Family Dollar Stores announced that it is gaining market share because of its broad appeal to budget-conscious customers who spend a large portion of their disposable income in discount stores. In July, shares of Family Dollar rose 7%.  However, Family Dollar has lowered its profit outlook for the third time in a year.

Dollar stores weathered the recession better than most retailers by selling smaller packaged items of staple goods and catered to customers who live paycheck to paycheck.    Investors are concerned about the sustained success of dollar stores that flourished during the recession, but might suffer as customers “trade up” to more upscale stores.   For dollar stores, like Family Dollar, a weak economy can be a double-edged sword.  Dollar stores have grown because of people trading down to lower-priced goods, however, the core customers of dollar stores are increasingly more cash strapped and are buying fewer higher profit margin items.

Executives at Family Dollar agreed that this past year has been more challenging than expected.  The core customers continued to buy essentials but spent less money on discretionary items like clothing and home goods. Both Family Dollar and Dollar General have been experimenting with new merchandise mixes to compete with higher-end discount retailers in order to retain customers who may begin to “trade up.”  However, Dollar General has to be careful as this strategy can backfire.  Dollar General expanded its assortment to offer more brand name goods and this led to customers bypassing the higher profit, private label items for the brand name merchandise.  In addition, the inclusion of more name brands has also led to an increase in shoplifting.

Discussion Questions:

Why are extreme value retailers, like Family Dollar and Dollar General, stock prices going up while their profits going on?

How are they changing their merchandise mix to strengthen their position?

 

SOURCE: Serena Ng and Ann Zimmerman, Wall Street Journal, July 10, 2013