Dollar stores were the stars of the recession – and recovery. During the depths of the financial crisis, customers flocked to these super-discount retailers, as they “traded down” from even cheaper outlets like Wal-Mart in order to save some sparse cash. When the economy bounced back, analysts worried that more confident consumers would “trade up” again, leaving dollar store earnings behind.
However, the dollar stores held on to many of their high-income consumers. The three most prominent dollar chains – Dollar Tree, Dollar General, and Family Dollar – all organized and modernized their stores. The dollar store stigma – you shop where? – began to fade. It turned out that these were decent places to shop, and paying a buck for a box of cereal can get addicting.
(PHOTO: Stores That Are No More)
Now, however, these dollar stores are starting to slow down, for pretty alarming economic reasons. The three outlets all just missed their earnings targets. As the Wall Street Journal reported on Monday:
All three retailers cited transportation costs due to rising diesel-fuel prices as a major reason for their earnings shortfalls. But the chains also said their price-sensitive customers, pummeled by high unemployment, stagnant wages and soaring gasoline prices, are buying more food and other basics like cleaning products, which have relatively low profit margins, and fewer higher-margin discretionary products, such as apparel and home decorative items.
Shoppers have become less likely to splurge, for example, even on a $5 die-cast Transformer toy or 2-for-1 children’s bathing suits at $7.
“This is a sector that was in nirvana during the recession, as customers traded down,” said Adrianne Shapira, a retail analyst at Goldman Sachs. “But now their shoppers have a bunker mentality. With all this mounting inflation crowding out discretionary purchases, it’s painful.”
Consumers are again buying what they need, but not necessarily what they want. And with food inflation cutting into margins – if you sell everything for a buck, like Dollar Tree, it’s hard to pass those costs onto consumer – the dollar stores are experiencing a slowdown. But if consumers aren’t even buying the cheap clothes and toys, that’s not a good sign for higher cost apparel and toy outlets, like Target and Toys R’ Us.
And as usual, this news once again speaks to the cruelty of macroeconomics. What’s good for the individual consumer – frugal spending on the necessities, even passing on that cheap, crappy toy – is not necessarily good for the rest of us. For unemployment to trickle down, we need more spending. These days, you’re not finding it in droves at the dollar stores.