What Killed the Dollar Tree’s $1 Price

The chain said last week that it will 25% permanent price increase on most of its products. Dollar Tree has made the change at some stores and will apply the new prices to all of its nearly 8,000 stores in the US by the first quarter of next year. In addition to new signs in stores to warn customers of the change, Dollar Tree will run ads and train store staff on how to handle customers confused about why prices aren’t $1. dollars more.

Dollar Tree is the last major dollar store chain that actually sells things for $1 and is determined by its price. In 2015, Dollar Tree boasted that it was “the nation’s leading operator of fixed-price point stores.”

The Dollar Tree’s model may have worked over the past few decades when inflation was practically non-existent. But the $1 strategy is not working for the time being. The company ended up walking away from $1 because it was hurting the business.

However, this is not a completely abrupt change to the Dollar Tree. In September, Dollar Tree said it had a plan begin selling items for $1.25 and $1.50 at select stores for the first time. It also said it would add $3 and $5 items to 5,000 stores, expanding on the previous strategy.
“This is the right time to get rid of the constraints of the $1 price,” Dollar tree (DLTR) CEO Michael Witynski said in a statement Tuesday, adding that it was a “monumental step” for the chain.

This is the reason Dollar Tree decided to abandon the $1 strategy for good.

Cost increase

Dollar Tree primarily sells low-margin consumer goods such as food and home goods, as well as toys, gifts, and seasonal goods in small, no-frills stores.

The company’s business model relies on limiting labor costs, inland transportation, fuel, goods and ocean freight – 40% of the company’s products are imported from abroad.

Keeping prices flat and staying profitable when things get more expensive has become more difficult for Dollar Tree and other thrift stores.

Costs are skyrocketing for businesses. The producer price index, which measures the prices manufacturers receive for their goods and services, rose 0.6 percent last month from September and rose 8.6 percent year-on-year, in line matching an annual record high, according to the latest data from the Labor Department.

Everything won't be $1 at Dollar Tree anymore.

This has reduced Dollar Tree’s profits and margins.

In Dollar Tree’s first three quarters of 2021, its profit margin fell 1.5% year over year. The drop was especially dramatic last quarter, down 4.7% to about 30% year-on-year.

Dollar Tree says its decision to permanently raise prices is “not a response to short-term inflation,” but the change should return Dollar Tree to a typical return of about 35% next year.

It will also help Dollar Tree offset the increased costs.

Willnski said on an earnings call Tuesday will “allow us to mitigate historically high increases in the cost of goods, including freight and distribution,” Witynski said on the earnings call. Tuesday, as well as a “wage increase”.

New products and sizes

When you can only sell for $1, that limits the products you can monetize and the size and quality of your merchandise.

“How small does a package of laundry detergent need to be to cost $1?” said David D’Arezzo, former chief commercial officer at Dollar General and veteran retail executive.

The company said selling things for $1 has forced Dollar Tree to stop offering some “customer favorites,” particularly in packaged and frozen foods and essentials. for family. This part of the business is important to Dollar Tree because customers visit stores most often to buy these items, not gifts and toys.

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The company says the price increase will give Dollar Tree the flexibility to reintroduce discontinued items, expand its merchandise selection, and introduce new products and sizes to attract customers.

The company may use a sales promotion measure. Sales at stores open for at least a year grew 2.2% last year from the previous year and 1.7% in the first three quarters of 2021 – a much slower pace than rivals. .

Dollar Tree did not respond to a request for comment on the specific products it plans to bring back.

Pressure from Wall Street

Dollar Tree has been struggling since buying Family Dollar in 2015 for $8.5 billion. Stock prices, sales and profit growth, and store openings lag behind Common Dollar (DG) and other discount chains. The company has its third chief executive officer since 2015.

Dollar Tree’s woes have drawn scrutiny from investors who think its $1 strategy is too rigid and hinders the chain.

In 2019, an active investor has shares in the company and forced Dollar Tree to give up the $1 price and also consider selling off Family Dollar. The activist ended the fight after Dollar Tree announced it plans to test higher prices.

But Wall Street’s pressure on Dollar Tree is back.

Dollar Tree is betting that customers won't object because of its higher price.

Another activist investor recently built a stake in Dollar Tree and tapped a respected former Dollar General CEO to drive the changes. Dollar Tree is open to input from activists and will evaluate any changes it proposes, Chief Executive Officer Witynski said last week.

One analyst said the active investor presence accelerated Dollar Tree’s decision to end the $1 price point.

“Deployment speed, along with [the] Sticky investor, Mantle Ridge, clearly suggests the opposite,” Kelly Bania, an analyst at BMO Capital Markets, said in a note to clients last week.

Customers are used to higher prices

Dollar Tree believes it now has the ability to raise prices thanks to competitors doing the same.

Dollar General, Family Dollar, 99 cent Only and Dollarama in Canada have sold many things for more than 1 dollar for many years. Year below (YEAR), the toy and game store that sells its stuff – as the name suggests – under $5 broke its strategy in 2019 when it started selling some items for up to $10.
Discount retailers such as TJX (TJX) and Costco (PRICE) Chuck Grom, an analyst at Gordon Haskett Research Advisors, said in a note to clients last week there has also been a recent increase in prices without much resistance from shoppers.

Dollar Tree “will likely be more ‘allowed’ by its customer base today” to raise prices because of these companies’ moves, he said.

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Dollar Tree is betting that customers won’t buy less than they did or switch to a competitor because of its new $1.25 price. The company tested the new prices in stores and conducted surveys with customers to gauge their reactions.

“Our shoppers are responding favorably,” said Witynski from Dollar Tree, adding that shoppers are “seeing market-wide price increases” and still can Find cheaper products at Dollar Tree.

But there are big risks to abandoning a brand identity built over 35 years.

“I think it dilutes their message,” said David D’Arezzo, former chief executive officer of Dollar General.

D’Arezzo and others warn that shoppers attached to the $1 image of the Dollar Tree could revolt, and a competitor like Dollar General could move to slash the Dollar Tree by selling multiple things. for a dollar more.

“This doesn’t sound very smart,” said R5 Capital analyst Scott Mushkin. “They shot the brand.”


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