Podcast May 23, 2024

Unpacking the Decline of Dollar Stores in America


Dollar stores have long been a staple in American retail, offering budget-friendly products to cost-conscious consumers. However, recent headlines have spotlighted a troubling trend: several prominent dollar store chains are closing their doors. This blog post delves into the current issues facing dollar stores, with insights from industry expert Stephan Lauzon, as discussed in the accompanying podcast.

Rising Challenges for Dollar Stores

Inflation and Interest Rates

One of the primary challenges for dollar stores is inflation. Rising costs of goods have strained the ability of these stores to maintain their low prices. Additionally, high levels of debt and increasing interest rates have exacerbated financial pressures.

Shoplifting and Security Issues

Shoplifting has become a significant problem, particularly in high density metropolitan areas, where laws can make it difficult to prosecute thefts under a certain dollar amount. Shoplifting leads to direct losses for operators, and strains the inherently limited resources of the businesses. Hiring security personnel for every store is often not financially feasible, especially when the store’s profit margins are razor-thin.

Inventory and Assortment Challenges

Maintaining an appealing and relevant product assortment is another critical issue. Dollar stores often rely on a strategy of buying products at extremely low prices, which can lead to a surplus of unsellable items. For example, Stephan mentions finding pallets of unsold VHS tapes of “Fast and Furious” in storage. This outdated inventory ties up valuable space and capital.

Moreover, the need to constantly rotate inventory to keep up with inflation and changing consumer preferences adds to operational complexity. Unlike premium retailers that prioritize product variety, dollar stores must focus on maintaining low prices, often at the expense of product diversity and quality.

Supply Chain Dynamics

Push vs. Pull Inventory Systems

The supply chain model used by dollar stores is predominantly a “push” system, where inventory is pushed to stores based on forecasted demand rather than actual sales data. This approach can lead to overstocking, particularly if stores cannot handle the influx of goods. As Stephan notes, pushing too much inventory into stores without proper infrastructure leads to congestion and spoilage, especially for perishable items.

Technological Investment

A recurring theme in the challenges faced by dollar stores is the lack of investment in technology. Efficient inventory management systems are crucial for handling the unique demands of dollar stores. However, limited financial resources often mean these investments are deprioritized, leading to inefficiencies and losses.

Going Taller

One interesting strategy is the idea of “going taller” by using higher shelves to increase storage capacity within the store. While this can help accommodate more products, it also requires careful execution to ensure that the right inventory is accessible and sellable. Stephan points out that simply adding more shelf space without proper inventory management can exacerbate existing problems.

The Path Forward

The decline of chains like 99 Cents Only Stores and Family Dollar underscores the need for dollar stores to adapt to changing economic conditions. Key strategies for survival and growth include:

  1. Diversifying Product Assortment: Introducing higher-value items at slightly higher price points can attract more customers without straying too far from the core value proposition.
  2. Investing in Technology: Modern inventory management systems can help optimize stock levels, reduce waste, and improve overall efficiency.
  3. Enhancing Security Measures: Finding cost-effective ways to mitigate shoplifting can protect profit margins and reduce losses.
  4. Reevaluating Pricing Strategies: Moving away from the rigid $1 or $0.99 pricing model to a value-based pricing approach can better reflect the true value of the products offered.

While dollar stores face significant challenges, there are also opportunities for reinvention and growth. By addressing supply chain inefficiencies, investing in technology, and adapting to economic realities, dollar stores can continue to serve their essential role in the retail landscape.

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If you have more questions about the business of dollar stores and their unique supply chains, reach out to Stephan at LIDD.com/contact.


[00:00:06.360] Well, it’s the end of the week. Stephan is back. Thank you, Stephan.

[00:00:11.410] Thank you for inviting me.

[00:00:13.490] Today. We’re doing, I think, a behind the headlines where we take a look at something in the news that got us all interested and talk about the supply chain implications or causations behind what we’re reading in the news. And the article, which of course Jeremy will helpfully but slowly get posted along with the podcast that we’re going to talk about is this exciting news article right here. It is. Dollar stores are shutting down across America and they did this to themselves. And the reason we’ve invited Stephan Eminence agrees at LIDD to talk about this is hardly anyone knows the dollar store supply chain better than you as you’ve had both as a consultant and as an operator, deep experience in that world. And so we thought we would be interesting to get your perspective particularly. You know, this article focuses on two companies in particular. One is what? Well, 99 cent stores, which is the California based dollar store company that is actually shutting down, is shutting down. And then dollar.

[00:01:39.970] Family dollar.

[00:01:40.770] Family dollar, right. Which is shutting 1000 stores.

[00:01:43.890] Yeah.

[00:01:44.480] Out of 8000.

[00:01:45.720] Well, I think, I don’t know how out of how many, but like 300 right now and then 600 soon after.

[00:01:53.650] I think it’s six and four.

[00:01:54.870] Sorry, sorry.

[00:01:55.380] Yeah, yeah. But 99 is going totally out of business. Completely out of business. They’ve announced that they were shutting down, that they’re liquidating everything, trying to get rid of a couple of real estate pieces that they had already sold their distribution center in the city of commerce to their neighbor, the Dido family, who I know very well because they weren’t my neighbor back then. And they had interesting stories about baseball that I didn’t know. So anyway, so they acquired the commerce, the Union Pacific commerce facility. So yes, 99 is going out of business.

[00:02:43.710] I mean, obviously not happy news when a business shuts down. And the article is blaming a couple of things. Inflation, I would think, not quite mention this as specifically, but they do talk about the level of debt that 99 cent stores had. And of course the rising interest rates would not have helped. That situation, would have exacerbated the demands for cash in the business. And then the other one that they mentioned was shoplifting. And maybe we could just start there because you have a very interesting, you were telling us something.

[00:03:20.190] Interesting fact about shoplifting is that there’s nothing you can do with a shoplifter until it reaches like let’s say $895, I think it was in Los Angeles, in the Los Angeles county. So there’s nothing you can do. You can ask him to bring the product back, but, so there’s 800 of.

[00:03:43.950] Shoplifting, no prosecution, nothing of $100 of chocolate bars. There’s no prosecution. And, you know, when you think of, and this is in La county.

[00:03:54.270] This is La county. That number was LA county, but it’s something similar.

[00:03:58.350] Yes, but what percentage of, of 99 cent stores were in La county?

[00:04:02.940] Well, I mean, 50%, 200 of the 271, I think, in California or in LA.

[00:04:09.510] Huge majority, yes. And let me ask you this, was shoplifting something that.

[00:04:14.620] Oh, yeah, absolutely.

[00:04:15.620] It was something you dealt with all the time.

[00:04:17.050] Absolutely. So that was our challenge. I mean, a big challenge. So we had to bring security. But again, I mean, you’re selling, you know, $0.99 items. So, I mean, bringing a, you know, a security firm in each of your store, impossible. And budget wise, it’s just operational.

[00:04:37.870] And like a lot of, I mean, obviously our audience, very sophisticated supply chain people. But sometimes my mother listens and just for her sake, like, you have to think about a dollar store selling a chocolate bar, Hershey’s chocolate bar, for $1 or $0.99. Right. The actual cash that generates for the business versus the cash that it generates for Hershey’s. Right. $0.99. There’s $0.66 going to Hershey’s. Right. Maybe there’s a penny going to the retailer. So when you shoplift a $0.99, well, the retailer had to pay $0.66 out of pocket. And that one penny that makes the whole magic happen. Not there in your example.

[00:05:21.870] You have to. To sell another 66 bars before.

[00:05:25.410] Just make up for that one.

[00:05:26.710] Just. Yeah, just to make it even. That’s it. Right, right. So, right, so I mean, that’s a multiple. And I mean, you can just imagine $895 worth of $0.99 item fries, like half an aisle.

[00:05:38.610] Right.

[00:05:39.380] So a guy can leave cargo.

[00:05:43.340] Paints are still popular in LA, you know, but the other thing I thought would be interesting to talk about is I was thinking about this. When you’re a 99 cent store, a dollar store, famously in Canada, dollarama, which is a relatively successful, strong retailer. And there are other dollar chains that are that way. But when you’re a dollar store, it’s in the name where other folks go to the extreme. Whole foods caters to a certain client and variety and choice is more important. Assortment is a higher priority than keeping the price to. But when you keep the price to something, first of all, you’ve got to have quite a bit of rotation in the planogram. Like you gotta, especially in an inflationary environment, you’ve got to provide an assortment that is defined by pricing, not by what a consumer who is not price sensitive cares about.

[00:06:53.420] Exactly. I mean, the rule at $0.99, for example, was like. Cause there was open day for seller to come and try to sell their stuff to 99. And I mean, there was one rule, if it’s, if it’s not $0.50 or less, we’re not going to buy. Right? So, because it was all about, so it didn’t matter what it was, right. It didn’t matter what it was, the price was, so. But you can just imagine the kind of inventory now you’re, you’re getting into, right? I found, you know, pallets of fast and furious volume one in VHS format in that back of awareness.

[00:07:33.020] I can’t believe you could buy that for $0.99. It’s a great deal on such a vintage item.

[00:07:38.570] So inventory is, you know, the right inventory is critical.

[00:07:43.840] Right, but that was stated also in the argument that the assortment or the choice of product was also just not. It might be cheap, but if no one buys it, it’s just collecting dust.

[00:07:55.440] And the other part of that is, that’s why these dollar store supply chains have to, have to be pushed systems. You know, if you think of that, you know, we have lots of retail clients where it’s buy one, sell one, sell one, buy one. But yeah, sell one, buy one. So you’re pulling inventory based on a planogram into your store to make sure the store doesn’t look shopped. And that’s how it’s the signals, it’s the demand signals at the store that trigger everything in the supply chain. But actually, when you have that priority of keeping the price to a certain minimum and assortment is a secondary priority to it, you kind of have to push inventory into the stores.

[00:08:44.130] And that’s the reason some of them are doing great, because they’ve increased those price tag. So now it’s more about what you first see as value. You know, customer doesn’t matter so much whether it’s a dollar or it’s $3. If they foresee it as a ten dollar value item, they’ll buy it for three. It doesn’t have to be $0.99, but at $0.99, that was the original. Wow. That was the original problem. It was that the store was named $0.99. Only store they got sued over selling something above 99.

[00:09:24.170] You’re kidding.

[00:09:24.970] Yes. So that’s where it all started. And then investment in systems in the cold chain, because $0.99 was very sold, very different. Yes, but you’re in California, Arizona, Texas and Nevada. Imagine how hot it is in summer and how hot it gets. So you can just leave it there and wait for half an hour or an hour to get it in the building or to get it in a cooler or a fridge. Right. So there wasn’t enough investment because of the $0.99 price tag back then, where Ralph, Ralph or any other grocer were selling the same watermelon for 499. We were selling it for 99.9 cents.

[00:10:20.790] Really?

[00:10:21.300] Yes. The same one from the same field? One wasn’t. Ours was from the field. So not wash and walks. The one at Ralph was from the same producer was $4.99.

[00:10:34.880] But it’s a big endeavor to launch perishable distribution if you haven’t.

[00:10:41.240] Well, I mean, there was some, but. To which extent, at one point, we pushed a little bit too much stuff in the store, so the store got just overwhelmed. I mean, I have plenty of examples, but I mean, I don’t want to get there, but I mean, we pushed so much stuff to the store, it is needed to sell.

[00:11:02.150] If you’re overly pushing into the stores, and the stores don’t have the infrastructure to take whatever you’re pushing, and when the assortment can change, you know, you might end up with, I don’t know. Right. Six pallets of something highly delicate. And if you don’t have the infrastructure to take those six pallets, they end up sitting in, you know, I mean, these stores are not on the ocean in a nice mediterranean climate. This is desert LA. This is the part of LA where you step out of your car and you want to melt. So imagine if you don’t have, have thick skin like me, and you’re just a little berry, you’re going to collapse at wilt in a second. So that probably contributes a lot to inventory losses.

[00:11:49.330] Absolutely.

[00:11:50.220] And then how do you sell? Like, if I had, I would personally purchase a VHS copy of Fast and Furious one, but if that’s what you’ve got, then no one’s buying it. And what happens there? Well, that just clutters up. That’s like cholesterol and plaque buildup in your arteries. I mean, it’s not inventory. It’s lethal to the whole supply chain.

[00:12:14.730] And then it’s harder to turn the good stuff that comes in because everything’s clogging.

[00:12:21.180] Yeah, clogging, clogging, clogging. The whole system.

[00:12:24.590] Another thing that was brought up was the lack of investment in technology, which is not, which we can see in many areas. Right. It’s something that we bring up as lagging. Some businesses are lagging in those kind of investment. But do you think from your point of view, from having dealt with that industry for a while, that because of the type of business, did it made it even worse, or that that, or was there, or do you feel that like any other business, they have the means and should be?

[00:12:56.110] Well, I mean, there’s really good example of some dollar stores operators that are successfully and that do it the way it should be done and that are not trying to push more than what the store can take on a daily basis. Or even though you have a great deal that comes in your DC and you want to push four pallets to every store. If the store can’t handle four pallets, what’s the point? So some are better than other. I think everybody had their own system, their own way of doing it. Some were better than others. And I think those results shows which ones are better.

[00:13:44.560] It’s interesting. It raises just a curious point. And I wish we had talked about that question before. I would have googled it. I’m almost tempted to grab my phone and see. But let’s ask you, Stephane, as the expert, you may not know the answer to this. It’s fair. But the sales per square foot of a dollar store, is it comparable to a typical retail sales per square foot? Is it lower? Could it be higher?

[00:14:10.490] Well, I know that I can’t answer exactly your question, but I know that 99 had the higher of all the dollar store chains. Of the dollar store chains, dollar per square foot sales. So.

[00:14:27.330] Because, and my reasoning is if the, if the sales per square foot is there, then is there, you should have the means to invest, to build the supply chain to support it, you know?

[00:14:39.880] Yeah, but one thing I’ve always said is that if you’re to have a lot of inbound, you know, coming in like every day on a daily basis, I mean, you need some room, you know, so. And of course, as you know, retailer wants to put all of their square.

[00:14:57.740] Footage in the front of the store. Yeah.

[00:15:00.540] No front end, no back end. Well, no, that’s, that’s, that’s a work. Well, that’s a problem when you’re in Tucson, Arizona or Phoenix, Arizona, and you’re, and you’re shipping strawberries.

[00:15:10.420] Well, if you’re shipping strawberries in Quebec, it would be a problem too, you.

[00:15:15.130] Know, because you’re dead in July. Well, yeah, but you’re in July when.

[00:15:19.510] The fresh slush, you know, you buy your strut in the middle of January. That’s really interesting. Well, what else did you have? Anything you wanted to throw out? Cautionary tales or lessons from the dollar.

[00:15:35.760] Store you brought as we prepared for this? You’re talking also about going taller.

[00:15:41.860] Yeah.

[00:15:42.680] Well, that was mentioned in the article.

[00:15:44.400] That was mentioned in the article, yeah.

[00:15:46.400] Explain that to us.

[00:15:47.570] I was there when we went taller at 99.

[00:15:50.310] What did that mean?

[00:15:51.430] Yeah. So a typical grocery store, go to it. So they go, their shelves are to a certain height where you can see from one side to another, if not to name anyone. If you come in Canada and you go to a dollar store, they’re typically loaded all the way to the ceiling. That’s as tall as it can be.

[00:16:13.870] One clarification, when you say, okay, so I’m going to put some numbers here. I got a 20 foot ceiling. The grocery store, the top of the shelf is going to be seven, 8ft. Okay. And now you’re saying in some dollar stores, like some in Canada, we go all 20ft. But that’s not retail product.

[00:16:37.230] No, that’s not practical and it’s not customers cheap, but it’s not that high. So I mean, in the retail industry. So you’ll typically see four, five or 6ft high. Yeah, you can go 10ft high and have overstock. So which means your store can handle more. So you have more inventory in your store. But is it the right again? Is it the right inventory? So some are very successful in Canada here having that kind of concept where they have a lot of overstock and they can, you know, refill or replenish the shelf during the day. They don’t have to wait until the next truck comes in. It’s there. They have plenty of wet cells. Right. Where when we decided to go taller, we just went taller and brought more stuff in and push inventory again. And it wasn’t because we didn’t know what we were doing, it’s because we didn’t know what was selling. So we didn’t have the information structure in place to know exactly how to proceed to decide what to push. Yes. So we went taller. We went from five to, I think it was seven. So we went from five to seven.

[00:17:56.860] So added 2ft of profit overstock. Some was overstocked, some was even retail.

[00:18:03.980] Interesting. I know they cite that as a problem, but as your point is, from your experience, you’ve seen that it’s not actually, it’s about execution.

[00:18:15.220] That is not what created that big hole at 99 for sure. Right.

[00:18:23.650] Ultimately, inflation plus interest rates are just right there and then shrink whether it’s.

[00:18:33.910] It’S stolen or whether it’s shoplift. Yeah. Or perish. That really played a big role in. Well, it’s very sad, I know, but it was a sad day when I, when I read and I kept receiving phone calls and emails and colleagues, from colleagues and said, that’s 14,000 people, 371 stores, 14,000 people. Yeah.

[00:19:03.870] Because as a business model, there’s all the reasons to thrive these, as you said, and our businesses that are highly successful. But absolutely it’s not because of lack of demand or.

[00:19:14.070] No, no, no, of course not. And I mean, we always, I remember those days when I was very close to the, to the dollar store industry and when you hear economics going downturn. Yeah, come on. I mean, that’s, puts a smile on your face because, you know, people, for these kind of stores, well, people are going to come to your store.

[00:19:36.010] You know, I do wonder, though, if you think of LA, San Francisco, New York, Boston cities with a high cost of living, high real estate costs, dollar stores may not actually work in the sense that just the rent on the stores themselves. It may be that someone should invent the $3 store and just say, okay, back to that original point you made. The key thing like the dollar is a gimmick. The $0.99 is a gimmick which inflation over 30 years is going to force your price to go to. And that the key is not so much to stick to a price point, but to, to a value proposition where someone making a purchase feels they’ve done a multiple of value deal in what they’ve purchased.

[00:20:26.760] Because when they started shifting pricing up and, well, they, it wasn’t just, you know, going from a dollar to a dollar 50. It was bringing a new product in that had more value but that you can sell for a dollar 50 and that’s it. You know, I mean, it’s the, it’s the, it’s all about what you see as value that makes it good or not to buy.

[00:20:52.920] Well, Stephan, Charles, thank you very much. But it is the end of the week and we all want to get out of here.

[00:20:59.720] Thank you, Stephan.

[00:21:00.630] Have a great time. Thank you.

[00:21:01.740] Thank you.


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