Today in Tedium: The dollar store is one of capitalism's greatest gifts to itself, if you think about it. Here's a business model that has, quite brilliantly, taken advantage of the ebbs and flows of supply and demand. It turns products that don't cost a lot to produce into things that actually make money hand over fist, despite the seemingly tight margins. Like companies that turn the liquidation of products into a viable business model and the makers of generic products, dollar stores have their place in the pantheon of retail. Today, we explain how. And don't be fooled by their names: They make way more money than you think. — Ernie @ Tedium
Editor's note: By the way, before I go any further, I just wanted to thank you guys for hopping on board the Tedium train. We just topped the 1,000-subscriber mark! We'll try not to screw things up from here.
The increase in Dollar Tree's stock price during 2015, according to The Motley Fool. The company, which has long been publicly traded, had a solid year in 2015, including the completion of its merger with longtime competitor Family Dollar.
The number of U.S.-based stores owned by the merged Dollar Tree and Family Dollar. That puts the number of their locations above Starbucks, Dunkin' Donuts, 7-Eleven, CVS, and Walgreens. Oh, and their direct competitor, Dollar General. "This is a transformational opportunity for our business to offer broader, more compelling merchandise assortments, with greater values, to a wider array of customers," Dollar Tree CEO Bob Sasser said of the merger. Dollar Tree paid $9 billion for Family Dollar.
The amount in profit that Carl Ichan personally made off of his investment in Family Dollar, after the activist shareholder pushed the company to make a sale. In June 2014, he bought 9.4 percent of the company's shares. By that September, after a sale had been put into play, he sold all of them.
Five strategies dollar stores use to get you to buy more stuff
- Putting the most popular products in the back: If you walk into a CVS or a Walgreen's, the food is usually in the front, with the actual pharmacy located in the back. Family Dollar uses a similar strategy: The company puts food or toys, generally the most popular types of items in a dollar store, in the back of the store. In the front of the store are the impulse buys.
- Consistency of store layout: If you walk into a big-box store like Meijer or Target in one area, odds are that you'll walk into another location elsewhere and find the same kind of layout, consistent to a T. Family Dollar and similar stores follow this strategy as well, which helps to build loyalty, as consumers know what to expect every time they enter a store.
- Market positioning: Different kinds of dollar stores aim their products at different kinds of audiences. Five Below, for example, focuses its products on teenagers and young adults, and as a result sells products such as smartphone cases. This also extends to locations: You're more likely to find a Five Below location in a mall, whereas Dollar General tends to be located in small towns.
- Relying on basic demand: Unlike mattresses, you need to replace cleaning supplies frequently. Paper plates don't last long, and cheap smartphone cases tend to crack and break relatively easily. These are items you won't buy online, generally—unless you're looking for something very specific, like a gallon jug of lavender-scented Dr. Bronner's soap—and it's likely you won't want to pay much for these items. And that's where dollar stores come in handy—you don't have to go all the way to Wal-Mart or Target just to fulfill the demand.
- The perception of a low price. The good news for people who buy items at dollar stores—especially at ones that actually properly stick to the concept, like Dollar Tree and 99 Cents Only—is that you generally know you're getting a low price out of the mix. Problem is, they are pulling a little bit of wool over your eyes, writes U.S. News and World Report's Meg Favreau. First, the sizes of the products tend to be a little smaller, so if you do an ounce-to-ounce comparison with what you get at a grocery store, you might be surprised at how much more you're paying. And there are some items that you might actually be paying more for if you buy them at a dollar store. But because the price tends to be consistent, you embrace that you're getting a deal.
"In many of these communities, dollar stores are often the only store selling essential household goods, including food. These factors place a higher level of responsibility on dollar stores to ensure they are not selling products that contain harmful chemicals."
— A report by the Campaign for Healthier Solutions, discussing the issues that many dollar stores have with harmful chemicals in the products they sell. The report, "A Day Late and a Dollar Short," says that dollar stores fail at their job of protecting the public from potentially dangerous chemicals such as cadmium or PVC. Of the 164 products the group tested, it found that 81 percent of them contained at least one hazardous chemical at levels above what is considered safe. The report adds that such chemicals are often not even necessary for producing the items.
Dollar Stores are Better Than You Remember Them
"Every millionaire in town comes in, too. Good values bring them in. You have to have quality to build a business."
That quote, from the obit of Dollar General founder Cal Turner Sr., attempts to speak against the image of the dollar store as a retail outlet only appealing to those with low incomes. Is he right? There's a reason why Citizen King's "Better Days (And the Bottom Drops Out)" includes the line "I got a good job at the dollar store," after all.
And, to be honest, there's truth to the idea that dollar stores target those with low incomes. Between 2008 and 2013—a time when jobs were harder to come by and incomes were sliding—dollar stores saw their sales jump by 45.7 percent.
But do dollar stores simply have a perception problem? A 2012 Deloitte study about how national brands could better embrace the dollar store segment makes that case pretty effectively, pointing out improvements in the stores' layouts and offerings. One part of the report relays the tale of a mystery shopper that hadn't stepped foot in a dollar store in years. They were shocked at the improvement of the offerings from the last time they checked out a store.
“I was amazed at the number of national brands that were available, and prominently displayed, on the shelf,” the person said in their comments.
Part of this is due to an intentional strategy on the part of national brands. People who shop in dollar stores, according to a 2014 Bloomberg Business piece, tend to be in the market for something they need immediately, something that national brands work to match by offering smaller sizes to those customers. And in a way, it works out, because the products that they do sell tend to go to smaller households that don't need to feed an entire family.
“Here, we market our products in smaller package sizes—perfect for one- and two-person households—which include many of the 55-year-old-plus consumers,” General Mills Vice President Shawn O’Grady said of the market.
And as the market shifts, more room is made for different kinds of dollar store consumers. While 27 percent of consumers at dollar stores tend to have household incomes below $20,000 according to Bloomberg, another 20 percent have income above $70,000—smaller than you might find among the average consumer who goes to a Costco or Target, but certainly still a big enough percentage to be a consideration for Dollar General and company.
And there are even differences between the audiences that different types of dollar stores attract. Another Bloomberg Business piece explains that Dollar Tree customers are more likely to go to higher-end stores like Bed Bath & Beyond or Whole Foods than their competitors Family Dollar or Dollar General.
Dollar stores may not aim for that Whole Foods dollar, but they nonetheless may occasionally get it anyway. (Then again, maybe people just go to dollar stores to buy crap they eventually sell on Amazon.)
Here's a fun fact about Wal-Mart you probably weren't aware of. Before Sam Walton started building his chain of mega-stores around the country, he cut his teeth by running a Ben Franklin store in Newport, Arkansas. If you don't know about the Ben Franklin chain, it was something of a prototype for a dollar store, selling a variety of products for a fairly cheap price. It's one of the longest-operating franchise brands in the country.
According to author Richard S. Teslow, when Walton was sold the store, the owners believed that they were selling Walton a bit of a lemon, and they charged him a pricey $25,000 for the store.
Little did they know they had given the store to a budding retail genius. Walton was so successful at selling stuff at the Ben Franklin that he had managed to turn the store into a sales juggernaut, putting away $250,000 in annual sales by his third year.
Then, just as quickly as he got there, the owners of the store wanted it back. He was frustrated, but thanks to all the profits he brought in, he was able to launch a department store of his own. He and his family left Newport and he soon opened up a ton of Ben Franklin stores around the region.
Soon enough, he took his knowledge from working the Ben Franklin stores to a new chain of his own, Wal-Mart—one, it should be said, was heavily inspired by the Meijer chain just getting its start in Michigan. About 20 years after departing the Newport market, Walton came back to town … with a Wal-Mart.
"As it happened, we did extraordinarily well with our Newport Wal-Mart, and it wasn't too long before the old Ben Franklin store I had run on Front Street had to close its doors," Walton recalled. "You can't say we ran that guy—the landlord's son—out of business. His customers were the ones who shut him down. They voted with their feet."
That's what we call capitalism at work.
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