December 11, 2018

Blue Collar General: For low-income towns, dollar stores are a surprisingly bad deal

Dollar Stores are growing faster than ever -- but they’re a deceptively dangerous deal for the low-income communities they target.

Dollar General became the fastest growing retailer in the US by catering to low-income consumers with no other options. Now, Dollar General and Dollar Tree are expected to have 50k stores in the next few years — roughly 10x as many as Walmart.

But, dollar stores can be a discounted devil in disguise: Dollar store “deals” are often more expensive than bulk-bought alternatives due to deceptive packaging, and they often leave consumers with fewer options by driving local stores out of business.

Where rural America goes to spend its bottom dollar

Dollar General built its discount dynasty in communities where even Walmart couldn’t turn a profit, something former CEO David Perdue (and current US senator) summed up simply: “We went where they ain’t.”

Box stores like Walmart cost millions to open, but Dollar General can open a store the size of a basketball court for $250k — and turn a profit even in low-income communities with just 1k homes.

Today, 75% of Dollar General’s 15k stores are in towns with fewer than 20k people (and more than 15 miles from a Walmart). Most of Dollar General’s customers have household incomes of less than $40k.

The profit is in the packaging

Astonishingly, Dollar General has posted 28 straight years of same-store sales growth by serving as the lucrative last resort to America’s “permanent underclass.”

But, while customers pay less at dollar stores, they also get less: 16-oz milk cartons for $1 seem like a good alternative to a $3.50 gallon — but they equal an $8 gallon when priced per ounce (talk about getting milked).

Death by discount

In communities with no retailers, dollar stores can spare consumers a journey. But in small local economies, dollar stores choke out local competitors, causing 40% sales declines that kill off mom-and-pop stores.

Local newspapers from North Dakota to Vermont to Minnesota have criticized dollar stores for killing of local businesses and reducing local jobs (Dollar Generals often employ just 1-2 employees).

But Dollar General can’t see the haters: with 31% profit margins, the chain posts less revenue than Macys — but twice the profit.

HT: When your business model starts making Walmart look like a community organization, I say it’s time to take a good long look in the the mirror.

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