How Do Dollar Stores Make Money?

By: Dave Roos  | 

dollar store, Family Dollar
A woman walks by a Family Dollar store Dec. 11, 2018, in Brooklyn, New York. As the income gap between rich and poor continues to grow, dollar stores have become increasingly popular in both urban and rural America. Spencer Platt/Getty Images

It's 9:17 p.m. on a Tuesday and you just realized there's no milk or eggs for the kids' breakfast tomorrow morning, and there's no bread for their school lunches. And if you're honest with yourself, that half-finished roll of toilet paper might not make it through the night. It's time to hit the store.

Now, you've got a choice to make. The nearest grocery store is 25 minutes away and the Walmart is even further. Driving to either one at this hour means you won't be home and in bed until 11. But what about that new dollar store that opened down the street? Does it even have food? If it does, you could get this shopping trip wrapped up in 25 minutes.

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So, you decide the dollar store is best option, and inside, you're surprised at the selection. It's tiny and packed to the gills, and there is actually some food. You don't recognize the brands and you feel a little funny buying eight 16-oz bottles (473 milliliters) of milk, but each one is only $1. On your way to the toilet paper aisle, you pass a toy section and bedsheets and greeting cards, which is useful because your mom's birthday was yesterday.

There's only one checkout person working, so the wait is a little long — looks like half your neighbors are in here — but the total bill is less than $30 and you're back home before 10 p.m.

Welcome to the dollar store economy. Dollar stores exploded during the Great Recession and have continued to do well during the COVID-19 pandemic and the current inflationary period. There are now more than 34,000 dollar stores in the United States. That's more locations than Walmart, Walgreens, CVS, Costco, Kroger and Home Depot combined. Once widely criticized as retail vultures preying on rural and urban poor living in food deserts, dollar stores now boast a more mixed-income clientele, including well-heeled millennials.

But why has the dollar store model been so successful? And how does a company even make money selling things for so cheap?

Dollar Store Demographics

The two biggest dollar store chains, Dollar General and Dollar Tree (which owns Family Dollar), have been brilliant at capturing underserved demographics. Dollar General, for example, has built 75 percent of its stores in small rural towns with fewer than 20,000 people, and pinpoints new locations in areas that are 15 to 20 miles (24 to 32 kilometers) away from the nearest big-box store or grocery store. Family Dollar targets urban and low-income shoppers, while Dollar Tree goes after the suburban middle-income shopper.

By expanding dollar store offerings to include more food, household cleaners, health and beauty products, paper products and other "consumables," dollar stores have positioned themselves as a whole new shopping category called the "fill in" trip. Our example above — where it's late and you need a handful of things but don't want to drive all the way to the grocery store — is the classic recipe for a fill-in trip and dollar stores have swooped in to fill that need.

Not only has the proliferation of dollar stores fueled this new type of shopping behavior, but the arrival of a new dollar store often kills off local competition like the small-town mom and pop grocery store, meaning even more customers and profits for the dollar store.

Because the shopping list for a fill-in trip is only a few items long, the total bill at the dollar store is usually pretty low. And since many dollar-store goods are still sold for $1 each, it's tempting to think that shopping at a dollar store must be a better deal than shopping at the local grocery store or a big-box retailer like Walmart. But is this always true?

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Are Dollar Stores Always Better Deals?

dollar store shopper
A woman shops in a dollar store Dec. 11, 2018. Dollar stores are usually packed to the gills, but people don't mind if they can save money. Spencer Platt/Getty Images

According to analysis by The Guardian, paying $1 for a 16-oz (473-milliliter) bottle of milk at a dollar store is the equivalent of paying $8 for a full gallon (3.8 liters), which is more expensive than the fancy organic stuff at Whole Foods. Similarly, the $1 bag of raisins at the dollar store weighs only 4.5 ounces (128 grams), while a 72-ounce (2-kilogram) bag from a big-box store costs $10.50, or 52 percent less per ounce.

By shrinking package sizes, dollar stores can get away with charging way more per volume, which is one of the main strategies that dollar stores use to wring the most profit out of every sale. Just because you only paid $1 for that roll of aluminum foil doesn't mean that it's a good deal. The Washington Post reported in 2018 that the Dollar Tree $1 roll of foil was only 15 square feet (1.4 square meters) long, while Walmart sold a 75 square foot (7 square meter) roll for $4.06, the equivalent of more than 18 square feet (2 square meters) per dollar. Of course, if finances are tight, maybe you'd rather pay $1 for 15 feet of foil rather than $4.06 for 75 feet.

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Dollar-store shopping is a no-frills experience and that's not an accident. By keeping stores small and employees at a minimum, dollar stores are able to convert a larger portion of sales into profit.

According to 2012 figures, Dollar Tree captured 35 cents of profit for each dollar of revenue compared to 24.1 cents per dollar at Walmart. For third quarter 2021, figures remained comparable. Dollar Tree had a gross profit margin of 27.5 percent of net sales, while Walmart's was 25 percent.

Dollar stores are rightfully called "small-box" retailers. The typically Dollar General store is 7,400 square feet (687 square meters) compared to 178,000 square feet (16,537 square meters) for the average Walmart Supercenter. And even though dollar stores are packed floor to ceiling with items, the typical dollar stores only carries 10,000 SKUs (individual item codes called "stock-keeping units") while the average Walmart carries closer to 90,000 SKUs. Those 10,000 dollar-store items are chosen for maximum profit, emphasizing long shelf life, off brands and small packaging.

Dollar stores don't need a lot of employees to run, again keeping overhead costs down considerably. The typical dollar store employs eight or nine people compared with 14 employees at a similarly sized independent grocery store. Wages at dollar stores are among the lowest in the retail industry.

The Future of Dollar Stores

In general, dollar stores have been doing well in 2022; inflation has pushed up the costs for goods, causing non-traditional, higher-income shoppers to visit dollar stores, along with their usual customers. Profits in 2020 were huge, but slowed in 2021, due to supply chain issues.

In late 2021, Dollar Tree became the last major dollar store brand to change its policy of charging only $1 for most items; it now charges $1.25 per item. Dollar Tree said the decision to raise prices was due to increases in labor, shipping and fuel costs and that several "customer favorites" had had to be discontinued as they were not sustainable at the $1 price point, reported CNN.

At the same time, dollar store staff has been quitting due to low pay and long hours. And many cities have put moratoriums on how many dollar stores can be built in an area. "Most dollar stores stock only a limited selection of processed foods and offer no fresh vegetables, fruits, or meats. Yet, in urban neighborhoods and small towns alike, the dollar chains are opening stores at such a density that they're crowding out full-service grocery stores and making it nearly impossible for new businesses to start and grow. This has exacerbated the problem of food deserts and further eroded the economic prospects of vulnerable communities," wrote the Institute for Local Self-Reliance in 2022.

Despite these negatives, dollar stores continue to expand at a very fast rate. Dollar General plans to open 1,110 new stores in 2022 and remodel 1,750 others. It also plans to open many more of its Popshelf stores, designed to appeal to a wealthier demographic, with most items priced at $5 or less. As dollar stores continue to expand their offerings and compete more directly with grocery stores, drug stores and big-box retailers, they may evolve to look and feel more like mini Walmarts than bloated bodegas.

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Originally Published: Mar 19, 2019

Lots More Information

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  • Corkey, Michael. "'Everything Going the Wrong Way': Dollar Stores Hit a Pandemic Downturn." New York Times. Sept, 30, 2021 (Feb. 15, 2022) https://www.nytimes.com/2021/09/30/business/dollar-stores-struggling-pandemic.html
  • Danzinger, Pamela. "Will Dollar Stores Be the End of Local American Retail?" Forbes. Dec. 30, 2018. https://www.forbes.com/sites/pamdanziger/2018/12/30/will-dollar-stores-be-the-end-of-local-american-retail-ilsr-seems-to-think-so/#24001b2b6194
  • Bursztynsky Kasperkevic, Jana. "Dollar General to Offer More Hours to Employees to Stay Competitive." The Guardian. March 15, 2015 (March 18, 2019) https://www.theguardian.com/business/2015/mar/15/dollar-general-hours-employees-pay
  • Donhaue Marie and Mitchell, Stacy. "Dollar Stores Are Targeting Struggling Urban Neighborhoods and Small Towns." Institute for Local Self-Reliance. Dec. 6, 2018 (March 18, 2019) https://ilsr.org/dollar-stores-target-cities-towns-one-fights-back/
  • Institute for Local Self-Reliance. "Dollar Store Restrictions." Jan. 12, 2022. (Feb. 15, 2022) https://ilsr.org/rule/dollar-store-dispersal-restrictions/
  • Meyershon, Nathaniel. "Why Dollar General Thrives Even in a Hot Economy" CNN. Aug. 30, 2018. (March 19, 2019) https://money.cnn.com/2018/08/30/news/companies/dollar-general-dollar-tree-walmart-target-economy/index.html
  • Meyershon, Nathaniel. "'Sick to my stomach': Dollar Tree fanatics protest new $1.25 prices." CNN. Jan. 16, 2022 (Feb. 15, 2022) https://www.cnn.com/2022/01/14/business/dollar-tree-new-prices/index.html
  • Salzman, Avi. "An Activist Investor Is Shaking Dollar Tree."Barrons" Jan. 7, 2019 (March 18, 2019) https://www.barrons.com/articles/activist-investor-seeks-changes-at-discount-chain-dollar-tree-51546881806
  • Shoulberg, Warren. "Are Dollar Stores the True Disrupters?" Forbes. July 22, 2018 (March 18, 2019) https://www.forbes.com/sites/warrenshoulberg/2018/07/22/are-dollar-stores-the-true-retail-disrupters/#2843efd77a6e

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