The dollar store dilemma

Make Me Smart April 23, 2024 Transcript

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Kimberly Adams 

Hello everyone, I’m Kimberly Adams. Welcome back to Make Me Smart, where none of us is as smart as all of us.

Nova Safo 

And I’m Nova Sofo. It’s Tuesday, April 23. Today we’re diving into a single topic, and that’s dollar stores. Some are thriving. Others are struggling. And we want to know: why? What’s happening with the dollar store business model?

Kimberly Adams 

That’s right, we’re talking 99 Cents stores, Dollar Tree, Family Dollar. Lots of these companies have announced closures in recent weeks. But that’s not the case for competitor Dollar General. And I know all these names are confusing because they’re confusing to me. But that chain, Dollar General, is planning a big expansion. So, what’s going on here. Here to make a smart on the economics behind dollar stores and why it matters is Sandro Steinbach, professor of agribusiness and applied economics at North Dakota State University. Welcome to the show.

Sandro Steinbach 

It’s a pleasure to be with you today.

Kimberly Adams 

So, first of all, can you give us a sense of the size of this industry? How many dollar-ish stores there are, and what chunk of the economy they take up?

Sandro Steinbach 

Sure, dollar stores, right, which involve Family Dollar, Dollar Tree, General Dollar, 99 Cents, and a few others that you might have heard or visited in the past are a growing part of see, obviously, US retail industry. When it comes to dollar store, they are about $20,000 General and about $16,700 Dollar Tree and Family Dollar actually across the United States. And that industry has experienced some very significant growth and goals over the years by expanding with annual growth rates above 10%.

Nova Safo 

Is it true that they make up a greater number than Starbucks and McDonald’s?

Sandro Steinbach 

Yeah, particularly in rural and suburban America. They have become a major part of daily life actually, occupying a major niche also when it comes to access to food.

Kimberly Adams 

Yeah, and a lot of these food desserts. Now dollar stores generally have this reputation for being resilient in both good and bad economic times. Has that been the case in recent years?

Sandro Steinbach 

Yeah, dollar stores, right. They operate actually on pretty low profit margins. I mean, if you think about the average profit margin over the past couple of years that dropped from about 10% to about 5%. Particularly Dollar Tree, right, which had been experienced some significant announcements to shatter existing businesses. You know, dropping the number of family dollars by about 1000, and also announcing further, further reductions in Dollar Tree stores by about 400 in the coming years has seen profit margin or net profit margin actually falling to focus. And last year in particular, they were pretty low at about minus 3%. That’s fairly, fairly low compared to, to many of the other industries actually. Business have been very, very successful over the years, but if you look for instance and compare Dollar Tree profits with stores of Dollar General, Dollar Tree had about three billion dollar and profits last year, while Dollar General had about 11 billion. What is interesting here is that Dollar Tree in particular, faced some very significant capital expenditures, which are largely due to the acquisition of Family Dollar in 2015, which cost of the company about $8 billion, and was part of that growth strategy, actually, to capture a large share of the existing US market and come in as a disruptive force before once the market basically constantly creates. And that’s where we are right now, in terms of this market, when it comes to Dollar General, it has very similar net profit margin such as the Dollar Tree, but at the same time still hasn’t, you know, still continues with its with its expansion plans actually. And that it is largely driven by the different profitability of those businesses.

Kimberly Adams 

But why is that? What’s the difference between the two?

Sandro Steinbach 

Sure, one big factor that played in what was the acquisition of Family Dollar in 2015. If you think about Family Dollar and Dollar Tree, and what is your difference. Dollar Tree is mostly suburban, and it caters to middle income shoppers with, you know, party supplies and little things basically. In contrast, Family Dollar serves more basic foods and household essentials. So basically, catering to low-income consumers in urban and rural areas. If you think about the Dollar General, it has a very strong gold base. And that’s a real advantage of Dollar General actually because it’s a catchment zone. Why is it any of these businesses need to be operational and be profitable actually is much smaller than if you think about an independent grocery retailer in that sense. So, that had been also one of the big issues that Dollar Tree actually faced over the last years was the cannibalization of business activities across many Family Dollar locations. And so, it was a fairly rational decision actually for the Dollar Tree leadership to decide to actually cut some of the kind of some of the businesses and reduce the cannibalization across locations.

Nova Safo 

So, this is a very low margin business. You know, approaching the low margin levels of airlines, which is very low. So, how do they manage to keep their, you know, costs down? I understand that Dollar Store chains have been criticized for their labor practices, for potentially, you know, maybe exploitative behavior in terms of how they target customers. Can you explain the business model itself?

Sandro Steinbach 

Yeah, that’s fairly interesting. But if you think about a typical dollar store, it’s the stuff by a store manager, has wanted to be assistant store manager, and then the sweet tooth to a couple of more sales associates actually, and it’s much less than the typical small independent grocery store, which employs, you know, significantly more people, about 14 people on average. And that obviously means that they can keep costs significantly lower. In addition, dollar store wide benefits significant by keeping cohort cost under control, say buy in bulk. And that’s a significant price advantage compared to many of the independent grocery retailers, particularly operating in rural areas. And many of you likely have heard to Trump’s shrinkflation, and that’s also a factor that actually is allowing dollar stores to keep some of the rising prices and PCE due to inflation. Other factors in play against such as a supply chain disruption under control and avoiding to alienate customers. In that sense, if we think about inflation, these businesses tend to cut the size instead of cutting twice. And that’s why it is a $1, $3, $4, $5 business. It works out fairly well actually.

Kimberly Adams 

You know, you mentioned this a little bit earlier, but many communities really depend on these dollar stores for access to food and other necessities. Where are these closures happening? And how are those communities going to be affected?

Sandro Steinbach 

There have been some prerelease data that I was able to have a look around. And there are many suburban, but also a lot of rural areas where those shops are actually closing. And that’s a concern because in rural America, low-income residents were dependent on access to affordable food. And local department stores such as here up in North Dakota, tend to be 50 miles, 75 miles away. And therefore, the pop-up dollar stores that have been appearing over the last 20 years actually fit an important niche where they cater to low-income consumers in many ways, which obviously prefer lower prices the dollar stores can actually offer when they are in close proximity. So, what shouldn’t be underestimated is actually the convenience of access to dollar stores.

Nova Safo 

So, benefits exist for the stores being in neighborhoods that are underserved. And yet, we’ve seen communities try to block them from coming in to try to block dollar stores are coming in. Why is that? Why have some voted to do so?

Sandro Steinbach 

So generally, the interesting of dollar stores coming to the community, it’s just the bunching of those stores, like dollar stores every couple of miles basically. That’s a main concern, basically, because you have these adverse impacts on independent grocery stores and access to food in general. And my colleague, Keenan Marchesi from the USDA Economic Research Service, and Rigoberto Lopez, who is with the University of Connecticut, recently conducted a study where we analyze data on dollar stores and independent grocery stores across the United States from 2000 to 2020 to look at what are the implications of when dollar stores actually come to town. And we found some very striking results. We found that business closures of independent grocery stores increased by about 2.3%. At the same time, we also see that employment and sales go down, so there are quite some marked impacts actually of dollar store entry. At the same time, there’s some significant variation actually, particularly in rural communities. Once a dollar store enters that market, the probability of independent grocery to actually exiting, which tend to be providing, you know, more healthy food and also employing a lot more people is going up three times more than in an open area actually.

Kimberly Adams 

You know, it reminds me of the pushback earlier when Walmart started coming into a lot of communities.

Nova Safo 

That’s what I was thinking. Yeah. It has a similar tinge to it, doesn’t it?

Sandro Steinbach 

Yeah, but we are not in the beginning, right? I mean, dollar stores have been expanding significantly over the last 20 years, so we talk about 50,000 stores, so it hits the end of the wave already. Right? It’s almost an industry that is maturing actually. That’s what we see these days where there’s some maturing industries that want to keep costs in check to get profits basically up. And that’s why we have these disclosures of Family Dollar stores and 99 Cent stores.

Nova Safo 

All right. Well, you know that kind of anticipated my last question that this era of the proliferation of dollar stores, it’s coming to an end then. There is kind of a shift happening.

Sandro Steinbach 

I think there’s potential for more consolidation actually coming up, right? It’s a low margin business, and low margin business operate in two ways. You grow or you die. And so, the attitude that Dollar General has is we expend more, we add more stores basically, and we can always cut back as long as equity is there to do that actually. The liabilities are comparatively low actually. And while they are still making profits in that sense. So, the approach that many of those companies a taking is a disruptive entry where you get into the market. You try to occupy as large as possible of a market niche. And then if comes the day when you basically out-compete your competitors, and that’s maybe some things that we are going to see in that market, which is still very much localized, right? Dollar General and Dollar Tree and Family Dollar have really localized markets and compete very little with each other, but they compete a lot with independent grocery retailers.

Nova Safo 

Alright, we’ll leave it there today. Professor Sandro Steinbach. I’ll pronounce as close to the authentic Austrian as I can. Joining us from Fargo, professor of agribusiness and applied economics at North Dakota State University. Thank you very much for this.

Kimberly Adams

Yes. Thank you, professor.

Sandro Steinbach 

Thank you. It was a pleasure talking to you today.

Kimberly Adams 

Likewise. When was the last time you were in a dollar store, Nova?

Nova Safo 

I don’t think I ever have been.

Kimberly Adams

Really?

Nova Safo

How about you? Yeah.

Kimberly Adams

Oh, probably a couple months ago. I was indeed buying some party supplies.

Nova Safo

Party supplies.

Kimberly Adams

Yeah. I mean, just as professor was saying, like a lot of, you know, depending on where you are, and you know, especially what sort of like economic band you’re in, you’re using these stores very differently. But I also remember a couple years ago, I went on a trip to West Virginia with a girlfriend of mine. And you know, we needed to get some groceries for this place we were staying, and the only place to get groceries was the Dollar Tree. And they weren’t so much groceries as just, you know, packaged foods and things like that. But that was the only option for quite some distance.

Nova Safo 

You know. Yeah. I mean, I’ve had situations where the only option has been like, you know, the Walmart superstore nearby, you know, especially as you said when you’re visiting places, but it’s never. I’ve never had that particular limitation, so I think it really seems to be very neighborhood and region specific, it seems.

Kimberly Adams 

Well, we want to know what you think. Do you shop at dollar stores? Do you have a favorite dollar store chain? You can tell us about it at 508-827-6278, also known as 508-U-B-SMART, and we will be right back.

Nova Safo 

Okay, time for some news. Kimberly, why don’t you get us going?

Kimberly Adams 

Yes, I’ve been getting a bunch of emails from Mozilla over the past week or so about this report they put out. They’re often sort of scanning apps and different websites for the privacy protections on the apps or the lack thereof of, but they recently did a deep dive on dating. Deep dive because it’s Tuesday. Deep dive on dating apps and it is not ideal from a privacy perspective. So, researchers at the, I’m reading here from The Washington Post summary. “Researchers at Mozilla Foundation’s Privacy Not Included project, who updated reviews of the 25 most popular dating apps out there based on their user privacy practices, data breach track records and more. The result? 22 of those apps -including popular options like Tinder, Grindr, OkCupid, Hinge and Bumble – received the team’s “Privacy Not Included” warning label. Among other things, Mozilla’s researchers found that 80 percent of the apps they reviewed may share or sell your personal information for advertising.” And there’s some examples. Yeah, there’s “one particularly strange example: If you’re a Coffee Meets Bagel user looking to break the ice with a match before meeting up in person, you couldn’t use the app’s video chat feature. That is, if you’re okay with the company collecting ‘the content and information you make available using our video chat feature.’” And, you know, a lot of these companies say that they may collect that information. But especially, you know, with so many companies selling the data that they do have for AI, to train these AI models and things like that. Or even using AI in their models and having these chatbot and all these different things, it’s just useful to remind yourself that when the product is free, you are the product. And sometimes also when you pay for a product, you are still the product. And just check those privacy settings and be mindful of what you’re putting on there and watch out.

Nova Safo 

This is cringy because I mean, people put a lot of information about themselves on dating apps because that’s the point.

Kimberly Adams 

Yeah, you’re trying to filter, right?

Nova Safo

Yeah.

Kimberly Adams

Well, what’s also worth noting is that sometimes it’s not just the information that’s on your profile that can be used by these apps. It’s also the information in your chat exchanges. And a lot of this is tied to safety features. They want to be able to go back and if someone has done something, you know, weird or scary to be able to access that conversation or to flag conversations for scams or for potential violence or whatever. And so, you know, there are definitely safety arguments for these companies having, you know, some kind of access to this stuff. But, you know, some companies design to make profit.

Nova Safo 

Yeah, access is one thing, but collecting the data and then using it for commercial purposes is something else.

Kimberly Adams 

All right. What do you got?

Nova Safo 

What do you do? I guess, we could all just go back to coffee shops and bars and meeting people at grocery stores.

Kimberly Adams 

Well, Kristin Schwab, our colleague has done quite a bit of reporting about sort of this backlash to online dating and dating apps and the return to IRL meeting people. And I, you know, from my very small sample size of people, single people, I know, a lot of folks are becoming very disenchanted with the apps and just, you know, trying different things.

Nova Safo 

I think I support that wholeheartedly. I think it cannot beat IRL. All right. Okay, my story broke this morning. The Department of Justice announced that it had reached a settlement with dozens and dozens, if not hundreds of young women to pay them 139 million dollars to resolve claims over their mishandling of the investigation into Larry Nasser, who was the women’s gymnastics organizations.

Kimberly Adams

Coach.

Nova Safo

Not coach. He was their main doctor.

Kimberly Adams

Ah yes, that’s right.

Nova Safo

Yeah, the lead doctor and using that power and position, he abused hundreds of young girls and young women from the early 90s, is the earliest evidence, all the way to 2016. And the FBI was informed finally, you know, the US Olympic committee or the gymnastics, I think. One of the organizations actually submitted a report to the police, and the FBI did a very shoddy basic quick investigation and then kind of sat without anything being done for eight months. And in that period of time, there’s evidence that dozens and dozens of more young women and girls were abused. So, that’s where the settlement comes in. The FBI director Christopher Wray has publicly apologized to those young girls and women. And this information that I’m sharing is not new information. There have been, the Inspector General report. The FBI Inspector General has conducted a report and released it publicly. A major law firm did also a kind of an independent investigation for the US Olympic Committee as well. So, there were multiple failures in the case of Larry Nasser, and multiple failure failures for decades, where these organizations from the University where he worked in Michigan, Michigan State University to the United States Olympics Committee to the gymnastics organization, failed these girls and young women. Did not believe them. Did not seriously take these allegations when they came up or did not question strange behaviors by this predator.

Kimberly Adams

And sometimes attractively protected him.

Nova Safo

And actively protected. In fact, especially the university. Yes, absolutely. You’re right. And the gymnastics committee. So, I had to. This really hits close. I mean, it really hits differently for me because I listened through every one of those testimonies in courts, as these brave women got up and told their stories during the sentencing part because Larry Nasser pleaded guilty. And it was gut wrenching to listen to. And so yeah, I mean, $139 million doesn’t really do justice. But hopefully, the FBI has become a better organization going forward.

Kimberly Adams 

Yeah, it’s good to see those women getting some kind of justice even if it’s not enough justice. But that is all the time we have today for the news. We are going to switch over to the mailbag.

Mailbag

Hi Kai and Kimberly. This is Godfrey from San Francisco. Jessie from Charleston, South Carolina. And I have a follow up question. It has me thinking and feeling a lot of things.

Kimberly Adams 

Okay, last week during our last deep dive, which was on young people’s smartphone and social media use, I talked about this conversation I had with LeVar Burton, who told me that parents who want their kids to read. Look, you should be. You should be. It was great. It was great. But he told me that parents and other adults and kids lives who want to see those kids reading more, especially when it comes to physical books should model that behavior of showing, letting them see you read physical books instead of you also been on your phone all the time. And we got this.

Dan

Hello, my name is Dan from Boulder, Colorado. That’s one of the reasons we have maintained a subscription to our paper newspaper, especially when the kids were in elementary school. Having them watch us page the newspaper was great. And in addition, they could use the paper themselves, either to check the weather which happened occasionally, or more commonly, to read the comics. Every day, they enjoyed pulling open that section of the paper and reading with us. It’s not evidence based, but it worked for us.

Kimberly Adams 

Oh, I love that. That’s so sweet. Yeah, what a nice little ritual to have as well.

Nova Safo 

I have questions like, what about making paper airplanes?

Kimberly Adams 

Out of newspaper? It’s too flimsy.

Nova Safo 

It’s a little flimsy, but you could do it. You could do it.

Kimberly Adams

I mean, I guess if you did quite a few folds.

Nova Safo

I got pretty good at that. Yeah, I’ve done it back in the day. It’s fun.

Kimberly Adams

Okay.

Nova Safo

All right. One more. Last week we talked about the Australian animated kid show “Bluey,” which I just watched a little bit before we got going here. It is beloved by kids and parents alike. And we got this.

David

Hi, Make Me Smart team. This is David from Jacksonville, Florida calling from a house full of “Bluey” fans. If anyone is interested in checking out the show, I would recommend to the Marketplace audience to begin with season 1 episode 20 “markets.” In a seven-minute cartoon about talking dogs visiting a farmer’s market, they’re illustrations about inflation by the Tooth Fairy opportunity cost, and how money flows to an economy. I really do recommend checking out even if you don’t have young kids. Thanks for making me smart.

Kimberly Adams 

I will have to go and look for that one. I didn’t know that they dealt with that. You knew about that episode?

Nova Safo 

Yeah, and my favorite part is the is the dog with a cowboy hat.

Kimberly Adams 

I’ll have to watch it, so I can get the reference. But we want to hear more from “Bluey” fans. What’s the best episode you’ve watched that you think kids and grownups would enjoy? Or the one that you revisit from time to time. Send us your top picks, maybe we can put them in the newsletter or something. But before we go, we’re going to leave you with this week’s answer to the Make Me Smart question, which is: what is something you thought you knew, but later found out you were wrong about?

Tamara

This is Tamra in Colorado, being a longtime Marketplace listener, I thought I had a really good understanding of trade deficits. I am currently taking a finance and accounting class and very recently learned the historical context behind why the inversion from the World War II era to the 70s, when we started importing more goods than we exported, was drastically different. This historical context was not something that I ever learned. So, I thought I knew about trade deficits. And I was happy to say that there was more information there than I had at my fingertips.

Kimberly Adams 

Wow, I didn’t know that either.

Nova Safo 

I’m stumped. I didn’t know about this. I’ll go look that up.

Kimberly Adams 

You know, there’s been so many shifts in the economy. And Justin Ho has been doing some reporting on this for us about sort of how many of these sorts of standard practices of the way that we think the economy works actually still apply anymore. And which ones are different? And, you know, I feel like World War II was another one of those great global economic resets, where they kind of just had to revisit a lot of the models and make some new ones. So yeah, but that is exactly what the Make Me Smart question is for. What’s something you thought you knew, but later found out you were wrong about? We want to hear your answer to the Make Me Smart question. You can let us know what you’ve discovered, and we can all get smarter together. So, leave us a voicemail, our number is 508-827-6278, also known as 508-U-B-SMART. Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Today’s program was engineered by Juan Carlos Torrado with mixing by Jay Siebold. And our intern is Thalia Menchaca.

Nova Safo 

Ben Tolliday and Daniel Ramirez composed our theme music. Our senior producer is Marissa Cabrera. Birdget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital. And Marketplace’s Vice President and General Manager is Neal Scarbrough.

Kimberly Adams 

I gotta go watch some “Bluey.”

Nova Safo

Yeah, me too.