Rising Tides: Why Discount Retailers Are Capitalizing on Inflation

If 2023 was the year of rate hikes, high inflation, and economic uncertainty, then 2024 is set to be the year of cautionary spending. Retailers nationwide have felt the impact of inflation as consumer purchasing power has decreased. However, discount retail stores stand to benefit from this fall in purchasing power, as they offer consumers everyday items and household staples at a more affordable price point.

The Fed has held rates steady since July 2023 and is expected to cut rates later this year, but the effects of those rate cuts will not be felt or seen until year-end or even 2025. With this in mind, by leveraging inflation to their advantage, discount stores stand to gain a wider consumer base and increase overall profitability during this volatile period.

Good News for Discount Retailers

It is no secret that the last four years have taken a toll on people’s savings. As of Q4 2023, Americans are saving 3.4% of their monthly income, down from 32% in April 2020, an all-time low, according to a report from the Government Accountability Office. Additionally, according to an analysis by JPMorgan, factors like student loan repayments after more than a three-year pause, reduced Supplemental Nutrition Assistance Program (SNAP) benefits, and the impact of tax refund delays could create a $10 billion obstacle to consumer spending in 2024. While consumers nationwide are struggling in the current economic environment, these statistics serve as excellent news for discount retailers nationwide.

Data shows that the top four discount retailers had nearly three billion annual visits from March 2023 to March 2024.

Growing Consumer Base

Dollar stores are a cornerstone in the country’s most economically distressed places–primarily rural counties that have few retail opportunities. This unique real estate footprint, combined with their value, affordability, and convenience, is what makes them so competitive compared to traditional retail stores.

Historically, dollar stores target households with an income of $40,000 or less. Now, with high gas prices and grocery prices, the dollar store customer demographic has expanded. In the last three years, there has also been an increase in higher-income Americans–households earning $100,000 and up– opting to shop at discount stores. In a March 2024 earnings call, Dollar Tree CEO Rick Dreiling stated that the discount store continued to attract new and higher-income customers, with around 3.4 million new customers added in 2023, predominantly from households earning over $125,000.

Dollar General has also expanded its consumer base with its Popshelf stores to target suburban shoppers feeling the impact of inflation. With ambitious growth plans for the Popshelf banner, Dollar General aims to capture the attention of budget-conscious consumers, particularly those with incomes ranging from $50,000 to $125,000.

Top U.S. Discount Stores

Several of the top discount stores have integrated into the grocery space, offering fresh produce at select stores. This, combined with being an affordable alternative to big-box retailers such
as Walmart, has significantly contributed to their strengthened position in the retail market.

Dollar General has opened about 1,000 stores a year on average, making it the fastest-growing retailer in the U.S. As of January 2024, Dollar General operates about 19,000 stores in the U.S. and Mexico, with produce in more than 5,400 stores.

In January 2024, discount stores experienced a continued rise in year-over-year (YOY) foot traffic, adding to the category’s significant growth and showcasing their resilience and sustained success from 2022 through 2023.

While some chains benefited from their reputation as affordable grocery destinations, such as Dollar General, others capitalized on the demand for affordable luxury goods. Brands like Five Below, Ollie’s Bargain Outlet, and Popshelf expanded their customer base by offering items above their standard discount price threshold.

Five Below, known for its affordable recreational products, ended Q4 2023 on a high note, with significant year-over-year visit increases ranging from 14.6% to 22.1%. This growth can be attributed to its expanding store network and the introduction of “Five Beyond” products priced above the traditional $5.00 limit. The brand’s popularity as a holiday shopping destination also contributed to its strong performance in Q4 2023 and continued success into January and February 2024.

On the other hand, Ollie’s Bargain Outlet adopts a unique approach, offering a wide range of heavily discounted name-brand items, including food, books, electronics, and home furnishings. Its closeout buying model adds an element of surprise for shoppers, making each visit a treasure hunt. Despite these differences, both Five Below and Ollie’s have expanded their physical presence and maintained positive year-over-year foot traffic growth, reflecting their enduring appeal to modern consumers.

Sector Update: Recent Store Closures

Dollar Tree recently announced plans to shut down 970 Family Dollar stores across the county in a move to enhance profitability following unsatisfactory holiday sales and decreased visits. December 25th to December 31st, 2023, visits were down 10.88% from the year prior, and monthly annual visits for December were down 0.12%.

Family Dollar has faced a decline compared to Dollar General, primarily attributed to pricing differences. Family Dollar’s prices are typically 10% to 15% higher than those of Dollar General and other discount competitors. It should be noted that Dollar General, being more than twice the size of Family Dollar, can provide lower prices due to its larger scale.

While a detailed list of closing Family Dollar stores is yet to be released, Dollar Tree CEO Rick Dreiling highlighted the company’s systematic approach in addressing underperforming locations, considering factors such as individual store performance, local operating conditions, and broader strategic goals, one goal being to invest those resources into improving overall store standards nationwide.

In addition to Family Dollar locations shutting down operations, the closure of 99 Cents Only Stores provides an opportunity for competitors like Dollar Tree, Dollar General, Five Below, and Big Lots to gain customers, with Dollar General strategizing to open more stores in areas where 99 Cents Only was popular.

Closure of unprofitable discount stores unlocks substantial value and marks a shift to revitalize footprint and tackle longstanding operational challenges.

Takeaways

As a result of shifting consumer behaviors in a volatile economic environment, this has set the stage for discount retailers to outperform in the retail sector. Though inflation remains a balancing act for any business, the discount retail sector is facing a unique opportunity, one that cannot be overlooked.