Since their beginnings in the 1950s, dollar stores have mushroomed across the U.S., sprouting up in urban and rural communities alike. But their rapid growth appears to be hitting a speed bump as their low-income customers struggle with inflation, cuts to government benefits and other problems.

Dollar Tree on Wednesday said it will shutter about 15% of its Family Dollar locations, leading to the closures of roughly 1,000 stores. It also plans to close about 30 of its own Dollar Tree-branded stores, with the company singling out unprofitable locations amid a hit to its customer base from inflation and cuts to food stamps. 

Rising challenges 

Dollar Tree stores are grappling with consumers who are more likely to shop around for bargains after two years of at times bruising inflation, experts say. 

"Over recent years, rates of shopping around have increased, and we believe that they will only increase further in the years ahead as other chains like Walmart, Aldi and Dollar General continue to expand," noted Neil Saunders, managing director of GlobalData, in an email about Dollar Tree's woes.

As recently as December 2023, Family Dollar had planned to open more than 300 stores, according to retail data provider Coresight. But Family Dollar customers are spending less at its stores, and shoplifting is accelerating in some locations, company executives said on Wednesday when they announced the closures.

Recent cuts to the food-stamp program, called the Supplemental Nutrition Assistance Program, or SNAP, have also drained dollars from their customers' wallets, putting them under even more pressure to find bargains. At the same time the cost of groceries has gone up by 25% since the start of the pandemic. 

"[T]his inflationary environment we've lived in for the last couple years has been a shock" for customers, Dollar General CEO Todd Vasos said in a Thursday conference call.

"White flag of surrender"

The challenges at Dollar Tree, which bought Family Dollar in 2015 for $8.5 billion, come after Family Dollar has struggled to convince shoppers to remain loyal, noted Saunders. 

Family Dollar has also had some headline-grabbing problems, such as its rat-infested warehouse that prompted the Department of Justice to fine it $42 million. Unsavory problems at the warehouse ranged from "four rat carcasses on the conveyor belt" to rodent droppings "too numerous to count," a Food and Drug Administration report found.

With the stores not particularly appealing to consumers, it wasn't able to build a loyal customer base, Saunders noted. 

The closures are "effectively Family Dollar running up the white flag of surrender in the value grocery battle," he said. "Despite some recent investments in price and attempts to make stores more pleasant places to shop, Family Dollar remains a laggard in the value segment."

Dollar General to limit self-checkout

At the same time, rival Dollar General is reducing self-checkout at thousands of its stores in order to improve service for its customers, who are feeling the impact of two years of high inflation, the company said on Thursday. The chain will remove self-checkouts entirely at 300 stores that are most impacted by shoplifting, CEO Vasos said.

Despite its shoppers' struggles, Dollar General appears to be outperforming its rivals. The retailer plans to open 800 stores this year, bringing its total number of locations to almost 20,000, according to a March report from Coresight.

Dollar Tree to add $7 items

Even at a time when shoppers are feeling pinched, Dollar Tree said it's experimenting with a broader price range. The company said it will introduce products that cost as much as $7 each at its stores this year, according to CEO Richard Dreiling on a Wednesday conference call. 

The plan is to add 300 new items at prices ranging from $1.50 to $7 to Dollar Tree's 3,000 stores, he added. Still, most products will remain at the entry price point of $1.25, he added.

"We are continuously working on new ways to deliver value, while expanding our assortment across a wider range of price points," Dreiling said.

In:
• Family Dollar
• Dollar Tree