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How Do Dollar Stores Make Money?

Are Dollar Stores Always Better Deals?

dollar store shopper
A woman shops in a dollar store on 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

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According to analysis by The Guardian and The Washington Post, paying $1 for a 16-oz bottle of milk at a dollar store is the equivalent of paying $8 for a full gallon, 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. That $1 roll is only 15 feet (4.5 meters) long, while Walmart sells a 75-foot (23-meter) roll for $4.06, the equivalent of more than 18 feet 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.)

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.

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.

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 stores like Dollar General are competitive with big-box retailers.

The Future of Dollar Stores

Not every dollar store chain has been wildly profitable, though, and the dollar store sector continues to evolve. Dollar Tree announced in March 2019 that it was closing 390 Family Dollar stores and remodeling 1,000 others to include more freezer and cooler sections, and to even sell alcohol. Sales at Family Dollar stores have been slumping compared to Dollar Tree and Dollar General, which continue to thrive even in a strong economy.

Dollar Tree is the only major dollar store brand that has stuck to its original pricing policy of selling almost everything for a dollar. A group of activist shareholders has been pressuring Dollar Tree to change its policy, citing inflation and the gradual increase in the cost of making those $1 products. So far, Dollar Tree execs are sticking to their (pricing) guns.

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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Sources

  • Bursztynsky, Jessica, "Dollar Tree to close up to 390 Family Dollar stores, reports $2.3 billion loss." CNBC. March 6, 2019 (March 18, 2019) https://www.cnbc.com/2019/03/06/dollar-tree-to-close-up-to-390-family-dollar-stores-this-year.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/
  • 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
  • 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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