Despite the search for deals among shoppers, Dollar General and Dollar Tree are not experiencing the expected benefits.

• Despite consumers seeking deals, Dollar General and Dollar Tree have lowered their sales projections for this week.
• The households with limited income, typically those who shop at discount stores, have been most affected by inflation.
• The dollar stores have been negatively impacted by company-specific issues such as disorganized stores, safety concerns for employees, and a lack of online sales.

While dollar stores may appear to be a logical choice for shoppers seeking value, they have not been successful in increasing sales for both companies.

In 2024, the shares of deep discounters have plummeted, leading retailers to cut their full-year forecasts due to weaker-than-expected sales. Both Dollar General and Dollar Tree have experienced leadership changes: Jeff Owens left Dollar General in October 2023, and Rick Dreiling stepped down as CEO of Dollar Tree on November 4. Additionally, Dollar Tree is considering selling off Family Dollar, its more grocery-focused brand.

The sharp turnabout for dollar stores has put scrutiny on them, with quarterly earnings reports coming up this week.

Peter Keith, a retail analyst for Piper Sandler, stated that a combination of factors, including lower-income customers, razor-thin operating models, and increased competition, negatively impacted retailers.

"While dollar stores have many locations, their weak digital offerings have become a disadvantage in the current environment."

Despite the S&P 500's gain of more than 26% this year, the shares of Dollar Tree and Dollar General have both dropped over 40%.

Stretched shoppers

Dollar stores have long attracted customers with their wide selection of affordable items and compact sizes, fitting tight household budgets. However, each dollar store banner has a unique approach to strategy and product assortment.

Dollar Tree is comprised of two store brands, Dollar Tree and Family Dollar. The store primarily sells seasonal and discretionary items, such as party supplies and toys, at its locations in suburban strip malls.

Dollar Tree acquired Family Dollar in 2015 for nearly $9 billion, but Family Dollar has been the weaker part of the business. The company plans to close about 1,000 Family Dollar stores and is exploring a potential sale of the business.

Dollar General has traditionally catered to rural customers by offering grocery stores and Walmart alternatives in small towns and residential areas. Recently, it has introduced a new store concept, Popshelf, which targets middle- and upper-income shoppers with discretionary merchandise such as makeup, candles, and throw pillows.

Despite employing distinct approaches, both Dollar Tree and Dollar General heavily relied on store openings to drive sales growth. These two retail giants in the U.S. have a combined total of over 36,000 stores. With more than 16,000 locations, Dollar Tree has a store for every 10,000 people in the country, while Dollar General boasts nearly 20,000 stores across the U.S.

Across the country, Walmart has approximately 4,600 stores, while Target has roughly 2,000 locations.

In September, at Goldman Sachs' retail conference, CEO Todd Vasos stated that about 60% of Dollar General's overall sales come from households with an annual income of less than $30,000 per year, and high inflation has put their business models to the test.

Those frequent customers tend to feel the pinch first during challenging economic times.

In September, Vasos stated that Dollar General experienced a "pretty drastic slowdown" during the three-month period ending August 2. He explained that the decline occurred in every region and division, with a similar impact on the company's newest stores.

In contrast to the Great Recession, the past two years of high inflation have not resulted in middle- and upper-income households shopping more at dollar stores to save money.

Keith stated that although unemployment rates have remained low, value-focused retailers such as Walmart have attracted middle- and upper-income shoppers.

CFO John David Rainey stated that in the latest fiscal quarter, the majority of Walmart's market share growth was attributed to households with annual incomes exceeding $100,000.

Price-conscious shoppers are being targeted by various competitors, including warehouse clubs like Costco and Sam's Club, online retailers such as Amazon and Temu, and private label-focused grocers like Aldi and Trader Joe's.

At the September conference, Vasos stated that the competition in Bentonville, Arkansas, where Walmart's headquarters is located, had increased, resulting in a larger share of the retailer's middle-income customers being taken by "the guys in Bentonville."

During Dollar Tree's earnings call in early September, Mike Creedon, the recently appointed interim CEO, stated that the retailer had to adjust its full-year outlook due to the "continued pressure on our customers from the challenging macro environment."

Family Dollar's core customer, who is lower income, "remains weak," according to him. However, he noted that Dollar Tree, which attracts a more diverse customer base, experienced a decline in shoppers from middle and upper incomes in the recent quarter due to inflation, high interest rates, and economic pressures.

In the most recent quarter, Family Dollar reported that discretionary merchandise items, such as home decor, seasonal, and beauty products, were among the least profitable items, with shoppers purchasing fewer of these items, according to Creedon on the earnings call.

The store problem

But some of the challenges for the dollar stores are more self-inflicted.

Both Dollar General and the other company have faced criticism on social media and have agreed to pay millions of dollars in fines to federal regulators for issues with their stores and warehouses, including cluttered aisles and blocked fire exits. Dollar General settled with the U.S. Department of Labor in July for $12 million in penalties for workplace safety concerns, in addition to more than $21 million in fines from the federal Occupational Safety and Health Administration since 2017.

Dollar Tree agreed to enhance worker safety in a 2023 settlement with federal regulators after it had amassed over $13.1 million in OSHA fines since 2017. In February, it confessed guilt and agreed to pay nearly $42 million after inspectors discovered live and deceased rodents in an Arkansas warehouse that stored food, drugs, and cosmetics.

Customers may be deterred from visiting a store due to safety violations, as seen in news headlines, when employees appear overworked and shelves are disorganized, according to Keith.

He stated that nobody desires to shop in a disorganized and unclean appearance.

During Alasdair James' tenure as Dollar Tree's chief customer officer from early 2021 to early 2022, some of the problems faced by retailers were caused by the Covid pandemic, including difficulties in filling jobs at their stores due to government stimulus payments and the spread of the virus.

As a result of having only one worker, some Dollar Tree locations experienced messy stores that turned off shoppers, according to him.

During the pandemic, big-box stores were prioritized by vendors and consumer packaged goods companies, who opted for the larger, bulk sizes of items rather than the smaller, budget-friendly sizes sold by dollar stores, James stated.

He said those out-of-stocks and poorly staffed stores drove customers to rivals.

The retailer has changed its pricing strategy by raising the price of most items to $1.25 and introducing merchandise at higher price points, such as $3, $5, and $7.

A Dollar Tree spokesperson stated that the "multi-price expansion at Dollar Tree, which we believe will be a long-term growth driver, continues to resonate with our customers." He described the retailer as "a solution for families who may be feeling the financial strain of inflation," including families who don't live near a grocery store or pharmacy.

Under the leadership of President-elect Donald Trump, both companies face a new risk as he has promised to impose additional tariffs on imports from China, a major supplier of goods sold at dollar stores.

Dollar General declined to comment about the company's challenges.

Dollar General is currently advertising a "24 Days of Savings" event in December, where it offers a daily deal on a featured item. These promotions, such as discounted holiday mugs or 12-ounce packs of bacon, are only available in-store.

— CNBC's Ryan Baker contributed to this story.