Dollar stores have more than an inflation problem

NEW YORK, Oct 1 (Reuters Breakingviews) - The American dollar store is the modern-day version of what was known during the Depression era as the five-and-dime. But as with the stores that sold goods for pocket change back then, inflation and changing habits are now taking their toll on dollar stores.

After several decades of selling most wares for $1 apiece, Dollar Tree (DLTR.O) on Wednesday said it plans to roll out more so-called Plus stores, which will also sell items for $3 and $5. The decision follows skyrocketing shipping costs that have crimped the company’s ability to make money read more . Chief Executive Michael Witynski told the Wall Street Journal that higher wages and supplier cost pressures were also causing problems.

In the past, when pocketbooks were squeezed, shoppers flocked to cheap sellers. During the recession from December 2007 to June 2009, Dollar Tree’s stock shot up almost 50% while the S&P 500 Index fell more than a third. Helpfully, inflation was low during that period, too.

For now, not least because the U.S. government continues to help people with lower incomes, they don’t need Witynski’s rock-bottom prices as much. Along with rising costs, analysts expect the company’s sales to grow just 3% this year, according to Refinitiv data.

In one sense, Dollar Tree and rival Dollar General (DG.N) simply have a superficial problem with their names as they relate to long-term inflation. Even a five- and 10-cent store back in August 1932 would now be selling things for $1 and $2, adjusted for consumer price increases since then. Shorter-term cost spikes just bring that trend into sharp focus.

But crises have a tendency to accelerate the adoption of new habits, too. Just as five-and-dimes that gave away free glassware were a fad that morphed, Covid-19 has changed buying patterns from online shopping for toilet paper to a rebalancing of restaurant and at-home dining. Dollar Tree is trying to offer more choices and appeal to more people. That means gradually encroaching on the territory of giant retailers like Walmart (WMT.N). For Witynski, that's a bigger kind of challenge than the fact that every George Washington buys less than it used to.

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CONTEXT NEWS

- Dollar Tree on Sept. 29 said it plans to add new price points above $1 across its Plus stores, selling goods at $3 and $5, for example. The company is on track to have 500 such stores by the end of its fiscal year in January 2022, with a total of 5,000 stores by the end of fiscal 2024. As of the end of July, the company operated almost 16,000 stores.

- Last month the company and its rival Dollar General warned that surging cost could cut into profit.