Meet the worst offenders in “deflationary inflation”: dollar stores

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If you notice more air than potato chips in your Lay’s bag, you’re not imagining things. “shrinkage” phenomenon Originated During the pandemic as retailers faced rising costs and experimented with pricing power. To avoid raising costs, stores reduce the size and quality of their products. Now, even as Inflation rates have receded, the hack of keeping the price unchanged but just filling a bag of chips with less food, for example, did not happen. Dollar stores are actually the worst offenders.

Despite their cheap prices, dollar stores such as Dollar General And Dollar tree In fact, it ends up costing customers more in the long run. Essentials like toilet paper, soap and groceries Cost more per unit price At dollar stores more than they do as other major retailers. For example, a package of six 3.17-ounce bars of Dove Sensitive Soap It costs $8 at Dollar Generalbut eight packages of the same soap in 3.75 ounce bars It costs $10.99 at Target. Despite its high price Goalthe cost of an ounce of soap ends up being about five cents less than its dollar store competitor.

This is a new gamble for dollar stores. Dollar General made the decision in 2021 to challenge its title He raised his prices to $1.25. By last summer, some of its products Cost up to $5.

“For more than eight decades and through a variety of macroeconomic environments, Dollar General has served millions of Americans seeking to stretch their budgets on household essentials in a convenient, easy-to-shop store,” a Dollar General spokesperson said. luck. “We continually collaborate with our national and private label suppliers to evaluate how best to offer items that meet our customers’ product needs and affordability.”

But these small cost differences add up: Dollar General and Dollar Tree were both there Profit margin is about 31.5% In 2023, 7% higher than Walmart’s margin of 24% and 10% higher than Kroger’s margin of 21.4%. These patterns have persisted for more than a decade.

The effects of dollar store deflation are enormous because the stores are everywhere. Dollar General has the largest number of locations of any retailer in the United States, with… 19,000 sites. Dollar Tree combined, the two retailers have finished 35,000 US sites. This is about five times the number of stores in the United States Walmart And Goal sites combined, luck calculated.

The contraction strategy is becoming more popular. Toilet paper and paper towels are 34.9% more expensive than they were in January 2019, with more than 10% due to manufacturers reducing product volume, according to December report From Democratic Senator Bob Casey. Snack foods were 26.4% more expensive in the same period, with 9.8% of the price increase due to deflation.

Dollar General has all the more reason to protect its profit margins after struggling Inventory shrinks in 2023. It reported a 41.1% decline in operating profit to $433.5 million in the third quarter. Despite the challenges, the company still achieved a 2.4% increase in net sales to $9.7 billion in the same period.

This is where the contraction strategy comes into play. Low-income customers, who hoard dollars They depend on it for most of their workPeople are sensitive to price increases linked to inflation, said Brian Nominville, director of retail consultancy The Feedback Group. luck. Instead of raising prices and alienating customers, these retailers choose to reduce the volume of their products while keeping prices the same, creating the illusion of a good deal while keeping their profit margins wide.

But that doesn’t mean shoppers won’t notice they’re getting less for their money even without an obvious price hike, Nominville said.

Shoppers hate shrinkage, but there’s not much they can do about it

Customers are already noticing differences in their products they shop frequently. Three out of every four American customers are concerned about shrinkage, according to one study YouGov April 2023 poll From more than 1,100 American adults. Nearly half of adults over 55 said they would stop buying certain products completely due to the downturn, and a third said they would temporarily stop buying some items.

Customers may want to change their purchasing behaviors to avoid shrinkage, but those who already shop at dollar stores may not have a choice.

The emergence of thousands of dollar stores across the United States may seem like a win for shoppers looking for convenience, but dollar store expansions have also been a win Independent grocers forced out They created food deserts in the areas they occupied.

Typically located in low-income rural communities, communities of color, and dollar stores Relying on poor customers Earning less than $35,000 per year and relying on government assistance. In 2017, those customers made up 21% of Dollar General’s shoppers and 43% of its 2017 sales, according to Jim Thorpe, Dollar General’s chief merchandising officer at the time.

And with dollar stores relying heavily on cash-strapped shoppers with few options, they have little incentive to ride out the downturn.

“There are approximately 100 dollar stores within a ten-mile radius,” Fort Worth Councilwoman Kelly Allen Gray, who helped pass an ordinance limiting dollar store openings in her district, said. He told CNN. “They are abundant in low- to moderate-income neighborhoods, making their presence appear predatory.”

Dollar Tree did not immediately respond luckRequest for comment.

This story originally appeared on Fortune.com

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