5 Ways Dollar Stores Make Money & Beat the Competition

Photo of a Dollar General Store
 

By Tricia McKinnon

Amidst a shakeup in the retail sector over the past decade dollar stores have been particularly resilient. There are now more dollar stores in the United States than McDonald’s and Starbucks locations combined. 2022 marked Dollar General’s 33rd consecutive year of same store sales growth, a record even Walmart would be envious of. In 2022 Dollar General’s sales were up 10.6%.

Add to that, Dollar General plans to open 1,050 stores in 2023. And it’s not just Dollar General that is opening a large number of stores. Dollar Tree which is planning to open as many as 650 stores this year. If you want to know how dollar stores continue to defy the odds and make money even in turbulent times consider these five key factors.

1. Location, location, location. Dollar stores typically locate their stores in lower income areas and rural towns. Many of these stores are situated within communities with a population of less than 20,000 people. Dollar stores also focus on areas with limited competition to increase their chances of success. For example, Dollar General tries to locate stores in areas that do not have a large retailer or grocery store within 15 to 20 miles. 

The areas where dollar stores have flourished are often known as “food deserts”, markets where consumers are many miles away from a grocery store or a big box chain such as Walmart but they still need a place to buy household items and food at affordable prices. Over time this strategy has allowed dollar stores to gain a larger share within the grocery industry. By 2018 sales of groceries at Dollar Tree and Dollar General combined were approximately $24 billion nearly eclipsing Whole Food’s sales of $15 billion. 

Locating dollar stores in food desserts is a strategy that is not without controversy. Speaking about this Lorraine Cochran-Johnson, county commissioner for Dekalb County, Georgia said: "when you look at the trends and you look at the pattern of growth of the dollar store as well as the areas that have the highest levels of obesity, hypertension, high blood pressure, there is a direct correlation. We see that in the data."

2. Creative Pricing. Do dollar stores use savvy pricing tactics or do they mislead consumers? The truth is that not all items sold in dollar stores are the cheapest. Many products sold at dollar stores have a low price but are contained in non-standard packaging. This can make it seem as if you are getting a deal when the unit price is actually higher than similar products sold at other retailers.   

Many “dollar” stores also carry items that cost well above one dollar. Dollar General has merchandise that can cost as much as $20. This type of marketing that focuses on the word “dollar” plays right into the hands of consumers with tight budgets who are looking to save as much as possible. No doubt, the everything is a dollar image is an effective way to get shoppers in the door and then customers are left wondering how they ended up spending $50.

Dollar stores sell products in small packages because it encourages customers to make more frequent visits. During these trips customers often make impulse purchases generating even more revenue for these stores. 

One of the ways dollar stores are able to sell products in non-standard sizes and at lower prices is by having private label branded products. They are also able to offer low prices by purchasing overstock and off-brand merchandise from other retailers.

3. Avoiding eCommerce. As much as we love eCommerce it is an expensive service for retailers to offer. When you shift activities consumers used to complete on their own to a retailer, someone has to pay for it. Think about the last time you made a purchase online, say for groceries from Walmart. Walmart picked, packed and delivered that order to you. Even if you paid a delivery fee it is often not enough to cover those expenses. A study by the Capgemini Institute found that on average retailers charge their customers just 80% of the cost of delivering goods..

eCommerce works better for retailers when there is enough margin in the order to cover logistics costs. For dollar stores that extra margin simply does not exist as these retailers are already operating on thin margins. Even retailers like Trader Joe’s that sell merchandise at higher prices than dollar stores avoided offering eCommerce during the COVID-19 pandemic. 

On Trader Joe’s podcast, Inside at Trader Joe’s, Matt Sloan, vice president of marketing said: “creating an online shopping system for curbside pickup or the infrastructure for delivery, it’s a massive undertaking. It’s something that takes months or years to plan, build and implement and it requires tremendous resources. Well, at Trader Joe’s, the reality is that over the last couple of decades we’ve invested those resources in our people rather than build an infrastructure that eliminates the need for people.” Dollar General and Dollar Tree both have a relatively modest eCommerce offering preferring to have its customers shop at their stores.

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4. Investment in private label brands. Successful retailers have long known about the power of a strong private label brand. Having a great private label brand gives customers a reason for choosing one retailer over another. If you love Costco’s private label brand Kirkland Signature you can only shop at Costco to get it.  

Once the economy started to recover after the 2008 – 2009 recession Target’s customers felt that the retailer lost its cheap chic edge. In 2017 Brian Cornell, Target’s CEO announced an ambitious turnaround plan for the company. Introducing new private label brands is a key part of that strategy. 

Since then Target has introduced  more than 20 new private label brands. Cat & Jack, a private branded kids clothing line quickly became a hit generating $2 billion in sales for Target within only one year after launch. “We know our guests have many choices for where to shop. We also know some of the things guests love most about Target are the same things that differentiate us in a crowded and dynamic retail environment,” said Cornell.

Not only do private brands help to differentiate a retailer they also help retailers to control margins ultimately making it easier to offer low prices while keeping more profits for themselves. Dollar General’s most successful private brand, Clover Valley, generated more than $1 billion in sales in 2019.

5. No Frills. There’s a grocery chain in Canada that is actually called No Frills. What’s the experience like to shop there? You guessed it, it’s No Frills. Customers pay to use a shopping cart. They also have to pay for shopping bags and the décor leaves much to be desired. At discount retailer Aldi neither grocery carts or shopping bags are free. At first glance it seems counterintuitive to provide a no frills shopping experience. Don’t consumers want the bells and whistles? Isn’t a sleek customer experience the way to go? But time and time again these types of stores perform better than what their décor would indicate.

Dollar stores and stores like Aldi save money on merchandising costs. They swap out fancy displays for bins and often leave merchandise in the very same cardboard boxes used to deliver goods to their stores. Instead, customers have to hunt a little bit more to find what they are looking for. But customers clearly don’t mind if they are saving money. These stores also save on store labour that is used when employees have to constantly chase down shopping carts that consumers often leave in random places. If you put a quarter in a shopping cart then you are going return it to get your money back.

Staffing is also kept to a minimum to keep costs down. Often there are only two or three employees on staff in a dollar store. Since these stores are often small they can manage with a smaller staff complement. Dollar Tree stores come in at 8,000 sq. ft. to 12,000 sq. ft. “Dollar stores are able to profit on slim margins, in part because operating costs are kept low by employing only a handful of people to stock aisles, and by limiting the amount of cold chain storage in their stores (which is necessary for fresh foods like produce),” says Darya Minovi, a policy associate at the Center for Science in the Public Interest. 

Tricia McKinnonStrategy & GrowthComment