Why Dollar Tree's price hike to $1.25 could be 'one of the worst decisions in retail history' | CNN Business (2022)

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In 1986, three retail veterans opened a chain of stores in the southeast named Only $1.00. They were building upon the concept of a store they had stumbled across called Everything’s A Dollar, and thought they could do it better.

But Everything’s A Dollar wasn’t so thrilled to welcome the competition, so the company sued, forcing Only $1.00 to change its name. The executives came up with a different name: Dollar Tree.

For 35 years, Dollar Tree (DLTR) sold toys, home furnishings, kitchenware, holiday decorations, stationary, party supplies, arts and crafts, books, food and household essentials for $1. Dollar Tree (DLTR) plastered big green and yellow “Everything’s $1” circles throughout its nearly 8,000 US stores (Dollar Tree (DLTR) purchased the trademark of the brand that had once sued it).

“I viewed the dollar-only concept as sacred. It was everything. Without it, we’d be just another discount retailer,” Macon Brock, a Dollar Tree founder, said in his 2017 autobiography “One Buck at a Time.”

Why Dollar Tree's price hike to $1.25 could be 'one of the worst decisions in retail history' | CNN Business (1)

Dollar Tree was originally named Only $1.00 in 1986.

“Ditch the dollar, I believed, and we’d surrender our niche,” Brock wrote.

Brock said he didn’t know how long Dollar Tree could stick to selling everything for $1: Inflation made it more challenging every year. But, as recently as August, Dollar Tree chief executive Michael Witynski said the company was committed to that price.

“This dollar price point is going to be more important than ever,” Witynski said. $1 “is going to look good.”

Just three months later, Dollar Tree changed course.

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The company said late last month it was throwing away those Everything’s $1 signs and walking away from its 35-year brand identity, announcing plans to raise prices to $1.25 on the vast majority of its merchandise at all stores by around May 2022.

“This is the appropriate time to shift away from the constraints of the $1.00 price point,” the company said in a news release.

But the decision to raise prices by 25% is a huge gamble for the company. Its future hinges on how customers respond to the end of $1 deals after 35 years.

Some retail analysts say the decision was rushed and will backfire, alienating loyal Dollar Tree customers who shopped there specifically because prices were a dollar. Some bet the chain’s primary competitor, Dollar General, will undercut Dollar Tree by selling more products for $1. Others question if a company that has struggled even as its discount competitors boomed — Dollar Tree is on its third CEO in six years — can effectively execute such a significant strategy change.

“It will be a shock to a loyal customer base,” said Scott Mushkin, a founder and analyst at R5 Capital, a retail research and consulting firm. “It could end up being one the worst decisions in retail history if it is not dialed back.”

David D’Arezzo, a former chief merchant at Dollar General and an executive at pharmacy and supermarket chains, said the move “destroys 35 years of brand equity in one fell swoop.”

Dollar Tree did not respond to requests for comment on this article.

‘As easy as spending money could be’

Dollar Tree, based in Chesapeake, Virginia, was the last of the big dollar store chains to actually sell products for a dollar.

Dollar General, Family Dollar — which Dollar Tree purchased in 2015 — 99 Cents Only, and Canada’s Dollarama have sold products for more than $1 for years.

But Dollar Tree has a different model and customer base than those brands. Its approximately 8,000 square-foot stores, dotted amid strip malls, are typically found in suburban areas and target middle-income shoppers.

Dollar Tree is also designed to draw a different type of shopping visit.

While customers primarily head to Dollar General or Family Dollar when they run out of items like milk or paper towels, Dollar Tree attracts shoppers who want to have a little fun and hunt for a quirky gift or items that might look good in their living room — for a buck.

Selling everything for $1 was also easy on store operations. Workers didn’t have to constantly spend time changing price displays in aisles or tags on shelves, and it was simple for customers on tight budgets to keep track as they shopped around. Ten things in your shopping basket? That’s ten dollars .

“When a customer walked into our store, she could shut off her brain. She didn’t have to think, didn’t have to calculate how much she was spending,” Brock said in his autobiography. “It made the transaction as easy as spending money can be.”

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The challenges of $1

But there were drawbacks to the rigid $1 strategy. Because Dollar Tree couldn’t raise prices, it was more vulnerable to cost increases than competitors who had the ability to pass them off to customers.

One-dollar prices were a “trap” for Dollar Tree, said Mark Cohen, director of retail studies at Columbia University’s business school and a former executive at Sears. “You can’t sustain the business at that level.”

The company’s model may have worked over the past few decades when inflation was basically nonexistent. But it became more challenging for Dollar Tree to maintain profitability when labor, transportation, fuel, merchandise and shipping costs surged — as they are today.

Those rising costs have squeezed Dollar Tree’s profits and margins. During the first three quarters of 2021, the chain’s profit margin dropped 1.5% from the same stretch last year. The falloff was particularly steep last quarter, down 4.7% percent from the same quarter a year ago to around 30%.

Dollar Tree said that the move to raise prices will help combat higher costs and return the brand to its typical profit margin of around 35% next year.

Additionally, when inflation spikes, Dollar Tree faces increased pressure to grow sales to cover higher costs, or alter its merchandise — including by shrinking sizes.

But Dollar Tree’s sales have grown at a slower rate in recent years than at its discount competitors, including Dollar General (DG), Walmart (WMT), TJX (TJX), Five Below (FIVE) and others.

Dollar Tree’s inventory also suffered from having to keep everything under $1. The chain discontinued several “customer favorites,” the company said, particularly in packaged and frozen foods and household essentials.

Raising prices will give Dollar Tree flexibility to reintroduce those items, expand its selection, and bring in new products to draw customers, the company said.

Breaking the buck

Dollar Tree had taken steps in recent years to raise prices on some items.

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In 2019, after an activist investor built a stake in the company and pressured it to hike prices or sell off its struggling Family Dollar arm, Dollar Tree announced it would begin testing higher prices at some stores — an initiative that became known as Dollar Tree Plus, with products at $3 and $5.

The company has also launched a new concept of joint Dollar Tree and Family Dollar stores in rural towns that have a mix of Dollar Tree items for $1 and higher-priced Family Dollar merchandise.

The Dollar Tree Plus sections and combination stores have shown promising results, and in September, Dollar Tree said it would start selling items at $1.25 and $1.50 in hundreds of stores with Dollar Tree Plus sections, as well as at select legacy Dollar Tree stores.

Two months later, the company said it was raising prices on the majority of its products to $1.25.

Dollar Tree says it has gotten positive feedback from customers at stores testing $1.25 prices and saw a sales lift at those locations — but the benefit was partially offset by a small decline in the number of products sold.

Dollar Tree also conducted independent surveys with shoppers, 91% of whom said they would shop at Dollar Tree “with the same or increased frequency” with higher prices, CEO Mike Witynski said on a November earnings call.

Customers were “telling us that even at the $1.25, there’s still great value and they’re going to continue shopping here,” he said.

‘Rushed, untested’

Dollar Tree may not have been able to hold prices at $1 forever. But some analysts criticized the route the company took, the speed at which it erased a 35-year strategy, and the risks it opened up with shoppers and competitors. Some say moving to $1.25 jeopardizes the brand’s clearly-defined image.

”[$1.25] doesn’t have any connection of value like a dollar does,” Cohen said. “I don’t think it triggers the same draw in the mind and heart of a customer.”

When Dollarama, the Canadian discount store giant, raised its prices above $1 for the first time in 2009, it did so on new products, so consumers could see the value they were getting for their extra money, said Kelly Bania, a retail analyst at BMO Capital Markets.

Dollar Tree isn’t doing that. Instead, it’s immediately charging 25% more for its existing merchandise. This may create confusion for customers, Bania said, and leave some shoppers puzzled as to why they’re paying 25% more for the same item they just bought for $1.

Why Dollar Tree's price hike to $1.25 could be 'one of the worst decisions in retail history' | CNN Business (3)

Some retail experts say Dollar Tree's move to raise prices jepordizes its identity with customers.

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When retailers make a pivotal changes, they often conduct months or even years of tests through different seasons, economic conditions and other variables that might impact consumer behavior. Dollar Tree, for example, has spent more than a year testing $3 and $5 products in select Dollar Tree Plus sections before rolling them out more broadly.

But Dollar Tree made the switch just two months after announcing the $1.25 and $1.50 test. This was not enough time to understand the full impact the change would have on shoppers, analysts said.

“Based on Dollar Tree’s track record of testing and learning, this was announced and rolled out at a much faster pace than you would think for such a big decision,” Bania said. “The execution of it does feel rushed, untested and adds risk.”

Although Dollar Tree said sales grew at stores where it tested $1.25 prices and customers responded favorably, it came when demand for goods was red hot heading into the holidays, wages were rising, and many customers had more cash to spend thanks to federal stimulus checks.

It is unclear how Dollar Tree shoppers will respond to $1.25 prices when they aren’t buffeted by federal stimulus or when the gap between supply and demand normalizes.

An opportunity for Dollar General

Price remains the most significant factor for many Dollar Tree shoppers and moving away from $1 may drive them elsewhere.

Dollar Tree’s decision was “reckless and unnecessary,” Mushkin said in a note to R5 Capital clients. An October R5 survey of 550 customers found that roughly 32% would shop at Dollar Tree less often if stores offered products for more than $1. Around 5% said they would stop shopping at the store altogether.

Dollar prices were the brand’s “ace in the hole,” and Dollar Tree could have taken other steps such as adding “Beyond $1” sections, Mushkin said. Five Below, the $5 and under discount toy and game story, did this in 2019 when it started selling some items for up to $10 in “Five Beyond” sections. Dollar Tree could have also introducing two items for $3 deals.

“They simply don’t need to raise prices on everything to get this done,” Mushkin said.

Dollar General may be able to capitalize on Dollar Tree’s decision to raise prices. Thousands of Dollar Tree stores are located near Dollar General locations, and the chain could pick off some disgruntled Dollar Tree customers looking for $1 items.

Dollar General sells around 20% of its products for $1 and highlighted the role of this merchandise in its strategy to reach low-income customers during an earnings call last week.

Products “at the $1 price point are important for our customers, and they will continue to have a significant presence in our assortment,” Dollar General CEO Todd Vasos said on an earnings call last week.

Dollar Tree has moved on from $1. But Vasos said Dollar General is “not walking away from a $1 price.”

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FAQs

How does Dollar General keep costs low enough to maintain its low prices? ›

Packages items in small quantities.

Dollar General sells goods in small quantities instead of in bulk to keep the cost of each transaction low. While the costs remain below $10, it may look like you're getting a better deal, but you are probably spending more per ounce or per item.

What is the name of the store where everything is $1? ›

Mighty Dollar is a true dollar store. The homepage of the retailer's website proclaims “Everything's $1.00.” So if you want the freedom of shopping while knowing that every item will add just $1 to your sales ticket, this is the place to go.

What is dollar general competitive advantage? ›

largest brick-and-mortar footprint in the U.S. rising market share and same-store sales. small low-cost store format is difficult for competitors to replicate.

Is everything a dollar at Dollar Tree? ›

That's right—despite the name, not all dollar stores sell every item in the store for just a dollar or less. Dollar Tree is an actual dollar store (for the most part). The company recently announced it will sell items in certain locations for more than its typical $1 price.

Why Dollar Tree selling items at more than a dollar? ›

The company attributes its price increases to supply chain issues, "higher freight costs and other inflationary pressures." This marks the end of a discount era as Dollar Tree has been known for selling items for no more than $1 for more than 40 years.

Why did dollar store prices increase? ›

Dollar Tree raised prices because its business was pressured by having to keep everything under $1. Labor, transportation, fuel, merchandise and shipping costs have surged, squeezing the company's profits. Some merchandise also suffered as a result of the $1 strategy.

Why is everything at Dollar Tree so cheap? ›

Sometimes, products hit the dollar stores because of damage or lack of freshness. BUT, they are often just offered cheaper because they operate on slimmer margins than grocery stores. Many items were surplus or overstock items from a company.

What you should always buy at Dollar Tree? ›

10 Items You Should Always Buy at Dollar Tree
  • Seasonal Decor. ...
  • Vases. ...
  • Mixing Bowls. ...
  • Dinnerware. ...
  • Drinkware. ...
  • Pregnancy Tests. ...
  • Greeting Cards. ...
  • Picture Frames.
20 Sept 2022

What you should always buy at the dollar store? ›

Here's what bargain-shopping experts say are some of the best buys at dollar stores.
  • Greeting cards. icatnews / Shutterstock.com. ...
  • Seasonal decor. bbernard / Shutterstock.com. ...
  • Notebooks. Peshkova / Shutterstock.com. ...
  • Gift bags, boxes and wrapping paper. ...
  • Storage containers. ...
  • Party supplies. ...
  • Reading glasses. ...
  • Hair accessories.

What is Dollar Tree pricing strategy? ›

The supply-chain upgrades are also coming as Dollar Tree resets its consumer pricing strategy, with plans to roll out items listed at $3 and $5 to more stores after lifting its pricing cap for many goods by a quarter last year to $1.25.

Who is Dollar Trees biggest competitor? ›

Dollar Tree competitors include Walmart, SUPERVALU, Dollar General, Family Dollar Stores and 99 Cents Only Stores. Dollar Tree ranks 2nd in Diversity Score on Comparably vs its competitors.

Who is the target market for Dollar Tree? ›

Customer Segments

Dollar Tree provides a customer base of general consumers with a range of products at discounted prices. The Company's Dollar Tree and Family Dollar-branded stores are targeted generally at lower income consumers, typically located so as to serve local communities.

Does Dollar Tree charge more than a dollar? ›

The company recently announced it will sell items in certain locations for more than its typical $1 price. This isn't totally new for Dollar Tree, though; they've tested “Dollar Tree Plus” sections at several hundred of its stores, where they sell items that could have a $5 price tag.

What's the difference between Dollar Tree and Dollar General? ›

First and foremost, Dollar Tree sells only products that are $1 or under, whereas Dollar General, which once did the same, is now more like a discount retailer.

Which is better Dollar Tree or Family Dollar? ›

In her experience, “Dollar Tree offers a wider variety of products for a single dollar, while Family Dollar has a more limited selection but often offers sales and discounts.”

Why is everything $1.25 at the dollar store? ›

The move to a $1.25 price point contributed to "both sales and margin improvements," he said. "Shoppers are responding favorably as the new greater value products hit our shelves." Dollar Tree's comparable sales in the quarter rose by 11.2%.

When did Dollar Tree decide to raise prices? ›

Yes, the new $1.25 price point is permanent. Dollar Tree started rolling out the $1.25 base price at their stores in late 2021, with all stores converted to the new price tag during the early part of 2022. However, the chain was already testing the waters with higher price points well before this change.

Is Dollar Tree affected by inflation? ›

Record high inflation is all around - at the pump, at the grocery store, when you're buying clothes, when you go out to eat, if you can still afford to go out to eat. It's also crept onto the shelves of discount stores like Dollar Tree, Dollar General, Family Dollar, where price tags are supposed to be low.

Is the Dollar Tree worth it? ›

"It's a great place to make your dollar go further and stretch your budget," she said. With such low prices, it can be tempting to want to buy everything at Dollar Tree. However, some products are better than others. With that in mind, here are 15 items to buy at Dollar Tree and 15 items to skip.

Do you really save money at dollar stores? ›

Just because an item is priced lower at the dollar store doesn't necessarily mean you're saving anything. Discount stores may offer what looks like the same product for less but they may actually be more expensive. Doing some comparison shopping before you buy can ensure that you're getting the most bang for your buck.

Which is better Dollar Tree or 99 cent store? ›

Results were generated by 280 employees and customers of 99 Cents Only Stores and 1561 employees and customers of Dollar Tree. 99 Cents Only Stores's brand is ranked #- in the list of Global Top 1000 Brands, as rated by customers of 99 Cents Only Stores.
...
99 Cents Only Stores vs Dollar Tree.
44%Promoters
13%Passive
43%Detractors

What is the most successful dollar store? ›

Just like in net sales and the store count, Dollar General leads the way in consumer loyalty among U.S. dollar store brands, although Dollar Tree follows closely behind.

Where does the Dollar Tree get their products? ›

Once seen as dumping grounds for liquidated and off-brand merchandise, today's dollar stores often buy their inventory from major manufacturers such as Procter & Gamble, Hanes, Unilever, Coca-Cola, Energizer, Crayola and General Mills.

What should you not buy at the dollar? ›

Toys and Costumes

Toys rank high on our experts' list of things not to buy at dollar stores. “It's rare that you find name-brand toys at dollar stores,” says Ramhold. “And if you aren't seeing name-brand toys, odds are they're going to be cheap playthings that break pretty easy.

How much does it cost to open a dollar store? ›

How much does the Dollar Store Services franchise cost? Dollar Store Services has no franchise fee and royalty fee, with a total initial investment range of $76,900 to $366,900.

What is the dollar store concept? ›

: a store that sells inexpensive items priced usually at a dollar or a few dollars. Inflatable balloons, holiday decorations, toothbrushes and spices are some of the best deals you can buy at the dollar store.

What is the highest price at Dollar Tree? ›

Dollar Tree prices items at $1.25+, with the Dollar Tree Plus stores selling items for as high as $5.00 each. Family Dollar prices operate more like a traditional grocery store, with some items even going for over $20.

What industry does Dollar Tree compete it? ›

Dollar Tree is the leading operator of discount variety stores in which it offers merchandise at the fixed price of $1.00. While it is a company in the Discount variety industry, it is believed that the variety and value of products it sells for $1.00 indeed makes it appear different from the competitors.

Who is Dollar Tree owned by? ›

Additionally, the company operates stores under the name of Dollar Bills, as well as a multi-price-point variety chain under the Family Dollar banner. Dollar Tree, Inc. Dollar Tree Stores, Inc.
...
Canada.
FormerlyDollar Giant (2001–2010)
ParentDollar Tree (2010–present)
Websitewww.dollartreecanada.com
9 more rows

Where is the largest Dollar Tree in the US? ›

I went to the World's Largest Dollar Tree ! Today I take you around the World's Largest Dollar Tree located in Burlington, North Carolina. Come Dollar Tree sho...

What is the future of Dollar Tree? ›

Dollar Tree will continue its aggressive growth in 2022. The extreme-value discounter plans to open 590 new stores and to renovate 800 Family Dollar stores in fiscal 2022. The new stores are expected to consist of 190 Dollar Tree stores and 400 Family Dollar stores.

Does Dollar Tree have a high turnover rate? ›

But those numbers could change quickly because the turnover rate at Dollar Tree is relatively high. Employees at Dollar Tree stay with the company for an average of 2.6 years before leaving. The average employee at Dollar Tree makes $29,519 per year.

How much does the average customer spend at Dollar Tree? ›

In February 2022, Dollar Tree, Inc customers spent an average of roughly $17 per transaction, 11 percent higher than the year before and 23 percent higher than two years ago.

Why do stores charge 99 cents instead of a dollar? ›

Endings in 99 increase sales of low value items, with the customer focusing on the lower digit on the left. Prices are a key product feature. They are immediately evident and extremely relevant when customers make their purchase decision.

What is the difference between Dollar Tree and Dollar Tree Plus? ›

Dollar Tree recently launched a brand NEW section at select stores called “Dollar Tree Plus” that offers oodles of $3 and $5 items ~ sort of like a mix between Five Below and Dollar Tree! Dollar Tree plans to have 500 Dollar Tree Plus stores by the end of 2021 and another 1,500 stores are planned for fiscal 2022.

Is Dollar Tree and Dollar General owned by the same people? ›

The short answer is that Dollar General and Dollar Tree are separate companies.

Are Dollar Tree and Family Dollar owned by the same company? ›

"We are pleased to announce we have completed our acquisition of Family Dollar and we formally welcome the Family Dollar team to the Dollar Tree organization," stated Bob Sasser, Chief Executive Officer in the release. Read the full release HERE. So we can verify, Family Dollar is owned by Dollar Tree.

How does Dollar Tree make money? ›

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.

Who pays more dollar or family tree? ›

Salaries. Of the top 3 common jobs between the two companies, Family Dollar Stores salaries averaged $1,015 higher than Dollar Tree.

Why are things cheaper at Family Dollar? ›

They buy in bulk

Think of it this way: It's like they shop at Costco and then sell you the individual products, says Willie Greer, founder of the Product Analyst. They also may buy millions of those bulk items and divide them up for each of their stores. This brings down the price company-wide.

Why are Dollar General stores so messy? ›

The Stores Can Get Messy

Walking into a dollar store in disarray isn't a rarity, but that's by design. These stores run on minimal staff and they're built to move a lot of product quickly. If that product has to sit on floors or in boxes for a bit while a cashier handles the register, so be it.

How does Dollar General sell stuff so cheap? ›

Dollar stores can sell the SAME items as grocery stores for cheaper because they have class-B or C locations, so they pay much lower rent than class-A locations. They also have a small, low-wage staff, that's usually only about 10 employees per store.

Why Dollar Tree is no longer having all of their items cost $1? ›

The company finally walked away from $1 because it was hurting business. It's not an entirely abrupt shift for Dollar Tree, however. In September, Dollar Tree said it planned to begin selling items at $1.25 and $1.50 at some stores for the first time.

How does a dollar store stay in business? ›

Dollar Tree will usually buy out almost expired goods from other companies so that they can be sold cheaply and still have a profit made on them when other stores do not want the inventory.

Is Dollar Tree a profitable business? ›

Conclusion. With a market cap of about $37.38 billion, Dollar Tree leads in the Discount Stores Industry. Dollar Tree has a large net income and gross profit margins.

Is Dollar Tree a profitable company? ›

Dollar Tree gross profit for the twelve months ending July 31, 2022 was $8.377B, a 5.93% increase year-over-year. Dollar Tree annual gross profit for 2022 was $7.737B, a 0.65% decline from 2021. Dollar Tree annual gross profit for 2021 was $7.788B, a 10.62% increase from 2020.

What is retail management in Dollar General? ›

The role of a Dollar General store manager is one that requires a great deal of responsibility and accountability. They are tasked with overseeing all aspects of their stores' operations, including merchandising, staffing, customer service, inventory management, and more.

Is Dollar Tree getting more expensive? ›

Then something happened to make the balancing act even more challenging. In late November 2021 Dollar Tree, one of the largest national dollar-store brands and a place I shop regularly, announced that after 35 years of offering all merchandise for just $1, it was raising the price across the board to $1.25.

Who is Dollar Tree competition? ›

Dollar Tree competitors include Walmart, SUPERVALU, Dollar General, Family Dollar Stores and 99 Cents Only Stores. Dollar Tree ranks 2nd in Diversity Score on Comparably vs its competitors.

How much does a dollar store owner make a year? ›

Dollar stores may make up to $. 80 profit on items they sell, though the average is about $. 35 for each item. This means a dollar store would have to sell 200,000 items a year to make around $70,000 in profit.

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