When people are worried about their income, their job security, and the cost of everything from rent to food rising, they tend to become careful about spending.
“Consumer sentiment confirmed its early month reading, falling about 6% from last month and landing about 11% below a year ago amid continued worries that inflation will remain elevated for the foreseeable future,” according to University of Michigan Surveys of Consumers Director Joanne Hsu.
Consumers are worried, but some people are more worried than others.
“Groups who are typically less-equipped to absorb increases in cost of living also exhibited stronger decreases in sentiment, including older consumers, lower- and middle-income consumers, and those with no stock holdings,” Hsu shared.
That, however, has proven to be good news for discount retailers with dollar in their name including Dollar General and Dollar Tree.
Dollar General and Dollar Tree reported strong results
Dollar General and Dollar Tree both reported strong second-quarter results.
- Dollar General’s Q2 net sales jumped 5.2% year over year to $11.3 billion, according to a company press release.
- Its 3.5% same-store sales increase reflected a 2% increase in traffic and a 1.5% bump in average transaction amount.
- Dollar Tree reported total sales grew 7% year over year to $4.9 billion, according to its second-quarter earnings release.
- Same-store sales increased 3.7% due to a 3.3% increase in ticket and a 0.4% rise in traffic.
“Both chains have continued to attract shoppers looking for value, and Dollar General has also been seeing more middle- and higher-income customers,” according to Coresight Analyst Sujeet Naik.
Dollar General sees strength in weakness
Dollar General CEO Todd Vasos noted that his chain keeps growing its customer base.
“This marks the fifth consecutive quarter of growth in customer traffic as we continue to build on the momentum in our business with both new and existing customers,” he shared during Dollar General’s second-quarter earnings call.
He admitted a sales weakness among lower-income customers, but also believes that economic conditions will lead to more shopping by that group.
“Our core customers continue to be financially constrained with a variety of factors impacting their budget,” he said.
He believes gas prices will impact his chain’s customers’ willingness to visit Walmart, Target, Costco, and grocery chains that might be located farther away.
“As customers have continued to reduce trips and shop closer to home, Dollar General is uniquely positioned to meet their needs with more than 21,000 stores located within 5 miles of approximately 75% of the U.S. population,” he added.
GlobalData Managing Director Neil Saunders also saw Dollar General’s footprint as an advantage.
“The sales lift was driven by both traffic and a slight uplift in basket values,” he told RetailDive. “The former dynamic got a small boost from higher gas prices which, especially in rural areas, make the proximity and shorter drive-times of Dollar General stores a bit more attractive. We have seen this dynamic play out before and, essentially, it acts as a recruiting tool for Dollar General.”
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Dollar Tree sees wealthier customers
Dollar Tree CEO Michael Creedon saw similar consumer behavior to what Vasos reported, and he talked about it during his company’s second-quarter earnings call.
“The consumer environment remains dynamic. Customers continue managing household budgets carefully, shopping with purpose and prioritizing value and affordability,” he said.
Those economic challenges, he noted, have driven wealthier customers to Dollar Tree.
“Our data shows we grew sales across all income cohorts. Households we serve were up nicely year-over-year with gains skewing to the middle and higher-income households,” he said.
Creedon noted that the challenging economy has hit lower-income customers hardest.
“First, the inflationary backdrop continues to pressure all household budgets, particularly for lower-income consumers. As our customers look for ways to stretch their dollars, they are increasingly turning to Dollar Tree for everyday essentials at compelling opening price points and pack sizes that help them manage their budgets,” he added.
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Kroger, Albertsons, and regional grocery chains are the targets
Consumers have reasons to keep going to Walmart, Costco, and other discount chains for larger trips. Those chains are cheaper than traditional grocery stores, according to data from Consumer Reports’ Most and Least Expensive Supermarkets.
“Dollar Tree and Dollar General’s recent sales surge isn’t taking a bite out of Walmart or Costco. They’re going straight after the regional full-priced grocers,” RTM Nexus CEO Dominick Miserandino told TheStreet.
He thinks that traditional grocery chains face a significant problem in the current economy.
“Kroger, Albertsons, Publix, and local supermarkets are getting squeezed from both sides. Low-income shoppers are trading down to dollar stores for quick fill-in trips to manage weekly cash flow, while middle-income consumers are sliding in for basic consumables like milk, cereal, and paper towels,” he added.
Walmart and Costco, he explained, are already cheaper and provide enough value to cash-strapped consumers that it’s worth spending the gas money to get there.
“Walmart already owns the absolute low-price full basket, and Costco has a higher-income demographic locked into bulk unit economics. Neither of them is losing their core weekly trip. The dollar chains are stealing the mid-week fill-in run — the exact three-item trip for bread and detergent that traditional grocers relied on to pad their high-margin center aisles,” he shared.
Miserandino’s analysis is supported by data from Dunnhumby.
“Affordability challenges are reshaping U.S. consumer buying habits for grocery shopping, according to the latest Dunnhumby Consumer Trends Tracker (CTT). Mass-market and value retailers like Walmart, Dollar General, Dollar Tree and Family Dollar have achieved 79% penetration, matching the reach of traditional supermarkets for the first time,” Retail TouchPoints reported.
