June 12, 2023
Dollar stores are usually more resilient in periods of recession
However, inflation is now higher than growth in comparable store sales
The model has been transformed to include more fresh produce
And technological innovation is challenging marketing strategies

CHARTS OF THE WEEK: "Discounters' quarterly results cause investors to panic"


Dollar stores saw their share prices fall massively following disappointing Q1 results and cautious announcements for the rest of 2023 (see chart of the week). The US consumer is beginning to show signs of weakness, despite a historically low unemployment rate. A soft landing for the economy looks increasingly unlikely.

Dollar stores are usually more resilient in periods of recession

Historically, discount shops have been more resilient to economic downturns than traditional retailers. Their sales are increasing as consumers look for more affordable products for their everyday needs while their spending budgets are shrinking.

The product mix changes during recessions, with households reducing their discretionary purchases and consumer staples accounting for a larger proportion of the average till.

However, US households have already begun to change their purchasing habits since last year, favouring essential goods at the expense of discretionary products (see Fig. 2). Food stamp benefits for the poorest have been cut and lower tax refunds than in previous years have reduced household disposable income.

At discounter Dollar General, revenues for the first quarter of 2023 rose by 6.8%, driven by sales of food products, while sales of household goods and clothing fell by -8.1% and -1.6% respectively. The same trend can be seen at Dollar Tree, Target and Walmart.

However, inflation is now higher than growth in comparable sales.

US discounters Dollar General and Dollar Tree both reported like-for-like sales growth below the rate of inflation in the first quarter of 2023. This means that their revenues are not keeping pace with rising costs. Inflation generally leads to higher input costs for retailers, including raw materials, labour and transport costs. If retailers cannot pass on these increased costs to consumers by raising prices, their profit margins will fall. A prolonged period of low same-store sales growth relative to inflation (see Fig.3) leads to lower profits and a deterioration in the financial position of retailers.

The main reason for weak sales growth is that costs are not reflected in the product price, and there

are many reasons for this:

  1. Households have less money to spend.
  2. Retailers are losing market share due to increased competition, unfavourable changes in consumer preferences or inadequate marketing strategies...

Like-for-like sales growth is a key performance indicator that is closely watched by investors, which explains the sharp fall in shares following the announcement of the results. This highlights the underlying challenges and potential risks in the retail sector. Potential declines in purchasing power, profitability issues, competitive pressure and investor scepticism can all have a significant impact on the long-term viability of retailers.

The model has been transformed to include more fresh produce

Just two years ago, discount shops changed their product mix to include fresh produce. So far, this strategy has paid off. Not only has it helped to meet consumer demand, but it has also increased shop traffic.

The wider and more varied the product range, the more loyal customers are, especially if they can find fresh produce, dairy products and consumables (see Fig. 4). This means that customers come back more often, which encourages them to make impulsive purchases and helps to boost sales.

The combination of low-cost products and consumer staples offers consumers a unique experience that sets them apart from the competition.

Finally, the presence of fresh produce in discount shops is also a response to increased consumer demand for healthier food. By aligning themselves with these market trends, discounters are further increasing their market share. They have long been criticised for selling only 'junk food', even though their shops in rural areas are often the only source of food for the local population. It is therefore easy for them to take market share in these areas, but margins are certainly harder to maintain because of the more complex logistics involved with fresh produce.

Technological innovation challenges marketing strategies

Competition intensifies in times of recession, as traditional retailers try to hold on to their market share and target more consumers likely to prefer low-price products. Discount chains, supermarkets and even online platforms all offer increasingly competitive prices and promotional offers.

Competition, particularly from Walmart, has intensified for discount shops, and Walmart has renovated many of its shops. The renovations include new signage to encourage customers to download and use the Walmart in-store app and help them find their way around. Following the model of airports, Walmart is also trying to use design to help customers navigate its shops and direct them to dedicated categories such as electronics and toys. The remodeling also includes self-checkout kiosks and contactless payment systems. Finally, some shops will be equipped with Scan & Go self-checkouts. These changes will help to improve the customer experience and increase market share.

Dollar stores, unlike Walmart, are above all convenience stores, and investment efforts are focused on the purchase of refrigerators to develop the fresh produce offer rather than on technology and sophisticated digital applications.

Retailers are embracing in-store advertising as a way of supporting sales growth while opening up new sources of advertising revenue. For example, Kroger, the second largest grocery chain in the US after Walmart, has extended its media strategy by adding digital screens to facilitate video advertising in 500 of its shops. In-store advertising captures audiences that are on average 70% larger than traditional digital audiences (see Fig.5).

On-site advertising margins are also much higher than distributor margins (see Fig. 6).


In times of recession, discount stores can benefit from increased sales due to their affordability. However, the split between food and discretionary spending, inflationary pressures and increased competition present challenges to their profitability. By managing these factors effectively, dollar stores can retain their appeal to budget-conscious consumers and continue to prosper.


Financial Research