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Dollar Stores Struggle to Adapt to the E-Commerce Age

The middle America darlings are (finally) embracing the internet. But they need help.

12 Minute Read

What You Need To Know:

  • Dollar stores, which have flourished in recent years, face slowing growth amid growing competition from low cost retailers, including Walmart, Target, Big Lots, and Wish.com.
  • Dollar stores will need help building e-commerce infrastructure along with ways to track inventory and target consumers through mobile devices.

How you can capitalize:

  • Buy online, pick up in store. This model has allowed brick and mortar retailers to use inventory from physical stores fill online orders, in effect turn existing stores into mini-warehouses for digital commerce. Many dollar stores must still build out their websites and mobile apps to allow consumers to search for product/price information. They also need to create inventory systems that match online orders with available merchandise.
  • Digital marketing. Dollar stores attract a good deal of traffic, a captive audience that retailers can reach to boost in-store sales through mobile devices. Research shows that dollar stores consumers often use paper coupons but would overwhelmingly prefer digital coupons if the retailer offered them. Dollar stores need a system that can target specific consumers with coupons via smartphones based on their purchase histories.
  • Opportunistic inventory. Dollar stores have been upgrading the quality of their merchandise by purchasing excess inventory from both national brand manufacturers and struggling retailers who need to liquidate their inventories to pay off creditors. Dollar stores could use a system that helps them predict and track these special situations to acquire inventory at fire-sale prices.

The last big holdout to e-commerce is about to fall. 

For years, dollar stores, the store format that mostly offers merchandise at a $1 price point, has stubbornly resisted entering internet retail. But amid lagging growth and stiffening competition, the major dollar store chains, including Dollar General and Dollar Tree, may soon have to follow suit.

Even as major retail chains have generated billions of dollars in online sales, dollar stores have reasoned that they can continue to generate strong growth without having to invest in the costly business of building a full-scale digital operation.

But growth is starting to slow, the result of building too many stores and increasing competition from Walmart, Target, Big Lots, and Wish.com. Target, in particular, has heavily invested in its own dollar store sections while Walmart enjoys a strong reputation for everyday low prices.

Moreover, today consumers expect multiple ways to purchase items, including e-commerce.

“It would just really defy reason for dollar stores to completely ignore this opportunity,” said Carol Spieckerman, president of Spieckerman & Associates retail consulting firm in Bentonville, Ark. “There are a lot of possibilities.”

Dollar stores have flourished, but trouble looms

Over the past decade, dollars stores have flourished thanks to a combination of smart positioning and economics. 

Since the Great Recession of 2007-2009, wealth disparity has widened, resulting in the world’s wealthiest 1%owning more than half of the world’s wealth. Combined with wage stagnation in the United States, the middle class has been squeezed particularly hard.

Therefore, it’s not surprising that retail formats that have long catered to the middle class like department stores have struggled while formats that have focused on luxury and lower incomes like dollar stores have done well.

Over the past 5 years, total sales from the dollar store category has grown at nearly 4% a year to $87.1B in 2019, according to IBISWorld research firm. Dollar stores have also benefited from the closing of malls, whose anchor tenants tend to be large department stores.

But clouds loom over the horizon. Spieckerman said Dollar Tree and Dollar General’s plans to rapidly open thousands of new stores each year will inevitably lead to market saturation and slowing sales growth.

Dollar General Distribution by State (2015)

As of July 2018, Dollar General has 15,000 stores across the continental US (via Dollar General).

Indeed, IBISWorld estimates that the dollar store industry will grow at an annualized rate of just 1.1% over the next 5 years.

And one Wall Street analyst recently warned that dollar stores are showing signs of losing ground to discounters Walmart and Target.

“It’s been some time since this was the case, or at least was consistently the case,” John Zolidis, president of Quo Vadis Capital in New York, wrote in a research note. “E-commerce growth is a factor, surely, as WMT and TGT have this channel but the dollar stores do not.”

Dollar stores thrive on the premise that they can surprise consumers with high quality merchandise at low prices. Online-only upstart Wish.com presents a strong challenge for these discovery shoppers. 

Wish.com allows consumers to purchase home furnishings, apparel, and electronics at bargain deals from vendors around the world. The company also runs Wish Outlet, in which it sells overstocked branded merchandise at reduced prices. 

The San Francisco-based startup, which has reportedly resisted acquisition offers from Amazon and Alibaba, grew revenue to $1B in its first three years. Though Wish owes much of its early growth to Facebook ads — in 2015, Recode reported Wish spent around $100m/yr. on Facebook — the Facebook algorithm masscre of 2018 seems to have led the company to change its strategy.

According to data from SimilarWeb, nearly 80% of Wish’s desktop search traffic is now organic (perhaps thanks to press from its viral ads) — just 20% is paid.

Wish.com’s Desktop Search Traffic (2019)

Data via SimilarWeb.

What’s more, social media now makes up just 9.26% of the site’s desktop referral traffic. This data doesn’t account for mobile traffic, but if it mirrors desktop traffic, it would seem that Wish has made a wise pivot — and they have plenty of gas in the tank to give Dollar Stores a run for their money.

Wish.com’s Desktop Traffic From Social (2019)

Data via SimilarWeb.

Plenty of room to grow

Judging from frequent headlines about struggling malls and retail chains, you would think that brick and mortar retail is now extinct.

In reality, the vast majority of Americans still shop at the physical store. Last year, e-commerce sales accounted for barely 10% of total U.S. retail sales of $5.32 trillion, according to government data.

In other words, despite a very late start, dollar stores have plenty of time — and room– to catch up as e-commerce sales are still relatively small in the United States but growing at a double-digit clip.

The traditional thinking that dollar stores don’t need e-commerce goes as follows: lower-income consumers don’t use home delivery and these consumers don’t buy enough in one order to justify online retailing.

But according to data from Inmar Analytics, people with incomes of at least $75k/yr. now account for more than one-third of all dollar store shoppers. And the merchandise dollar store consumers are purchasing are not just greeting cards and party favors: IBISWorld estimates over 30% of dollar store products are kitchenware and clothing while another 16% are groceries.

Thrive on their own terms

The internet can help dollar stores to not just play defense but to thrive on their own terms. 

Dollar store’s sizable store base and high penetration in dense urban markets gives them significant advantages over both large discounters and online only retailers. 61% of dollar store shoppers live 1 to 5 miles from a dollar store and 17% less than one mile, according to Inmar Analytics.

Instead of building out an expensive home delivery system, dollar stores can take advantage of their high store traffic to roll out a less costly “buy-online, pick-up” service option.

Inmar Analytics said 40% of dollar store shoppers visit a store at least once a week, with 11% frequenting the format multiple times a week. Given such high traffic and frequency of trips, the service can boost in-store sales since consumers who pick up online orders also tend to purchase additional items in the store.

A Dollar Tree shopper back for more (via Forbes).

With buy-online, pick-up-in-store, dollar stores can provide a nice alternative to Walmart and Target, which are frequently crowded on weekends, says Burt Flickinger, managing director of Strategic Resource Group consulting firm in New York. Target, in particular, struggles with keeping its shelves stocked, especially basic goods, while dollar stores are always well supplied, he says.

Flickinger says buy-online, pick-up-in-store options also boost efficiency by reducing the number of returns. Customers can resolve many problems at the store itself. By contrast, online-only players like Wish.com struggle with poor customer service and a high return rate, especially with goods from overseas vendors that prove to be defective or counterfeit.

Preserving the ‘Wow’ factor

For digital entrepreneurs, the obvious opportunity is to help dollar stores build and operate websites, mobile apps, and software to manage digital orders. However, there are two more specific services entrepreneurs can provide: digital coupons and opportunistic inventory data.

Dollar store consumers love coupons and get most of them from the Sunday newspaper. Almost one-third of dollar store shoppers redeemed a coupon during their trips to dollar stores in the past three months, according to Inmar Analytics.

Most importantly, 60% said that they would be more inclined to use a dollar retailer’s mobile app if it offered digital coupons, the firm said. 

Dollar stores are also increasingly upgrading their merchandise by acquiring excess products from retailers and national brand manufacturers.

“National brands are lining up and begging dollar stores to take their business because their other distribution is kind of drying up,” Spieckerman said.

We can also expect more retailers to file for bankruptcy in the coming years. Over the past few years, the “retail apocalypse” has claimed the lives of several once-prominent chains who have failed to adjust to online shopping, including Toys ‘R Us, Borders, Payless Shoes, Radio Shack, and Dress Barn to name a few.

Flickinger said dollar stores will need a real time system to track such close out sales and liquidation events so they can grab the best stuff at fire sale prices.

Stocking dollar stores with such products is crucial to preserving a “Wow” factor with consumers looking for surprising deals. Such a system can give dollar stores an edge over Wish.com and Big Lots, which also seek out similar inventory.

Obstacles for startups

Startups hoping to crack the dollar store industry, however, face some tough obstacles. For one thing, they must convince dollar stores that e-commerce is necessary. So far, Dollar General and Dollar Tree executives say they believe they can still drive significant growth through new store openings. 

In addition, brick and mortar retailers have traditionally struggled to effectively integrate e-commerce and physical store sales due to cultural differences, conflicting priorities, and turf battles over talent and resources.

But digital entrepreneurs who can successfully navigate these problems could reap the rewards.

“There is such a big opportunity here,” says Flickinger.

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