Home » Business » Dollar store customers unconvinced by proposed change to pricing

Dollar store customers unconvinced by proposed change to pricing

A Manhattan-based hedge fund manager thinks he knows what is best for Dollar Tree. Starboard Value’s Jeff Smith argues the US discount variety chain should stop insisting on pricing every item — from spatulas to sunglasses — at only $1.

But 760 miles away in suburban Nashville, customers are unconvinced. “They’d lose a lot of business,” reckons Vicky Lewis, 37, laden with bags in a Dollar Tree car park. “We need more affordable stores, not less.”

The nurse returned to the Nashville area recently from a lengthy stint in California and was surprised at the cost of living. She visits the Madison dollar store frequently to supplement trips to Walmart and has just spent $12 on snacks for the family.

Demand from customers such as Ms Lewis has fuelled a dollar store boom. The 2008 crisis turned tens of millions of Americans into newly frugal bargain hunters and the businesses have expanded rapidly ever since — in some areas, at the expense of local shops.

The rise of discount retailing is a global phenomenon: so-called 100 Yen Shops are doing well in Japan, while the UK has several pound-store chains and the German discount grocers Aldi and Lidl are opening about 100 stores between them each year.

In the US, the three largest domestic brands — Dollar General, Dollar Tree and Family Dollar — now have more than 30,000 outlets, more than double the number of Starbucks cafés. Trump-voting rural towns are a particularly favoured location, although Dollar Tree is popular in the suburbs and the dowdier Family Dollar has a foothold in gritty inner-city areas.

The Dollar Tree chain alone is opening stores at a rate of about six a week. Founded in 1986, the parent group now employs more than 56,000 people and is forecast to produce $23bn in revenues this year.

Despite the seemingly unstoppable rise of value-focused retailing, Dollar Tree’s recent financial performance has underwhelmed. The company has struggled to revive the fortunes of the underperforming Family Dollar, which it bought in 2015 for about $9bn. Dollar Tree shares have lost 4 per cent over the past year while its rival Dollar General is up more than a fifth.

Starboard, a $6bn fund that has pushed for change at other retailers including Macy’s and Staples, took a 1.7 per cent stake last month. Along with his call for the company to explore a sale of Family Dollar, Mr Smith has made his demand for it test differently priced items in Dollar Tree a centrepiece of the activist campaign.

Dollar Tree was originally known as “Only $1.00” before it changed its name in 1993, but in contrast to the two other chains it has continued to sell everything for a buck.

Starboard argues that inflation — one dollar 30 years ago is worth about $2.30 today — has made Dollar Tree’s pricing strategy increasingly untenable © Bloomberg

Its store in Madison, a northern suburb of Nashville, comprises a mix of items from pregnancy tests to batteries, bandages and bin bags. It also sells food. For Valentine’s day, the shop is packed with cards and heart-shaped knick-knacks. Much of its contents has been shipped from China.

Starboard argues that inflation — one dollar in 1986 is worth about $2.30 today — has made the pricing strategy increasingly untenable. In a letter to Gary Philbin, chief executive, Mr Smith says the retailer had been forced to cut package sizes, reduce quality or stop selling some products that customers would otherwise buy.

Rising world trade tensions only make matters worse by exacerbating inflationary pressures, he writes. In any case, says the Wharton-educated former M&A banker, sales tax means customers do not in practice pay $1 at the checkout. In Madison, customers pay $1.09. He argues the pricing rigidity has resulted in “meaningful underperformance”.

So far, the company has been diplomatic in response, saying it welcomes “constructive input from shareholders”. But a fight is brewing. Starboard is pushing for seven directors to be added to the board. Dollar Tree, advised by JPMorgan Chase, says the hedge fund made its demand “without seeking any engagement”.

“It could end up being quite nasty,” says John Strong, professor of finance and economics at William & Mary university.

He says the activists have a point about the sustainability of the $1 strategy. So far, it has worked in part because the company has become more influential, giving it clout to pressure suppliers to reduce package sizes and otherwise tailor their products. “But at some point they’ll be faced with making that change,” says Prof Strong. “They’ve been trying to push that date as far off into the future as they can.”

But Rupesh Parikh, analyst at Oppenheimer, says the company’s real problem is the poor state of Family Dollar stores and points to the risks of a different pricing strategy. “The concept might no longer be as differentiated versus peers,” he says.

Back in Tennessee, Dollar Tree regular Noman Abdullah says it is the chain’s simplicity that attracts him: he knows everything will cost $1. “It’s the whole purpose of Dollar Tree.” Asked about Starboard’s “multi-price point” plan, he adds: “Honestly, that’s not a good idea.”

Dollar Tree ran a trial more than a decade ago selling differently priced items, but abandoned it. Starboard argues the results were inconclusive and the test was poorly handled. It says Dollarama, a Canadian retailer that diversified its pricing strategy, is an example of how a changed approach can pay off.

“There’s no reason to think it can’t also be successful at Dollar Tree,” adds Anthony Chukumba, analyst at Loop Capital.

Whether or not the activists are successful, demand for dollar stores is showing few signs of sliding. Even in Nashville itself, which enjoys the lowest unemployment rate of any big city in the country, you need not venture far from the booming downtown area to see why dollar stores are doing a roaring trade.

Less than half an hour walk from a glass tower being built to house AllianceBernstein, the asset manager moving its headquarters from New York, Relonna Reid has popped in to a Family Dollar for cigarettes.

Despite her job as a phlebotomist, the mother of five says she feels “a pay cheque away from being homeless”.

The shop near the Cayce Homes projects in east Nashville is a lifeline for the neighbourhood, she says. The product quality is not the best, but that is to be expected, she says, adding: “You can’t get mad if your broom breaks. You only paid a dollar for it.”


Leave a Reply

Your email address will not be published. Required fields are marked *



Check Also

Divorce after 50 is absolutely destroying baby boomers’ finances


Ottawa is working hard to land trade deals abroad that businesses at home have never heard of