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Dollar stores adapt to an improving economy

Dollar Tree

Dollar Tree announced it will buy Family Dollar Stores for about $8.5 billion in cash and stock.

There's really only one reason consumers shop at the dollar store. 

Joe Feldman,  Senior Managing Director and Assistant Director of research with Telsey Advisory group, says Family Dollar played around with its raison d'etre more than was wise: “One would think that a dollar store would be at an everyday low price." But, Feldman notes, its name notwithstanding, Family Dollar has been embracing a multipricing strategy - which wasn't a hit with consumers. 

“Maybe they’re not shopping at Family Dollar, they may be shopping at Dollar General,” he says, referring to one of the store's competitors.

The entire dollar store industry has slowed down this year. One reason  middle and upper middle class consumers can now afford to shop somewhere else.

Robert Campagnino, head of consumer research at SSR, says dollar stores have started selling higher-margin discretionary items which can prove to be problematic.  If there is a recovery, says Campagnino,  lower income consumers are not feeling it.

“So what’s happened when their consumer has been under pressure is that higher margin category has been where the sales weakness has been,” he says.

Even some staples are a hard sell. Like food, which Sandeep Dahiya, a professor of finance at Georgetown University’s McDonough School of Business, says dollar stores have been increasingly getting into.

“The operations involved in selling something that has low shelf life is very different than selling soap. Soap doesn’t go bad... If that three pound chuck doesn’t get sold today tomorrow it will be thrown out,” he says.

Family Dollar says its sale means a good deal for shareholders, employees and shoppers. Joe Feldman says Dollar Stores, all of them, need to continue to make sure they have the right price.

About the author

Sally Herships is a regular contributor to Marketplace.

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