netrashetty
Netra Shetty
Dollar Tree, Inc. (NASDAQ: DLTR) is an American chain of discount variety stores selling every item for $1.00 or less. A Fortune 500 company, Dollar Tree is headquartered in Chesapeake, Virginia and operates 4,009 stores[1] throughout the 48 contiguous U.S. states. Its stores are supported by a nationwide logistics network of nine Distribution Centers. The Company operates one dollar stores under the names of Dollar Tree and Dollar Bills. The Company also operates a multiprice-point variety chain under the name Deal$ (http://www.deals-stores.com/).
Dollar Tree competes in the dollar store and low-end retail markets with the national chains Family Dollar, Big Lots and Dollar General together with regional chains such as 99 Cents Only Stores, Fred's and many independent dollar stores nationwide.
Each Dollar Tree stocks a wide variety of products including national, regional, and private-label brands. Some of the product departments found in a Dollar Tree store include health and beauty, food and snacks, party, seasonal décor, housewares, glassware, dinnerware, household cleaning supplies, candy, toys, gifts, gift bags and wrap, stationery, craft supplies, teaching supplies, books, and more. Many Dollar Tree stores also sell frozen foods and dairy items such as milk, eggs, pizza, ice cream, frozen dinners, and pre-made baked goods.
In 2009, Dollar Tree launched a redesigned website (http://www.dollartree.com/) with a new e-commerce platform. DollarTree.com sells Dollar Tree merchandise in larger quantities to individuals, small businesses, and organizations. Every single item on the website is still only $1 or less and the Company offers free shipping to Dollar Tree stores. The Company also advertises in-store events, specials, seasonal promotions, and featured products through the site and users can locate a retail store, research information about Dollar Tree, and view product recalls. Dollar Tree also recently added customer ratings and reviews to the site so customers can go online and read and write reviews about Dollar Tree products.
Dollar Tree Stores (NASDAQ: DLTR) is a discount retailer and the largest retailer offering a fixed price of $1 on all merchandise in its main discount variety stores.[1] The company targets low to lower-middle income consumers and sells everyday products from food and personal care products to non-essentials like toys and holiday decorations. At the end of 2009, the company operated 3,806 stores in 48 states.[2] All but 143 of these stores were the main discount variety stores that sold everything for $1. The remaining stores, a chain operating under the name Deal$ which was acquired in 2006, sell most of its items for $1 or less but also sells some items for more than $1.[1] In FY2009, Dollar Tree had net sales of $5.2 billion.[3]
Unlike other stores in the retail industry, discount retailers like Dollar Tree typically do not suffer during economic slowdowns because lower-class and price-conscious middle-class consumers gravitate towards discount stores in order to save money.[4] As a result of the recession, in 2009 the company's net sales and net income increased by 12.6% and 40% respectively.[3] The company competes for price-conscious shoppers in an intensely competitive and saturated market, which is dominated by big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as comparable companies like Family Dollar Stores (FDO) and 99 Cents Only Stores (NDN).
Company Overview
Contents
1 Company Overview
1.1 Business Segments
1.2 Growth Strategy
1.3 Acquisition of Dollar Giant[8]
2 Business Growth
2.1 FY 2009 (ended January 30, 2010)[3]
2.2 Q1 2010 (ended May 1, 2010)[9]
2.3 Q2 2010 (ended July 31, 2010)[10]
2.4 Q3 2010 (ended October 30, 2010)[11]
3 Trends and Forces
3.1 Difficulty in Sustaining Recession-Based Growth
3.2 Dollar Tree Well-Positioned in Recession
3.3 Discounters Experience Difficulty Passing on Cost Increases to Customers
3.4 Inability to Pass on Inflation Risk Harmful in the Long-Run
3.5 Stiff Competition and Low Competitive Advantages in a Mature and Saturated Market
4 Competition
4.1 Dollar Tree vs. Comparable Dollar Stores
4.2 Dollar Tree vs. Big-Box Sellers
5 References
Dollar Tree has expanded from 2,735 stores in 2004 to 3,806 in 2009, a 39%increase over five years.[5] The company is able to sell its goods for just $1.00 each by importing 40 to 45% of its products from foreign countries (most of which come from China) and buying 55% to 60% domestically including purchases through closeouts. The company has established close relationships with manufacturers which have allowed them do purchase products at much lower costs.[1]
Business Segments
Each Dollar Tree store carries an average 6,000 items at any given time. The company sells its products in three different business segments:[6]
Consumable merchandise (48.1% of net sales): which include candy and food, basic health and beauty care, and household consumables such as paper, plastics and household chemicals and in select stores, frozen and refrigerated food. The company has started to add freezers to its stores in order to increase the variety of consumable merchandise it could sell. In 2009, the company added freezers to 200 stores, making the total number of stores with freezers approximately 1,400. The company plans to add freezers to 225 additional stores in 2009.[1]
Variety merchandise (46.9% of net sales): which includes toys, durable housewares, gifts, fashion health and beauty care, party goods, greeting cards, apparel, and other items.
Seasonal goods (5.0% of net sales): which include Easter, Halloween and Christmas merchandise, along with summer toys and lawn and garden merchandise.
Growth Strategy
Since 2004, Dollar Tree's net sales have increased at a compound annual growth rate of 10.4% due to new store openings, store expansions, and acquisitions. In 2004, the company operated 2,735 stores and by the end of 2009 operated 3,806 stores, an increase of 1071 stores. In addition, the average selling square foot per store increased from 7,475 sq. ft. in 2004 to 8,440 sq. ft. in 2009.[5] The company believes that the optimal size of its stores is between 8,000 and 10,000 sq. ft. and have focused expansion construction on stores that have less than 6,000 sq. ft. of selling area.
In March 2006, the company acquired 138 Deal$ stores for $30.5 million. The acquisition of Deal$ strengthened Dollar Tree's commitment to selling its products for $1 even though some Deal$ stores sell some items for more than $1. Since then, Dollar Tree has continued to operate the Deal$ chain and has opened five new stores with the name.[7] In addition to acquiring Deal$, Dollar Tree also acquires the rights to smaller store leases through bankruptcy proceedings of certain discount retail.
Acquisition of Dollar Giant[8]
On October 11, 2010, Dollar Tree announced that it was acquiring Dollar Giant Store Ltd. for $52 million in cash. Dollar Giant operated 84 stores in Canada. The acquisition is Dollar Tree's first exposure to an international market.
Business Growth
FY 2009 (ended January 30, 2010)[3]
Dollar Tree's net income increased 40% in 2009 from $230 million in 2008 to $321 million in 2009. The company benefited from its market position as a discount dollar-store retailer as recessionary pressures set in and consumer budgets shrank, allowing them to appeal to more price-conscious consumers and thus increasing store traffic and sales..
Net sales rose 12.6% in 2009 to $5.23 billion as a result of new and expanded stores as well as increased comparable store sales of 7.2% due to increased customer traffic as result of the sluggish economy.
Operating margin for the year was 9.8% of net sales which grew by 190 bps from 7.9% in 2008. This stagnation was a result of a decrease in SG&A expenses which fell to 25.7% of net sales or $1.3 billion.
There was an 7.2% increase in comparable store sales in 2009 due to increased customer transactions (3.7%) and increased transaction size (0.4%).
Dollar Tree opened 250 stores, expanded 75 stores and closed 25 stores in 2009. At the end of the year, the company operated 3,806 stores.
Q1 2010 (ended May 1, 2010)[9]
Dollar Tree's net income grew by 5% from $60.4 million in the previous year's quarter to $63.6 million. The discount retailer benefited from increased traffic and a higher average ticket as consumers continued to be price conscious in the wake of the economic recovery.
Net sales for the period increased 12.6% from $1.20 billion to $1.35 billion. The company reported that the health and beauty care products, food, household consumables, and party goods were the leading categories.
Comparable store sales grew 6.5% for the quarter, on top of a 9.2% increase during the the previous year's quarter.
During the quarter, the company opened 74 stores, closed 6 stores, and expanded or relocated 34 stores. Retail selling square footage increased 6.5% compared to a year ago, to 33.0 million square feet.
Q2 2010 (ended July 31, 2010)[10]
Dollar Tree's second quarter net income increased by 37% to $78 million. The company attributes this to higher sales driven by increases in traffic and average ticket.
Net sales increased 13% to $1.38 billion on stronger sales of food, health and beauty products, and party supplies. Comparable store sales increased 6.7% during the period.
During the second quarter, Dollar Tree opened 56 stores, expanded or relocated 34 stores, and closed 5 stores. The company runs 3,925 stores in 48 states.
Q3 2010 (ended October 30, 2010)[11]
Dollar Tree's third quarter net income increased 37% to $93.2 million. The company benefited from 86 store openings, which generated more sales.
Net sales increased 14.2% to $1.43 billion. Comparable-store sales increased 8.7% on top of a 6.5% increase in the prior year period. Leading categories in the third quarter included food, housewares, domestics and home products, party supplies, and health and beauty care products.
During the quarter, Dollar Tree opened 86 stores, relocated 27 stores, and closed 2 stores. Retail selling square footage increased 6.6% to 34.4 million square feet.
Trends and Forces
Difficulty in Sustaining Recession-Based Growth
Dollar Tree, as have most other discount retailers, has had higher revenues, net incomes, and same store sales during the recession as consumers look for deals in order to save money. In 2009, the company's net sales increased by 12.6%.[3] The question though is will discount retailers like Dollar Tree be able to sustain the same levels of growth after the recession has passed. Although Dollar Trees offers its products at a fixed price of $1, it does not necessarily mean that customers are getting the best deal. Not only do other discount companies offer extremely low prices but some may offer higher quality products. When the recession passes there is risk that customers will abandon these discount stores and spend a little more money to buy higher quality goods.[12] Dollar Tree will have a lot of work to do to keep up the 7.2% comparable store sale increase that it had in FY 2009.
At the end of 2010, a company survey of its shopper revealed that 95% of its "trade-down" consumers would continue to shop with the company in 2011, despite a strengthening economy.[13] If Dollar Tree can retain these "trade-down" consumers, the company will have a better chance at sustaining the same level of growth it has had over the past couple of years.
Dollar Tree Well-Positioned in Recession
As a dollar store retailer operating in the discounting market, Dollar Tree’s customer base is largely of the low-income demographic. Low-income families are generally more sensitive to declines in disposable income during recessions when unemployment rises, which leaves the possibly negative effect of customers attempting to save money and cut back on non-essential spending. However, simultaneously consumers looking for cheap essential goods (such as foodstuffs and clothing) may head to Dollar Tree Stores looking for low prices. This is incredibly pertinent since the U.S. has been in a recession since late 2007 and unemployment reached 9.7% in January 2010.[14] In FY2009, Dollar Tree's same store sales grew 7.2% while many other retailers posted falling same store sales, signaling that customers may be switching to low-cost stores such as Dollar Tree.[3]
Discounters Experience Difficulty Passing on Cost Increases to Customers
Because the company’s low-income customer base is highly sensitive to price and because the company competes largely with a fixed merchandise price of $1, input cost increases (such as inventory, overhead, and marketing) are difficult or impossible to pass on to consumers. Although the company has been able to raise some prices - changing an item that was 2 for $1 to 59 cents apiece, for example - the prices of the vast majority of its goods cannot be increased. Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation increases the risk of large margin decreases that cannot be offset by price increases. For example in 2009, Dollar Tree's cost of sales increased 10.5% to $3.37 billion.[15]
Inability to Pass on Inflation Risk Harmful in the Long-Run
The company assumes substantial inflation-related risk. Because the majority of its stores are based on the $1 fixed price point concept, the company is limited in its ability to pass on inflation to consumers on a regular basis. And, indeed, lest the company experience awful returns in the very long-run, the company must someday break the $1 fixed price point (i.e. think about what a dime could buy in the 1930s compared to what it can buy today)[16]. The company is, however, growing via its Deal$ concept, which offers a range of prices on merchandise, including offering items over $1. Expansion of the Deal$ chain will mitigate inflation risk in the long run, but will depend upon rapid growth of this concept, as it currently comprises just under 4% of the company's store base.[7] Concurrent with the downfalls of the economic recession is the risk of higher inflation -- in 2008 the U.S. inflation rate was 3.85%, the highest level since 1991.[17]
Stiff Competition and Low Competitive Advantages in a Mature and Saturated Market
Dollar Tree competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Dollar Tree store operating within a few miles of a nearby Wal-Mart or Target, for instance, will struggle to compete on value and selection, and may instead gain customers via convenience and location. Also, while the company is technically the largest "single price point" ($1) retailer and attempts to differentiate and scale itself in this way, it faces competition faces other “dollar stores,” that have similar or identical value propositions, such as Family Dollar Stores (FDO), Dollar General (DG), and 99 Cents Only Stores (NDN). With low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores and collectively, these companies are approaching U.S. saturation. While Dollar Tree has some scale and is attempting to both grow and differentiate itself by expanding in densely populated, higher traffic urban areas, there is substantial risk of lower margins due to increased overhead expenses as well as stiff competition as other discounters pursue the same strategies.[18]
Competition
Dollar Tree vs. Comparable Dollar Stores
Dollar Tree is a discount retailer that competes with other stores that have similar business models. Thus, the company faces direct competition from dollar-store chains, such as Family Dollar Stores (FDO) and 99 Cents Only Stores (NDN), that sell many of their products at or around $1.
Description of dollar store companies:
Family Dollar Stores (FDO): operates 6,655 stores in 44 states. Most of the merchandise the company sells ranges from less than a dollar to around $10 in price, with the majority under $1 per unit.[19]
99 Cents Only Stores (NDN): operates 275 stores in the United States. The company sells all of its products for 99 cents or less. Food and grocery sales account for more than half of the company's annual revenue. .[20]
Dollar Tree vs. Big-Box Sellers
As a discount retailer, Dollar Tree faces significant competition from big-box sellers like Wal-Mart Stores (WMT) and Target (TGT), whose enormous scale allows them to extract value in their inventory purchases and pass these savings on to consumers. Dollar Tree Stores, however, attempts to differentiate itself with its smaller-format stores that enable the company to open shop in most rural, small town, and urban markets while incurring fewer overhead costs. Along these lines, the company is more focused on urban areas than Wal-Mart, which has traditionally focused on dominating rural and small-town markets. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale. The company's growth going forward is highly dependent on finding attractive new urban stores to add to its existing base, while avoiding opening up in areas already dominated by major competitors, a challenging task given the market saturation of the US discount retailing industry.
Description of big-box sellers:
Wal-Mart (WMT): is the world's third largest company[21] with 7,873 stores worldwide. Because of its mammoth size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers.[22]
Target (TGT): operates 1,682 stores in 48 states. Target offers a range of general merchandise in a similar store format to Wal-Mart but targets a higher income demographic than that of Big Lots and Wal-Mart.
Dollar Tree competes in the dollar store and low-end retail markets with the national chains Family Dollar, Big Lots and Dollar General together with regional chains such as 99 Cents Only Stores, Fred's and many independent dollar stores nationwide.
Each Dollar Tree stocks a wide variety of products including national, regional, and private-label brands. Some of the product departments found in a Dollar Tree store include health and beauty, food and snacks, party, seasonal décor, housewares, glassware, dinnerware, household cleaning supplies, candy, toys, gifts, gift bags and wrap, stationery, craft supplies, teaching supplies, books, and more. Many Dollar Tree stores also sell frozen foods and dairy items such as milk, eggs, pizza, ice cream, frozen dinners, and pre-made baked goods.
In 2009, Dollar Tree launched a redesigned website (http://www.dollartree.com/) with a new e-commerce platform. DollarTree.com sells Dollar Tree merchandise in larger quantities to individuals, small businesses, and organizations. Every single item on the website is still only $1 or less and the Company offers free shipping to Dollar Tree stores. The Company also advertises in-store events, specials, seasonal promotions, and featured products through the site and users can locate a retail store, research information about Dollar Tree, and view product recalls. Dollar Tree also recently added customer ratings and reviews to the site so customers can go online and read and write reviews about Dollar Tree products.
Dollar Tree Stores (NASDAQ: DLTR) is a discount retailer and the largest retailer offering a fixed price of $1 on all merchandise in its main discount variety stores.[1] The company targets low to lower-middle income consumers and sells everyday products from food and personal care products to non-essentials like toys and holiday decorations. At the end of 2009, the company operated 3,806 stores in 48 states.[2] All but 143 of these stores were the main discount variety stores that sold everything for $1. The remaining stores, a chain operating under the name Deal$ which was acquired in 2006, sell most of its items for $1 or less but also sells some items for more than $1.[1] In FY2009, Dollar Tree had net sales of $5.2 billion.[3]
Unlike other stores in the retail industry, discount retailers like Dollar Tree typically do not suffer during economic slowdowns because lower-class and price-conscious middle-class consumers gravitate towards discount stores in order to save money.[4] As a result of the recession, in 2009 the company's net sales and net income increased by 12.6% and 40% respectively.[3] The company competes for price-conscious shoppers in an intensely competitive and saturated market, which is dominated by big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as comparable companies like Family Dollar Stores (FDO) and 99 Cents Only Stores (NDN).
Company Overview
Contents
1 Company Overview
1.1 Business Segments
1.2 Growth Strategy
1.3 Acquisition of Dollar Giant[8]
2 Business Growth
2.1 FY 2009 (ended January 30, 2010)[3]
2.2 Q1 2010 (ended May 1, 2010)[9]
2.3 Q2 2010 (ended July 31, 2010)[10]
2.4 Q3 2010 (ended October 30, 2010)[11]
3 Trends and Forces
3.1 Difficulty in Sustaining Recession-Based Growth
3.2 Dollar Tree Well-Positioned in Recession
3.3 Discounters Experience Difficulty Passing on Cost Increases to Customers
3.4 Inability to Pass on Inflation Risk Harmful in the Long-Run
3.5 Stiff Competition and Low Competitive Advantages in a Mature and Saturated Market
4 Competition
4.1 Dollar Tree vs. Comparable Dollar Stores
4.2 Dollar Tree vs. Big-Box Sellers
5 References
Dollar Tree has expanded from 2,735 stores in 2004 to 3,806 in 2009, a 39%increase over five years.[5] The company is able to sell its goods for just $1.00 each by importing 40 to 45% of its products from foreign countries (most of which come from China) and buying 55% to 60% domestically including purchases through closeouts. The company has established close relationships with manufacturers which have allowed them do purchase products at much lower costs.[1]
Business Segments
Each Dollar Tree store carries an average 6,000 items at any given time. The company sells its products in three different business segments:[6]
Consumable merchandise (48.1% of net sales): which include candy and food, basic health and beauty care, and household consumables such as paper, plastics and household chemicals and in select stores, frozen and refrigerated food. The company has started to add freezers to its stores in order to increase the variety of consumable merchandise it could sell. In 2009, the company added freezers to 200 stores, making the total number of stores with freezers approximately 1,400. The company plans to add freezers to 225 additional stores in 2009.[1]
Variety merchandise (46.9% of net sales): which includes toys, durable housewares, gifts, fashion health and beauty care, party goods, greeting cards, apparel, and other items.
Seasonal goods (5.0% of net sales): which include Easter, Halloween and Christmas merchandise, along with summer toys and lawn and garden merchandise.
Growth Strategy
Since 2004, Dollar Tree's net sales have increased at a compound annual growth rate of 10.4% due to new store openings, store expansions, and acquisitions. In 2004, the company operated 2,735 stores and by the end of 2009 operated 3,806 stores, an increase of 1071 stores. In addition, the average selling square foot per store increased from 7,475 sq. ft. in 2004 to 8,440 sq. ft. in 2009.[5] The company believes that the optimal size of its stores is between 8,000 and 10,000 sq. ft. and have focused expansion construction on stores that have less than 6,000 sq. ft. of selling area.
In March 2006, the company acquired 138 Deal$ stores for $30.5 million. The acquisition of Deal$ strengthened Dollar Tree's commitment to selling its products for $1 even though some Deal$ stores sell some items for more than $1. Since then, Dollar Tree has continued to operate the Deal$ chain and has opened five new stores with the name.[7] In addition to acquiring Deal$, Dollar Tree also acquires the rights to smaller store leases through bankruptcy proceedings of certain discount retail.
Acquisition of Dollar Giant[8]
On October 11, 2010, Dollar Tree announced that it was acquiring Dollar Giant Store Ltd. for $52 million in cash. Dollar Giant operated 84 stores in Canada. The acquisition is Dollar Tree's first exposure to an international market.
Business Growth
FY 2009 (ended January 30, 2010)[3]
Dollar Tree's net income increased 40% in 2009 from $230 million in 2008 to $321 million in 2009. The company benefited from its market position as a discount dollar-store retailer as recessionary pressures set in and consumer budgets shrank, allowing them to appeal to more price-conscious consumers and thus increasing store traffic and sales..
Net sales rose 12.6% in 2009 to $5.23 billion as a result of new and expanded stores as well as increased comparable store sales of 7.2% due to increased customer traffic as result of the sluggish economy.
Operating margin for the year was 9.8% of net sales which grew by 190 bps from 7.9% in 2008. This stagnation was a result of a decrease in SG&A expenses which fell to 25.7% of net sales or $1.3 billion.
There was an 7.2% increase in comparable store sales in 2009 due to increased customer transactions (3.7%) and increased transaction size (0.4%).
Dollar Tree opened 250 stores, expanded 75 stores and closed 25 stores in 2009. At the end of the year, the company operated 3,806 stores.
Q1 2010 (ended May 1, 2010)[9]
Dollar Tree's net income grew by 5% from $60.4 million in the previous year's quarter to $63.6 million. The discount retailer benefited from increased traffic and a higher average ticket as consumers continued to be price conscious in the wake of the economic recovery.
Net sales for the period increased 12.6% from $1.20 billion to $1.35 billion. The company reported that the health and beauty care products, food, household consumables, and party goods were the leading categories.
Comparable store sales grew 6.5% for the quarter, on top of a 9.2% increase during the the previous year's quarter.
During the quarter, the company opened 74 stores, closed 6 stores, and expanded or relocated 34 stores. Retail selling square footage increased 6.5% compared to a year ago, to 33.0 million square feet.
Q2 2010 (ended July 31, 2010)[10]
Dollar Tree's second quarter net income increased by 37% to $78 million. The company attributes this to higher sales driven by increases in traffic and average ticket.
Net sales increased 13% to $1.38 billion on stronger sales of food, health and beauty products, and party supplies. Comparable store sales increased 6.7% during the period.
During the second quarter, Dollar Tree opened 56 stores, expanded or relocated 34 stores, and closed 5 stores. The company runs 3,925 stores in 48 states.
Q3 2010 (ended October 30, 2010)[11]
Dollar Tree's third quarter net income increased 37% to $93.2 million. The company benefited from 86 store openings, which generated more sales.
Net sales increased 14.2% to $1.43 billion. Comparable-store sales increased 8.7% on top of a 6.5% increase in the prior year period. Leading categories in the third quarter included food, housewares, domestics and home products, party supplies, and health and beauty care products.
During the quarter, Dollar Tree opened 86 stores, relocated 27 stores, and closed 2 stores. Retail selling square footage increased 6.6% to 34.4 million square feet.
Trends and Forces
Difficulty in Sustaining Recession-Based Growth
Dollar Tree, as have most other discount retailers, has had higher revenues, net incomes, and same store sales during the recession as consumers look for deals in order to save money. In 2009, the company's net sales increased by 12.6%.[3] The question though is will discount retailers like Dollar Tree be able to sustain the same levels of growth after the recession has passed. Although Dollar Trees offers its products at a fixed price of $1, it does not necessarily mean that customers are getting the best deal. Not only do other discount companies offer extremely low prices but some may offer higher quality products. When the recession passes there is risk that customers will abandon these discount stores and spend a little more money to buy higher quality goods.[12] Dollar Tree will have a lot of work to do to keep up the 7.2% comparable store sale increase that it had in FY 2009.
At the end of 2010, a company survey of its shopper revealed that 95% of its "trade-down" consumers would continue to shop with the company in 2011, despite a strengthening economy.[13] If Dollar Tree can retain these "trade-down" consumers, the company will have a better chance at sustaining the same level of growth it has had over the past couple of years.
Dollar Tree Well-Positioned in Recession
As a dollar store retailer operating in the discounting market, Dollar Tree’s customer base is largely of the low-income demographic. Low-income families are generally more sensitive to declines in disposable income during recessions when unemployment rises, which leaves the possibly negative effect of customers attempting to save money and cut back on non-essential spending. However, simultaneously consumers looking for cheap essential goods (such as foodstuffs and clothing) may head to Dollar Tree Stores looking for low prices. This is incredibly pertinent since the U.S. has been in a recession since late 2007 and unemployment reached 9.7% in January 2010.[14] In FY2009, Dollar Tree's same store sales grew 7.2% while many other retailers posted falling same store sales, signaling that customers may be switching to low-cost stores such as Dollar Tree.[3]
Discounters Experience Difficulty Passing on Cost Increases to Customers
Because the company’s low-income customer base is highly sensitive to price and because the company competes largely with a fixed merchandise price of $1, input cost increases (such as inventory, overhead, and marketing) are difficult or impossible to pass on to consumers. Although the company has been able to raise some prices - changing an item that was 2 for $1 to 59 cents apiece, for example - the prices of the vast majority of its goods cannot be increased. Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation increases the risk of large margin decreases that cannot be offset by price increases. For example in 2009, Dollar Tree's cost of sales increased 10.5% to $3.37 billion.[15]
Inability to Pass on Inflation Risk Harmful in the Long-Run
The company assumes substantial inflation-related risk. Because the majority of its stores are based on the $1 fixed price point concept, the company is limited in its ability to pass on inflation to consumers on a regular basis. And, indeed, lest the company experience awful returns in the very long-run, the company must someday break the $1 fixed price point (i.e. think about what a dime could buy in the 1930s compared to what it can buy today)[16]. The company is, however, growing via its Deal$ concept, which offers a range of prices on merchandise, including offering items over $1. Expansion of the Deal$ chain will mitigate inflation risk in the long run, but will depend upon rapid growth of this concept, as it currently comprises just under 4% of the company's store base.[7] Concurrent with the downfalls of the economic recession is the risk of higher inflation -- in 2008 the U.S. inflation rate was 3.85%, the highest level since 1991.[17]
Stiff Competition and Low Competitive Advantages in a Mature and Saturated Market
Dollar Tree competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Dollar Tree store operating within a few miles of a nearby Wal-Mart or Target, for instance, will struggle to compete on value and selection, and may instead gain customers via convenience and location. Also, while the company is technically the largest "single price point" ($1) retailer and attempts to differentiate and scale itself in this way, it faces competition faces other “dollar stores,” that have similar or identical value propositions, such as Family Dollar Stores (FDO), Dollar General (DG), and 99 Cents Only Stores (NDN). With low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores and collectively, these companies are approaching U.S. saturation. While Dollar Tree has some scale and is attempting to both grow and differentiate itself by expanding in densely populated, higher traffic urban areas, there is substantial risk of lower margins due to increased overhead expenses as well as stiff competition as other discounters pursue the same strategies.[18]
Competition
Dollar Tree vs. Comparable Dollar Stores
Dollar Tree is a discount retailer that competes with other stores that have similar business models. Thus, the company faces direct competition from dollar-store chains, such as Family Dollar Stores (FDO) and 99 Cents Only Stores (NDN), that sell many of their products at or around $1.
Description of dollar store companies:
Family Dollar Stores (FDO): operates 6,655 stores in 44 states. Most of the merchandise the company sells ranges from less than a dollar to around $10 in price, with the majority under $1 per unit.[19]
99 Cents Only Stores (NDN): operates 275 stores in the United States. The company sells all of its products for 99 cents or less. Food and grocery sales account for more than half of the company's annual revenue. .[20]
Dollar Tree vs. Big-Box Sellers
As a discount retailer, Dollar Tree faces significant competition from big-box sellers like Wal-Mart Stores (WMT) and Target (TGT), whose enormous scale allows them to extract value in their inventory purchases and pass these savings on to consumers. Dollar Tree Stores, however, attempts to differentiate itself with its smaller-format stores that enable the company to open shop in most rural, small town, and urban markets while incurring fewer overhead costs. Along these lines, the company is more focused on urban areas than Wal-Mart, which has traditionally focused on dominating rural and small-town markets. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale. The company's growth going forward is highly dependent on finding attractive new urban stores to add to its existing base, while avoiding opening up in areas already dominated by major competitors, a challenging task given the market saturation of the US discount retailing industry.
Description of big-box sellers:
Wal-Mart (WMT): is the world's third largest company[21] with 7,873 stores worldwide. Because of its mammoth size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers.[22]
Target (TGT): operates 1,682 stores in 48 states. Target offers a range of general merchandise in a similar store format to Wal-Mart but targets a higher income demographic than that of Big Lots and Wal-Mart.