It's no secret that the cost of everyday goods is way up. These days, consumers are paying more at the pump, supermarket, and just about everywhere.
In November, the Consumer Price Index recorded a 6.8% jump in the cost of goods compared to the previous year. And with supply chain issues still running rampant, there's a good chance high levels of inflation will persist well into the new year.
That's already having an impact on dollar stores. Though these stores have managed to thrive during the pandemic at a time when other retailers have experienced declines in revenue, the higher cost of procuring goods is making discount stores rethink their strategy.
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Dollar stores no more?
Dollar Tree (DLTR -0.57%) recently announced a shift in its pricing model -- one that its customers may not be thrilled about. Beginning in the first quarter of 2022, most of the chain's $1 items will increase in cost to $1.25.
Sticking to its strict $1 price point has hampered Dollar Tree, the company reports, and forced it to remove popular products from its inventory line. The retail chain's hope is that raising its price point will allow it to bring back customer favorites and expand its product line.
Increasing its price point might also enable Dollar Tree to better absorb the higher cost of procuring inventory -- a byproduct of recent supply chain bottlenecks that many retailers are grappling with. And let's not forget there's a massive labor shortage that's impacting retail on a whole. By raising price points, Dollar Tree could put itself in a better position to raise wages -- and attract workers at a time when labor is so difficult to come by.
A strategic move or a sorry one?
Dollar Tree has stuck to its $1 price point for 35 years. Now the company is looking to not only raise its primary price point to $1.25 but also add $3 and $5 items to more of its stores in select locations.
But whether this change helps Dollar Tree or hurts it is yet to be determined. On the one hand, customers might appreciate a wider range of inventory and accept the $1.25 price point as a sign of the times. On the other hand, customers might balk at the idea of paying more than $1 for items across the board -- especially at a time when other dollar store chains aren't universally raising their prices.
Dollar General (DG -0.36%), for example, does offer some items at a higher price point than $1. But it hasn't announced plans to shift its primary $1 price point upward.
It has, however, expanded its Popshelf line, which offers higher-end goods around the $5 mark. The key difference, though, is that Popshelf is expressly designed to target a different audience than the typical Dollar General customer, whereas Dollar Tree's price hikes won't achieve that goal. If anything, what they might do is put the chain at risk of losing customers to competitors.
Will dollar stores lose their edge?
Budget-conscious shoppers have long flocked to dollar stores to stretch their income further. And in the wake of the pandemic -- a time in which many households experienced their share of financial upheaval -- many consumers have become even more motivated to keep their spending to a minimum.
But if dollar stores continue to raise prices to combat inflation and the other challenges they're facing, like supply chain holdups and hiring struggles, they could end up driving customers away. Consumers who shop at dollar stores not due to financial constraints but due to their desire to snag bargains may instead opt to seek out sales at regular-priced stores rather than take their chances at dollar stores, where inventory can be hit or miss.
Of course, if raising price points ends up hurting dollar stores, it could put their expansion plans on hold. Dollar General, for example, is aiming to open 1,000 Popshelf locations by the end of fiscal 2025. But if customers start ditching dollar stores, those plans could be paused.
That would, in turn, be a blow to real estate investors. Many retailers have shuttered locations in the course of the pandemic, leaving shopping centers and malls with vacancies to deal with. The hope right now is that dollar stores will come in and fill some of those gaps. But if dollar stores lose their appeal, it could put shopping centers and malls in a very precarious position.
