The Depressing Dominance of Dollar Stores

Before getting to anything else, let's look at the following chart that compares the performance of the nation's largest deep-discount, dollar stores versus the S&P 500 (SNPINDEX: ^GSPC  ) .

DLTR Total Return Price Chart

If you're anything like me, two things went through your head when you saw this. First, you regret that you missed out on the investment opportunity. Since the end of 2009, shares in all three of these companies, led by Dollar Tree (NASDAQ: DLTR  ) , have simply trounced the broader market. Even the worst performer of the bunch, Family Dollar (NYSE: FDO  ) , beat it by nearly a factor of two.

At the same time, however, one can't help lamenting their success and what it means for the United States. I mean, think about it for a second. We're the largest, most economically dominant country in the world, yet the most vibrant companies within our borders are dollar stores? Not to knock their operations, because I firmly believe that there's a time and a place for everything, but have you been in one? Is this really where we want a growing proportion of our citizens to buy food and clothing for their children?

The growth of Dollar General (NYSE: DG  ) over the past five years provides a textbook case of this trend. Since the end of 2006, it's opened a net 2,277 new stores, increased the average size of each location, and is making 30% more per store than it was before the financial crisis. All told, its net sales over this time period have gone from $9.2 billion up to $16 billion today -- an increase of 75%. By comparison, Target (NYSE: TGT  ) , a middle-class establishment if there ever was one, has seen its top line expand by only a cumulative 24% while, more tellingly, its sales per store have actually decreased in real terms over the same five-year time span.

My point is that these stores, and thus the performance of their respective shares, are a useful and easily accessible barometer for the health of the underlying economy and particularly that of the oh-so-critical middle class. It can't be forgotten that nearly three-quarters of our gross domestic product derives from consumption. And if that consumption is being channeled into stores that advertise their wares by affixing the word "dollar" to their brand, well, you do the math.

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Read/Post Comments (16) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2013, at 3:57 PM, twill59 wrote:

    What was omitted is that Dollar Stores are popping up in small towns, like under 2,000 population.

    Target needs what....a community of 20,000 before they open a store?

  • Report this Comment On June 09, 2013, at 5:33 PM, EweRBaad wrote:

    There's also the assumption that people are shopping at Family Dollar only for the prices...which are important, don't get me wrong. In a small town, getting into and out of Super Wal-mart is a major production. For certain items, such as cleaning chemicals, it's MUCH easier to run into the dollar store, and you can usually be out in under 5 minutes. Think of the people who are tired at the end of a long day, or who have physical disabilities. Not having to walk through a large parking lot and to the back of Super Wal-mart for a gallon of milk or some bleach is tempting. While spur-of-the-moment purchases are probably important to Wal-mart's bottom line, having a call-ahead service or some type of "near the door necessities" section might boost sales in this area.

  • Report this Comment On June 09, 2013, at 8:46 PM, jeminix wrote:

    Ha, you ain't seen nothing yet! The "baby boomers" are hitting the rocking chairs(retirement) and the biggest population of consumer ever in the United States has already been there, done that!

    We've lost our IRA's, bailed out the greedy banking community, lost our houses and gotten OVER that "new car smell!!!!"

    We are in the pull our heads into our shells and hold on mode and American consumerism will NEVER be the same!!!

  • Report this Comment On June 10, 2013, at 5:29 PM, agwisreal wrote:

    Unfortunately, at least in my experience, there's not much for sale at a "dollar store" that I'm likely to want.

    Simple items such as tape, scissors, glue? Inferior quality. Glue is used to fix things so valuable that fixing them makes more sense than buying a new one.

    Clothing? I like to wear mine more than a few times.

    Tools? Never buy a low-grade tool.

    So yes, it's depressing. Too many people are so near the edge that they must buy low grade stuff that gives them less value for the dollar, just to avoid the investment that a house full of solidly made stuff would cost.

    And that's a vicious circle.

  • Report this Comment On June 10, 2013, at 9:50 PM, harmonyjoe wrote:

    Not everything needs to be high quality, especially if you don't have a lot of dollars to spend on an item. A previous writer "agwisreal " laments the fact that "so many people are so near the edge that they must buy low grade stuff that gives them less value for the dollar". But who is to say that you're getting more for the dollar by purchasing an item for $5 rather than $1? That $5 item may actually be providing less value per dollar than the $1 item. The $5 item might just possibly be overpriced. At the very least paying $1 affords you the opportunity of replacing the item five times for the same price as the $5 item once. Another view is that not everything needs to last forever, one use might be sufficient in which case spending $5 for an item that lasts makes entirely no sense at all.

  • Report this Comment On June 11, 2013, at 1:42 AM, jomueller1 wrote:

    Once in a while I buy in a dollar store. Some items are relatively expensive because of the low quantity in a package. Quality is sometimes OK. We definitely do not expect precision or long lasting items. As always, one has to know prices, quality, and quantities.

    Food? No thank you.

  • Report this Comment On June 11, 2013, at 11:37 AM, Gabe102 wrote:

    Look at all of the major cities in America where the guilt vote dominated, NOLA, Detroit, Atlanta, etc.

    Now you can see where America it destined to go.

    I'm retired with a IRA that is making 1%, I am driving a 10 year old car and am not going to invest in this guilt ridden environment, my life is on hold until 2016. Your retailers will starve before I change my purchasing habits. I buy only the items I have to have. When you vote in a decent administration that doesn't have a social agenda, and isn't determined to destroy capitalism and turn us into a third world country I will rejoin you in an attempt to rejuvenate our economy and our country. If you can't find it in your heart to reverse this trend toward hyper socialism I can find another country to live in,

    My ancestors had to leave Europe to find peace and prosperity,so may I. Good Luck!

  • Report this Comment On June 14, 2013, at 1:46 PM, Wildflyer wrote:

    Goodbye,Gabe.Let us know how healthcare, individual rights,consumer/investor protection against bank failures&business abuses,and general living conditions are in that third world toilet.

    You,like so many impressionable Americans,have been brainwashed so as to confuse big business' brand of laissez faire capitalism with a healthy investment climate for retail investors.

    It is precisely this poorly regulated big bank,etc abuse that you want to blame,but cannot find it in your small heart to thank a black man for leading us out of it.

    BTW,I am a retired WASP, and have found dollar stores to have some exceptional values.

  • Report this Comment On June 14, 2013, at 3:44 PM, infopackrat wrote:

    This article makes the mistake of puuting any store with "dollar" in its name in one basket. "Dollar Tree," for example, is one of those stores that prices everything at $1.00 (most everything, anyway). "Family Dollar" is not (I think of them more as a Walgreens without the pharmacy). So putting them together isn't creating a clear demographic. In fact, even if you look at a group of "everything's a $" stores, you STILL have to sort out which are overstock stores, which have sometimes major discounts on often-changing overstock items; and low-value first-retail stores (like Dollar Tree) that may actually charge more than a "regular" store for some items in order to maintain their $1 pricing.

  • Report this Comment On June 14, 2013, at 4:13 PM, JoanHBD wrote:

    IF you are old enough you will remember we used to have Dime Stores. They served the same purpose as the Dollar Stores. I have been purchasing Laundry Detergent from the Dollar Tree for $1.00 and find it cleans just as well as the expensive stuff. I have plenty of money to buy the other brands, but do not think they are worth the price when I can get this one. They do not seem to carry dishwasher detergent, though, too bad.

  • Report this Comment On June 15, 2013, at 12:06 AM, billybob58 wrote:

    a lot of Dollar Tree stuff is just as good as stuff found elsehwhere at much higher prices. Some of the brands you find there have fallen out of favor, though they still have brand recognition. But there is no advirtising budget for Brecks shampoo, so manufacturers can meet DT's cost requirements. Frozen vegetables and fruit may not be as good as birdseye but at 1/3 to 1/4 of the price, quality is quite good. A great deal is antiperspirant. What is $3.79 in another store can be replaced by something that is $1.00. Now, my annual cost is maybe $5 not $20. Sometimes I might find a slight quality inconstency perhaps a nick in the antiperspirant cake, but why pay more?

  • Report this Comment On June 17, 2013, at 8:53 AM, borneofan wrote:

    The Fool's biggest weakness is that it is stuck in Rome, at the very heart of the empire. It is hard to understand anything about the country while trapped inside the media distortion spin machine that is DC.

    Most of Vermont has been abandoned or never served by big box retail. Much of New England has been contracting in population and aging faster than the nation as a whole. The economics dictate that big box retail will never cost justify. And as gas prices advanced, the cost advantage of driving long distances for savings has also dropped, so people shop more local than ever. Folks have even stopped car pooling to shop at distant Walmarts (30 miles on a two lane in snow is quite a task).

    They are not called dollar stores and they don't have a negative connotation. It is called shopping or just the mall. WalMart is developing mini stores for urban locations, but only the dollar chains understand how to thrive in small towns.

    Until the Fool has a few more correspondents outside the capital hothouse, dismay at the hinterlands lifestyle will continue. I've suffered the viciousness of the DC Ikea, been tailgunned by speed shoppers in Wegman's, and seen the how the natives behave in traffic. You can have it. The interstate system drained the youth into the cities, toward the action.

    While I understand the drumbeat of urban growth stocks in the Fool, there are other economic niches, especially in retail, as dollar stores have proven.

  • Report this Comment On June 17, 2013, at 11:37 PM, inmocean wrote:

    I consider myself middle class and do occasionally shop at Target. But going there requires more energy and time to find things and wait in the Target lines. For certain smaller non-essential type things I do like Dollar Tree.

    My wife and I shop at Dollar Tree regularly to get toys for our granddaughter. They have a decent selection, each one only $1. You won't get Fisher Price, but you'll get crayons, balls, figures, frisbees, etc. Also, Hallmark-type cards are 2 for a dollar, which is a substantial savings. And the cashier gets us through the line very rapidly. Another thing we've gotten there - helium party balloons which are first rate quality for only $1.

  • Report this Comment On June 18, 2013, at 12:21 AM, 650nm wrote:

    harmonyjoe makes a better point in a brief comment on the back of a longer article.

    JoanHBD adds another winner. Consider that when you go to a CVS/Walgreen's/Rite-Aid, your expectation is that you're getting convenience at a cost. If we went back to the dimestore days, what's the problem there?

    I've been to Dollar Tree and really the only thing I didn't like about it was the *environmental* feeling of cheapness. They had no-name, old-name, and name brand goods for sale; the store was clean; the staff was friendly.

    Now, if Dollar Tree were to rename themselves something akin to 5&Dime, plus freshen up the look of their stores to be a touch more friendly, that would be a huge buy signal to me.

  • Report this Comment On June 18, 2013, at 2:07 PM, esotericevets wrote:

    Farm stores, building supply stores, electronic stores, farmers markets, shopping malls, yard sales, dollar stores and all the other mercantile establishments in the world are worthy of a visit and maybe even an extended visit if you treat these places as eventful places. Overhearing conversations in these places are one of the great attractions. Whether waiting to buy stamps at the Hyannisport post office and over hearing the chit chat in line, or asking the counterman at Occult Harrys" if the dragons blood comes from rear dragons or kicking the tires of military equipment at Interarms, most any store can provide you with an interpersonal experience and the careful buyer can realize exceptional value from many places with a well thought out purchase. Yesterday I bounced sunlight off a 15 year old dollear store mirror into the bottom of a well and could see how it was built with well placed brownstone with no mortar in the joints and

  • Report this Comment On June 18, 2013, at 2:30 PM, esotericevets wrote:

    The previous note self posted prematurely. Please put "real" in for the word "rear" right before "dragon".

    Anyways, I have a seemingly worthless dollar store mirror with about 2 cents of duct tape around the edge to keep it in its plastic backing and that mirror has done better enlightenment of dozens of holes than most any flashlight could. I have seen strip malls deserted by all but a dollar store and I have seen a small town newspaper announcing the good news of a dollar store coming to town. In some remote areas, you can see little general stores that sell items from Wall Mart, but the people at the counter still are able to inform you well about the country you are entering and if you leave the store with a Wall Mart pie, you should still be satisfied with the transaction.Pardon me, but I have to go out and buy some Colgate toothbrushes, 2 for a dollar.

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