Business

Dollar stores thrive even in a hot economy. So why is Family Dollar closing its HQ?

When you walk into the Family Dollar on North Tryon near East Sugar Creek Road, you might feel like you’re in a grocery store but without the fresh produce and meat.

The discount store, nestled in a mostly abandoned shopping mall, is filled with rows of cereal, bread, canned goods, alcohol and candy. It’s also stocked with non-grocery products, like electronics, toys and clothes.

Prices are low, even on national brand products, catering to consumers on a budget who need essentials. A pack of 48 infant diapers costs $7, for instance, while a pack of five ramen noodle dinners is $1.

During the recession and its aftermath, dollar stores thrived and expanded, opening 12,000 stores nationwide. The discount retailers cater to low-income customers who often have few other nearby grocery options. And they don’t face the same kind of competition from Amazon as other retailers like bookstores or department stores. Family Dollar doesn’t even sell its goods online, and its rival Dollar General only started doing so in 2011.

The rip-roaring success of dollar stores illustrates some of the many contradictions playing out now in the economy. The job market and overall economy appear to be thriving. But Family Dollar, its parent company Dollar Tree and competitor Dollar General — companies that make most of their money from stressed-out consumers trying to make ends meet — are also growing rapidly.

Yet Family Dollar still lags its arch-rival Dollar General, more than three years after Dollar Tree bought the Matthews-based retailer for $9.1 billion. Last month, Dollar Tree reported that sales at existing Family Dollar stores were down 0.5 percent for the first six months of the year.

“It’s not the same rising tide for the customer at Family Dollar,” Dollar Tree CEO Gary Philbin told analysts in an earnings call last month.

Now, Dollar Tree is seeking to cut its expenses and streamline operations by closing Family Dollar’s Matthews headquarters, an announcement the company made this week. The closure, to be complete in fall 2019, will cost the Charlotte region 900 jobs (700 employees will be offered the chance to relocate to Chesapeake, Va., and about 200 jobs are being cut).

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“By bringing our teams together into one location, we will further improve our ability to support our stores more effectively through enhanced collaboration, communication and teamwork,” Philbin said.

Experts say Dollar Tree is likely to continue cutting costs and making improvements to shore up Family Dollar’s flagging business.

So far, Dollar Tree’s been taking a “two-pronged” approach to cleaning up its business, according to Steven Cox, a marketing professor at Queens University of Charlotte. For one, Dollar Tree has been improving Family Dollar by renovating stores and adding more private labels, which are more profitable.

“Right now (Dollar Tree is) testing the waters,” Cox said. “They’ve got to make a decision as to what they’re going to do.”

Unlike Family Dollar, which has items at a variety of prices, everything at Dollar Tree sells for $1 or less. The retailer has started implementing some of that strategy, which is its “core competency,” in dealing with Family Dollar, by selling items in its stores for $1 or under, and by re-branding some Family Dollars as Dollar Trees.

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In 2017, Dollar Tree (Family Dollar’s owner) and Dollar General reported similar sales totals: $22.2 billion for Dollar Tree, $23.5 billion for Dollar General. Both retailers operate about 15,000 stores.

The two companies have expanded quickly in the decade since the recession that cost millions of people their jobs and pummeled consumers’ wallets.

In 2008, there were just over 18,100 total Dollar Tree, Family Dollar and Dollar General stores. A decade later, there are more than 30,000 such stores, and the retailers continue to open hundreds more each year.

Last year alone, Tennessee-based Dollar General, which focuses more on rural locations where there are few other retailers, opened more than 1,300 new stores. The retailer said it plans to open 900 more this year.

Dollar Tree sees even more room for growth. In its most recent annual report, Dollar Tree said its executives believe the U.S. can support more than 10,000 Dollar Tree stores and 15,000 Family Dollar stores. That’s 10,000 more than its current total.



In large part, they’ve thrived because of hardship. Recovery from the Great Recession has been slow coming, and more people who are looking to stretch their budgets turned to discount stores.

According to the U.S. Census Bureau, median household income climbed to just over $61,000 last year — finally above the prerecession level in 2007, after a decade of falling incomes followed by fitful and uneven growth. Unemployment is down to 3.9 percent, but many people are still feeling a pinch in the pocketbook.

“Our core customer is always stretched,” Dollar General CEO Todd Vasos said at an investor conference this month. Although he said Dollar General’s customers have been helped by rising incomes in the past year, most of that income rise is attributable to more hours worked at multiple part-time jobs, not higher wages.

“A lot of them tell us ‘I’m working two jobs now,’ ” Vasos said of the typical Dollar General shopper, often 20 hours at one job and 30 at another. Meanwhile, rent and health care costs continue to rise faster than wages, pressuring consumers even as their pay grows.

“Those are the two big ones (the typical customer) continues to battle with, and they’re increasing across all of the geographic areas we operate in,” Vasos said.

And analysts say their main customers aren’t likely to have $119 Amazon Prime accounts and the budget to order groceries in bulk ahead of time — important insulation for Family Dollar and Dollar General against online retailers. They also might not have access to a big-box store like Walmart or grocery store nearby. Instead, discount stores position themselves as a nearby option allowing customers to pick up the essentials a customer needs on short notice.

Philbin, the Dollar Tree CEO, told analysts last month that Family Dollar’s main shoppers are commonly looking for help with “the burden of ... stretching out their budget for the back half of the month.”

Uneven growth

A big part of what’s attracted customers to stores like Family Dollar, notably its food and other grocery offerings, has also hurt the chain.

Over the years, Family Dollar ramped up its selection of consumable goods (think candy and canned goods, tobacco, alcohol, health and beauty products, and household goods). Such goods have helped to draw in customers for more frequent trips. Often, residents with few or no other full-service supermarkets in their neighborhoods rely on Family Dollar and other discount chains as their primary source for groceries.

Though consumables have helped boost sales, they also have lower profit margins than other goods Family Dollar carries, such as toys and clothes. So, making more room for food and cigarettes in stores has at times increased sales, but hurt profit margins.

That’s one reason Family Dollar has struggled to keep up with Dollar Tree (although consumables comprise about three-quarters of everything sold at Family Dollar, and the breakdown is about the same at rival Dollar General.)

Dollar Tree, which still breaks out results for Family Dollar separately in financial reports, said sales at existing Family Dollar locations are down 0.5 percent for the first six months this year. Sales at existing Dollar Tree stores, on the other hand, are up almost 4 percent.

For the first half of the year, Dollar Tree stores generated operating profits of $628 million. Family Dollar accounted for just $192 million in operating profits.

Dollar General has raked in the money too, with existing store sales up almost 3 percent. Net income at Dollar General for the first half of 2018 rose to $772 million.

Roger Beahm, a business professor at Wake Forest University, said Family Dollar doesn’t have as strong an identity as Dollar Tree — where every item costs $1 — and is struggling against the larger Dollar General.

“Part of it has to do with the fact that Dollar Tree is very tightly positioned in the minds of customers. People know what to expect when they go to Dollar Tree,” Beahm said. “Family Dollar’s ability to compete in the marketplace against Dollar General has to do with the company’s ability to be perceived as offering quality merchandise and good service. They continue to be challenged in the marketplace to deliver against that positioning relative to their competition.”

Dollar General has benefited from its focus on opening small stores in rural areas, often with less than 20,000 people, which larger big-box retailers haven’t deemed worth opening in. That leaves the company with little competition in many areas for nearby residents’ dollars.

“These areas remain mostly untouched by large-scale retailers, giving Dollar General a location advantage,” analysts at IBISWorld wrote in a 2018 report.

Deep Charlotte roots

Leon Levine was 22 years old when he opened his first Family Dollar store in 1959 at 1510 Central Ave., in what is now an antiques store in the heart of Plaza Midwood, a booming Charlotte neighborhood.

In its opening announcement in The Charlotte Observer in November 1959, Family Dollar advertised specials like two bath towels for $1, boys “wash n’ wear” pants for $2 and four pairs of ladies panties for $1.

In expanding his company, Levine would scout new locations by spying fresh oil spots on the pavement left by low-income motorists. He knew that his store was popular with shoppers on a budget.

“Sale prices are every day prices at Family Dollar Stores,” a Family Dollar ad in the Observer boasted in 1959 . Nothing in the store was over $2.

Charlotte community historian Tom Hanchett said Levine’s growth strategy seems prescient in hindsight. Despite the growth of malls and department stores in suburbs in the 1960s, Levine opted instead to open Family Dollar stores in neighborhoods, mostly low-income ones.

“(Levine) was both recognizing a national trend and jumping on it, as young innovators can, and creating his own niche that has taken Family Dollar literally coast to coast,” Hanchett said. Family Dollar filled the gaps, Hanchett added, by opening in places with few other retail options.

In 1971, Levine was featured in an Observer profile when Family Dollar opened its 100th store. Levine told the Observer that the chain would continue to grow throughout the Carolinas, and that he could see it expanding as far as Alabama and Texas. Locations, Levine said, would be determined “by the type of people, and the type of payrolls” in a town.

That growth pattern still holds true today.

“We’re not looking for the country-club set,” Levine said, “and they have no need for us.”

Staff writer Cassie Cope contributed

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