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Dollar Stores Encountering New Challenges in the U.S. Economy

The landscape for dollar stores in the United States has become increasingly turbulent in recent years. While these discount retailers once flourished during economic downturns, their current trajectory appears far less favorable.

Historically, dollar store companies were standout performers in the S&P 500 throughout the Great Recession, according to insights from Piper Sandler’s managing director, Peter Keith. However, both Dollar Tree and Dollar General, key players in this sector, have witnessed their stock prices plummet by approximately 50% this year.

The difficulties these companies are facing stem from a combination of external economic factors and internal operational issues. A significant portion of their customer base, particularly lower-income individuals who represent around 60% of sales at Dollar General, are increasingly strained by rising inflation. As financial pressures mount, these consumers are shifting their focus towards necessities such as food and household products, rather than discretionary items that generally offer higher profit margins.

In a contrasting trend, middle and upper middle-income shoppers are finding themselves less inclined to opt for dollar store products, largely due to a robust job market in 2024 that has provided them with greater purchasing power.

During the second quarter earnings call for fiscal year 2024, Dollar General highlighted that its traditional customer base is becoming more dependent on online shopping. Unfortunately, dollar stores have struggled to effectively compete in this digital space, unlike their larger counterparts.

Keith pointed out that larger legacy brick-and-mortar retailers, such as Walmart, Home Depot, and Best Buy, accelerated their e-commerce and digital investments significantly during the COVID-19 pandemic, gaining a competitive edge. As a consequence, Walmart’s stock has surged by more than 60% this year as it captures a larger share of consumer spending.

Moreover, both Dollar Tree and Dollar General have been grappling with numerous worker safety violations over the past ten years, further complicating their operational effectiveness.

For a deeper look into the factors contributing to the current struggles of dollar stores, check out the related video.

-CNBC retail reporter Melissa Repko contributed to this story

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www.cnbc.com