When I first heard about Temu, my initial thought was about how unsustainable the model seemed. But my second thought went to dollar stores: How could they compete with a website that makes it easy to find thousands of even cheaper items and have them delivered directly to your home, instead of having to search through the aisles of these stores?
Having recently read about Dollar Tree and Dollar General’s stock prices dropping significantly in the last quarter, I immediately wondered if competition from Temu and Shein was too much for these companies. Was my assumption correct, or is the situation more complex? Let’s see what’s happening with dollar stores and see if Temu is responsible for the drop in their stock prices. Then, I’ll quickly review what I observe on the digital side of these companies.
What Happened to Dollar Stores?
Looking at stock prices, Dollar Tree declined by 32% YoY and close to 50% YTD. It isn’t much better for Dollar General, with -22% YoY and -38% YTD. Some other chains are in worse shape. I’m thinking of 99 Cents Only, which went out of business (although many locations will be turned into Dollar Trees).
So, what happened to these stores? According to their executives, the macro environment and changing customer behavior are to blame, with more Americans cutting down on basic items. Dollar General CEO Todd Vasos stated, “Inflation has continued to negatively impact these households, with more than 60 percent claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items.” He also mentioned that the largest segment of the company’s consumers are households with incomes under $35k a year.
Dollar store executives also recognize that even customers with higher household incomes ($125k and up) are cutting down on non-essentials, such as party supplies. Dollar Tree COO Mike Creedon noted that the company was “navigating through one of the most challenging macro environments” it has faced.
While executives are blaming the economic environment, could there be other reasons why dollar stores are underperforming? I read dozens of comments in a Daily Mail article (linked below) to get an idea of what customers think about dollar stores.
Two recurring themes in the comments were pricing/locations and the in-store experience. Dollar stores tend to be popular in rural areas with few options, and many customers seem to believe these chains are overcharging for food. Some report going there only when they can’t or don’t want to drive to the nearest Walmart. Others question the high density of dollar stores in their area.
The other theme is the in-store experience. Customers report messy stores, with empty shelves and boxes scattered all over the store. Some even question the working conditions and pay of the employees.
I’m not sure about the working conditions in these stores, but I have seen many discussions about the store experience. Retail experts frequently mention dollar stores’ struggles with keeping shelves stocked.
This isn’t a new issue. The Wall Street Journal reported in 2018 that “Family Dollar’s sales have been sputtering, hurt by neglected stores, poor product selection, and unhappy workers.”
Earlier this year, Family Dollar was ordered to pay $41.6 million after using a rat-infested warehouse to distribute products, including food, to over 400 stores in the South.
Finally, many experts and executives report that competition from Walmart poses a challenge for dollar stores, especially on basic items. Todd Vasos admitted that Walmart has been “doing a pretty nice job” in attracting bargain-hunters. This is particularly difficult for dollar stores, as Walmart has a strong presence in the areas where dollar stores operate.
Is Temu Killing Dollar Stores?
So, is it all Temu’s fault? No one can ignore the size of the Chinese giant and the impact it’s had in the U.S. From Super Bowl commercials to digital ads everywhere, Temu quickly gained market share. And to be honest, I expected its entry into the U.S. market to be rough for dollar stores. But before I give my opinion on its role in dollar stores’ struggles, let’s quickly go over what Temu and dollar stores have in common and how they differ.
What attracted customers to Temu is obviously the extremely low prices on a wide assortment of items. Low prices are also key to dollar stores’ value proposition; it’s even in their name. Temu and dollar stores both offer a wide range of low-cost products across categories like household goods, beauty, and electronics. As a result, both focus on high volumes rather than high margins. Another thing these two models have in common is that they’ve both faced several controversies and frequent complaints. Dollar stores have been criticized for limiting access to fresh food and allegedly underpaying employees. Temu faces concerns over data privacy, counterfeit goods, and labor practices.
However, there are also several important differences between Temu and dollar stores. The most obvious one is that Temu does not have physical retail locations in the U.S. (at least for now). This means customers must order online and wait several days or weeks for delivery. While online shopping is convenient, many shoppers would rather have their items immediately. Have a Halloween party tomorrow? Too late to shop on Temu, but there may still be cool things to grab at your local dollar store.
Another difference is that dollar stores make food and drinks a significant part of their product assortment, while Temu does not sell food (yet). This is important because dollar stores are often located in areas with few grocery stores.
I was also surprised to learn that Temu and dollar stores cater to different demographics. We’ve already mentioned Dollar General’s comments about households earning under $35k a year making up the largest segment of its customers. However, according to Rmwcommerce, “Temu’s sales among customers earning $190k grew faster than any other segment, and customers earning $55k or less grew the slowest. Forty percent of the company’s customers are making above $130k per year.”
Lastly, while both companies sell items manufactured in China, Temu was launched by Pinduoduo, a major Chinese e-commerce platform. On the other hand, Dollar Tree and Dollar General are American companies.
So, can we say that Temu is killing dollar stores? I’d say it puts pressure on them in some categories and contributes to slower sales. David D’Arezzo, a former executive at Dollar General, told CNN that “Dollar General made a mistake in trying to shift toward discretionary items.” However, I think it would be wrong to place all the blame on the Chinese company. There are major differences between these businesses, such as product assortment, distribution strategies, and customer segments. Dollar stores are facing other issues, as discussed earlier, which are often the source of customer complaints.
What Does Dollar Stores Digital Experience Looks Like?
We’ve seen that Temu can take market share away from dollar stores, but they are still competitive due to their network of retail stores and ability to sell food and other consumable products. But are dollar stores competitive on the digital front?
The short answer is no. The customer experience on these websites is terrible. Dollar Tree only allows customers to buy full cases. Need a can opener? Too bad, you’ll have to buy 48. Shipping isn’t much faster than Temu either.
And that’s when items are actually available, which isn’t always the case. For example, we’re a few weeks away from Halloween. Want to order party supplies? Good luck finding something in stock on Dollar General’s website.
I understand that reliable inventory management systems can be expensive and difficult, especially with this business model. However, I think Buy Online Pickup In-Store (BOPIS) could work well for dollar stores. A pain point of in-store shopping is finding the right product on the shelves, and a problem with Temu is the delivery time. Accurate inventory management on retailers’ websites, with the option to pick up items in-store shortly after placing the order, could be convenient for millions of customers.
Unfortunately, I currently see little value for customers shopping on dollar stores’ websites, but the upside is that there is a lot of potential for improvement in delivering value.
Conclusion
In conclusion, while Temu has added pressure to dollar stores, especially in the non-consumable categories, it is not the only reason behind their recent struggles. The economic conditions (according to executives), negative in-store experiences, and competition from Walmart have in my opinion had a larger impact on dollar store stock prices. Temu’s business model, though competitive in terms of pricing, addresses a different demographic and lacks the immediate availability that dollar stores provide, especially for food items.
However, one area where dollar stores lag is their ecommerce capabilities. The shopping experience on their website is terrible, with limited stock availability and sometimes only bulk purchasing options. Implementing strategies like BOPIS could greatly improve customer satisfaction and allow dollar stores to compete better in the digital space. Dollar stores still have potential, but they’ll have to adapt to customers new expectations
https://www.ft.com/content/ac297f38-ffeb-4761-a79d-ac1246209bfe
https://nypost.com/2024/09/04/business/dollar-tree-stock-falls-20-after-cutting-forecasts
https://qz.com/dollar-general-dollar-tree-new-strategy-walmart-target-1851643834
