Dollar Store Pandemic Prospects Sink Beneath Rising Freight Costs
The onset of the Covid-19 pandemic brough about many sudden and drastic changes to the global economy. While most brick-and-mortar businesses have struggled to adapt to this tumultuous new climate, dollar stores have so far managed to whether the storm. As customers flooded to dollar stores to stock up on household essentials, the industry experienced a bumper year in 2020 with exceptional monthly sales growth of 12 percent year-over-year, compared to just 7 percent prior to the pandemic.
While performance for the early part of the pandemic far outpaced other retailers, the rising tide of freight costs in recent months forecasts rough seas ahead for dollar stores. Contrary to expectations, demands for shipping containers has surged as the pandemic drags on.
Supply congestion caused by Covid 19 has resulted in extreme price increases per container, with the ramifications reverberating across the entire retail industry.
Of the effected businesses, dollar stores are particularly vulnerable. The issue for the industry is twofold. Dollar stores tend to import more containers per $100 million in sales because of the low price of individual items. According to CEO Mike Witynski, Dollar Tree stores import nearly 90,000 40-foot containers per year, with more containers required per $100 million in sales than any other retailer. Because their low prices are their stores’ biggest selling points, the traditional retail strategy of passing the costs to the customers is off the table. Dollar Stores therefore must adopt new strategies to counter these rising costs.
Although Dollar General executives also mentioned the impact of increasing freight costs in their earnings release, they were far less pessimistic about how it would affect business and predicted higher sales would offset the costs as pandemic restrictions recede. In addition to seeing a large increase in sales volume during the pandemic, Dollar General has also found a way to alleviate their supply cost issues through their new brand of luxury retail, Popshelf. Targeting affluent suburban customers, PopShelf would allow Dollar General to continue to see the benefits from high volume sales of low-cost consumables while giving them more pricing flexibility than in their main stores.
With Popshelf, Dollar General is looking to expand into territory traditionally controlled by its rivals. The company’s two leading competitors, 99 Cents Only and Dollar Tree have regularly performed much better with affluent customers than Dollar General. 99 Cents Only Stores has the highest percentage of customers with incomes over $100,000, with 27 percent in February 2021, compared to just 18% at Dollar General.
While other stores are limited in their ability to pass off higher freight costs, Dollar General has found a new strategy with Popshelf to alleviate some of the cost pressure on their main brand. When taken with the increased sales volume their stores have seen in the pandemic, Dollar General is in a very good position to further strengthen its dominant position in the dollar store industry.
- True Fong-Vig