Dollar Tree, which owns the Family Dollar chain of discount stores, along with its own namesake stores, has posted a collection of enviable performance metrics lately. Consider just a few numbers:

• Consolidated net sales up 8 percent, from $28.3 billion to $30.6 billion, over the last year.
• Fourth quarter total sales up 12 percent, from $7.7 billion to $8.6 billion.
• Same-store sales up 4.6 percent in one recent quarter, followed by another 5.4 percent jump the following quarter.
• Stock prices up 3 percent.

With these impressive outcomes, reports about how discount stores are enjoying a massive surge in success seem well-founded. But another number also sticks out when we consider Dollar Tree, namely, its plan to close down nearly 1000 physical locations in the next few years, including 600 immediate closures of Family Dollar stores. If a company is earning such remarkable sales increases, why would it start eliminating stores?

One reason has to do with other metrics, such as profits. Whereas it keeps raking in sales, the profits earned by the parent company dove, from $1.62 billion in profits to $998 million in net losses.

Most of the problematic profit outcomes appear attributable to Family Dollar, which Dollar Tree bought in 2015, in what one analyst called “a rather botched acquisition.” Whereas Dollar Tree enjoys strong brand recognition and loyalty, Family Dollar performs poorly on these measures. Its customers instead appear driven exclusively by convenience and price benefits. Thus, if a store sits in a weak location, people are unwilling to drive to reach it.

The appeal of Dollar Tree seems to derive from its more diversified pricing strategy. Shoppers can find some items for less than the $1 mark, as well as some relative luxuries that cost a bit more, which is especially appealing to middle-class consumers who are trying to lower their expenditures. These shoppers might be willing to spend, say, $7 for a package of paper towels, which still represents a great deal but also requires the capacity to pay more. Family Dollar instead has stuck firm to its $1 pricing, such that its limited offerings appeal mainly to very low-income shoppers who need access to a single roll of paper towels at a time, for just $1 paid on each trip, to be able to afford the purchase.

In choosing which Family Dollar stores to shutter, Dollar Tree is focused on what it defines as less-than-optimal locations, such that there is strong competition in the market (perhaps even from a Dollar Tree). Eliminating the Family Dollar option might leave low-income consumers in a bind though, in that they rely on extreme discounts to maintain their budgets.

Discussion Questions

1. What makes Dollar Tree more appealing than Family Dollar for middle-income consumers?
2. What happens if all the extreme discounters in an area close?

Sources: Nate Delesline III, “Dollar Tree, Family Dollar to Close 1,000 Stores,” Grocery Dive, March 13, 2024; Brooke DePilma, “Consumer Pressures and Deflationary Forces Could Lift These Two Retailers,” Yahoo! Finance, January 29, 2024