar Tree’s former CEO.
Speaking about the price increase Wytinski said this after it was implemented: “the Dollar Tree banner delivered its strongest quarter in company history. Among the highlights, an 11.2% comp, the best quarterly comp performance in more than 20 years, which is including our largest sales day ever, which was the Saturday before Easter. A 40.6% gross profit margin, nearly 700 basis points above the prior-year's quarter and a company record 20.2% operating margin, more than 800 basis points over Q1 of last year.”
Dollar Tree also added its range of $3 to $5 products, known as Dollar Plus, to 30% of Dollar Tree locations in 2022. While Dollar Tree makes adjustments to its pricing matrix it still has to contend with Dollar General, the largest dollar store in the United States. While Dollar Tree has increased its average price Dollar General is trying to position itself as a way for customers to trade down, by emphasizing merchandise it sells for $1 even though the majority of its items sells at higher price points. “One of the things we’re very, very pleased with is the fact that we are still leaning hard into our dollar price point. And we’re there for that customer….that is resonating extremely well with her,” said Dollar General’s former CEO Jeff Owen.
While Dollar Tree raised prices at its namesake brand it reduced prices by an estimated 5% in 2022 at its Family Dollar chain. In the past the merchandise at Family Dollar could be 10% to 15% higher than at Dollar General. Dollar Tree bought Family Dollar in 2014 for close to $9 billion but it has struggled to turn the chain around. In the third quarter of 2023 Dollar Tree announced it is conducting a comprehensive review of Family Dollar stores that are not performing well and is planning to close underperforming stores.
2. Store expansion and renovation. By the third quarter of last year Dollar Tree opened 187 stores and 235 Family Dollar stores for a total of 422 stores. That makes Dollar Tree one of the chains with the highest number of new store openings in the United States in 2023.
Dollar Tree ended 2022 with over 800 Combo Stores. "At Family Dollar, our Combo Stores are working. Customers love shopping the best of Family Dollar and Dollar Tree in one easy-to-shop local store in their community. The stores are driving a material comp sales lift, increased productivity, higher gross margins and improved operating performance," said former Dollar Tree CEO Mike Witynski. Dollar Tree also planned to renovate 1,000 stores last year.
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3. Assortment. More and more consumers are turning to dollar stores to purchase groceries. When it comes to food purchases dollar stores represent the fastest growing retail channel in the United States with purchases of food in that channel growing 89.7% between 2008 and 2020.
But critics are unhappy with consumers buying more groceries at dollar stores since dollar stores tend to “offer foods that are mostly packaged, shelf-stable, higher in calories, and lower in nutrients.” “On the one hand, dollar stores may challenge and force out local grocers through competitive pricing, leaving consumers with limited, less-healthy food options,” said Wenhui Feng, Tufts’ Health Plan Professor of Health Care Policy. “On the other hand, in some places, local grocers may not have enough business to support maintaining a store, or that grocery stores’ consolidation may leave residents with less food options. In these cases, dollar stores may be the only option in terms of food access.”
With the tide shifting Dollar Tree is looking to capitalize on consumers without large budgets by adding more groceries to its stores. “We are developing our frozen assortment to meet our shoppers' family needs as they are looking to save money by dining at home. We are aggressively expanding our offerings of protein, pizza, breakfast items, and family sizes at price points that meet their budgets,” said Wytinski.