Discount & Dollar Retailers
Date February 2020
- Mass merchandisers’ growth continues with expected holiday sales growth of 4.1% for 2019
- Market expansion continues as most major dollar store chains opened new locations in 2019
- As it matures as an industry, dollar and variety stores’ revenue is expected to grow at an annualized rate of 3.5% through 2024, primarily because of heightened competition
Approximate Net Recovery on Cost
Continued growth for Dollar Store segment: Store counts for the major dollar store chains expanded in 2019 over 2018, as most chains increased their store counts while competing big-box formats slowed store growth in favor of digital growth. Dollar General led the segment with an increase of 867 stores for the 12-month period. It posted a comparable store sales increase of 4.6 percent for the quarter ended November 1, 2019, and an eight-quarter average increase of 3.5 percent. Most of Dollar General’s direct competitors also posted positive same store sales averages for the eight-quarter period including Dollarama (+4.0 percent), Five Below (+3.6), Ollie’s Bargain Outlet (+2.3), and Dollar Tree (+2.0).
U.S. retail sales for December 2019 increased 0.3 percent over November, in line with expectations. However, the increasing cost of gas, healthcare, and household rent expenses pushed the annual U.S. inflation rate to 2.3 percent (through December) up from 1.9 percent in 2018, adding pressure on discretionary spending, a key consideration for value-oriented shoppers.
A six-day shorter holiday selling period resulted in disappointing holiday sales for some including Five Below, whose holiday comp sales were down 2.6 percent over 2018. Total holiday sales however, increased 13.4 percent driven by a 20-percent increase in store count. Five Below noted that it is planning to implement a “Ten Below” concept in 2020 to drive sales, expand product offerings, and increase gross margins.
Research from IBISWorld indicates that retailers in the dollar and variety store segment will continue to consolidate as competition intensifies from mass merchandisers and large superstores like Walmart, Target, and Costco. Another key area of competition is digital, where mass-market retailers have invested heavily in recent years. Walmart’s e-commerce sales in the United States increased 41 percent for the third quarter of 2019.
To compete in these tough market conditions, IBISWorld projects that dollar stores will likely increase their market penetration and continue improving their efficiency, while smaller operators and non-chain stores will likely be unable to compete. As a result, store counts are projected to increase at a slower pace through 2024 than they did for the five years ending 2019.
Economic climate drives sales: The target consumers of dollar stores are typically budget minded and looking to take advantage of the value-pricing model offered by discount and dollar stores. Fiscal trends may predict discount and dollar store volume, and the segment is more apt to benefit from economic downturns and higher jobless rates. The U.S. unemployment rate remained at historical lows in 2019, but increased slightly to 3.6 percent in January 2020 from 3.5 percent in December.
Based on data from the Bureau of Economic Analysis, per-capita disposable income is expected to increase at an annualized rate of 1.9 percent through 2025. IBISWorld expects that dollar and variety stores’ industry revenue will grow at an annualized rate of 3.5 percent over the same period, including growth of 4.3 percent in 2020.
Ongoing tariffs have taken a toll on retailers that import a significant quantity of lower priced products from China. Since the tariffs were first implemented in 2018, many retailers have had to move to find alternative vendors or raise prices on products sourced from China in order to maintain gross margins. It should be noted that, as part of the phase-one China trade deal signed January 15, 2020, the United States agreed to cut tariffs from 15 percent to 7.5 percent on $120 billion of imports in exchange for an agreement from China to purchase more American products. Additional tariffs of 25 percent on $250 billion of Chinese imports are still in place as of the date of this publication.
To the extent that the unemployment rate rises, or the country faces future government shutdowns or other economic pressures, discount and dollar stores may benefit as they pick up opportunistic shoppers trying to make ends meet.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
Reference sources: U.S. Bureau of Economic Analysis, retail dive, creditntell, ibisworld, dollargeneral.com