Dollar General is betting on the continuing decline of the middle class

Discussion
Dollar General celebrates its 13,000th store opening in Birmingham, Alabama - Photo: Dollar General/Business Wire
Dec 06, 2017
Al McClain

Quick: Who made more money in their most recent fiscal year — Dollar General or Macy’s? And whose market value is higher — Kroger’s (with five times the revenue) or Dollar General’s? According to a Wall Street Journal article, Dollar General wins on both.

Business Insider states, “Dollar stores’ sales grow as more Americans struggle economically, with retailers betting on a ‘permanent underclass in America.’”

Retailers have long known that the middle is no place to be, but now it seems the low-end of the market may be as big an opportunity as the high-end.

Dollar General’s CEO, Todd Vasos, told the WSJ that “the economy is continuing to create more of our core customer,” which is households making less than $40,000 per year.

According to Business Insider, dollar store sales grew from $30.4 billion in 2010 to $45.3 billion in 2015. Analysts think that with the imminent passage of a tax bill said to bring more benefit to corporations and the rich, the trend will continue. Cushman & Wakefield analyst Garrick Brown told Bloomberg that “what the dollar stores are betting on … is that we are going to have a permanent underclass in America.”

The middle class shrunk in 203 of 229 metropolitan areas from 2000 to 2014, according to Business Insider. The average income of the top 20 percent of Americans grew by 60 percent from 1980 to 2015, while income of the poorest 20 percent grew just 10 percent, citing Pew Research.

As Tony Orlando, owner of Tony O’s Supermarket and Catering and BrainTrust panelist, put it in a recent discussion on independent retailer success, “it still comes down to the economic circumstances of the community you are in. Our area has lost over 25,000 jobs in the past 30 years, and what we have left are poor retired folks and a lot of government assisted families.”

DISCUSSION QUESTIONS: Should more retailers start to target America’s poorest consumers given the uneven progression of economic recovery? How might more mainstream retailers reposition themselves to cater to lower-income households?

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26 Comments on "Dollar General is betting on the continuing decline of the middle class"


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Art Suriano
BrainTrust

I think we will see more retailers reaching out to lower-income Americans as we are seeing retailers expanding in all areas. The dollar store industry has been thriving for a long time and continues to grow at an enormous rate. However, we shouldn’t lose sight that those in higher income brackets shop those deep discount stores as well. Everyone loves a bargain, and although those making a higher income may not be buying their clothes in bargain stores, they do tend to buy other items like supplies because they realize they can buy the same thing for a lot less. For those reasons, I can see other retailers getting into the deep discounting game appealing to both lower-income customers and the bargain shopper regardless of their income status.

Phil Chang
BrainTrust
Phil Chang
Retail Influencer, Speaker and Consultant
1 year 3 months ago

The middle is a tough place to be. As much as we’ve been looking at the retailers in the middle of the retail spectrum and plotting their demise, it’s not that different for the middle class. I’ll stop the politics there – this probably isn’t the time or place for that.

Retailers need to use the data at hand to figure out how to reach different demographics and pyschographics within their grasp. I *think* retailers are doing this now — clustering and building stores to suit their neighborhoods and building assortments to reflect their consumer base. If they do this and pair this with their unique reason for being, they should be set up for success.

Mark Ryski
BrainTrust

The economic stratification of America into haves and have-nots always existed. And while there has always been a belief that anyone who worked hard and was determined enough could climb the socio-economic ladder, the data clearly suggests that this is much harder than it once was. The reality for many Americans, and the economic data supports this, is that the gap between haves and have-nots is not only growing, but also becoming calcified. This reality creates a large and growing market opportunity for retailers like Dollar General and others who cater to customers in the market segment. However, the choice of repositioning to cater to this market is a much bigger decision than just merely chasing a large and growing market — not every retailer will want to cater to this market regardless of its size.

Neil Saunders
BrainTrust

I don’t disagree with the analysis that the middle class is shrinking and that more consumers are finding it hard to make ends meet. However, while this is a part of Dollar General’s (and Dollar Tree’s) success, it is far from the whole story.

One of the reasons both companies have grown is because they’ve enlarged their customer base by attracting an increasing number of middle class and affluent shoppers. This is mostly because of convenience: the rapid expansion of both chains means there are now many locations where they are by far the nearest and most convenient option.

Middle class customers have responded to this and, while they might not buy everything at dollar stores, they actively use them for essential and top-up purchases.

Dave Bruno
BrainTrust

From a marketing perspective, of course retailers need to be aware of market conditions that impact their business. If economic status is a key driver, then reacting to growth in the underclass is not only a good idea, it is a requirement. Assortments, store locations, pricing strategies and loyalty programs should all be evaluated to make sure they stay closely aligned to this business driver. From a human perspective, I am deeply saddened by the struggles of so many people, and hope for a turnaround soon.

Ken Lonyai
BrainTrust

A lot of high drama headlines exaggerating the situation. Yeah, the middle is shrinking, slowly. If it were as bad as reported, the economy would tank for everyone. Dollar General is by nature aimed at lower-income and frugal shoppers so of course, they want to make the most out of relatively benign (near-term) changes. For most merchants, making major adjustments to product assortment and brand positioning based on these headlines is suicide.

And the “experts” have to make up their minds too: one day retail is here to stay with 90 percent of sales and the next there’s no middle class to sell to. It can’t be both ways because a retail sector of dollar-type stores will not stand and even Amazon would be degraded substantially.

Kim Garretson
Guest

Responding to Art’s comment: “However, we shouldn’t lose sight that those in higher income brackets shop those deep discount stores as well.” Here in Palm Springs I see this trend in spades at a new 99 cent store. With tourism being the major industry here, we have a lot of service industry workers who shop this store, while I also see BMWs and Mercedes in the parking lot shopping both this store and the expensive Italian deli immediately next door.

Brandon Rael
BrainTrust

Off-price retail and the dollar stores have been the most rapidly expanding retail segments in recent history. While the economic conditions are ripe for the dollar stores to fully capitalize on this opportunity, this is a clear reflection of an emerging underclass demographic that has been most impacted by the recent events.

Dollar General and other dollar stores have grown significantly over the last few years, as they offer compelling value not only to the lower economic segments but to anyone who is looking to save money on commodity items. In addition, for the moment, dollar stores are thriving as they offer convenience, value and are omnipresent, as well as a segment where folks exclusively shop in-store, vs. online.

As our new economy shakes out, we can expect not only dollar stores and off-price retailers to have aggressive promotional strategies in play, but also we should expect all mid-level and even upper-ended retailers to work their pricing strategies to attract continued consumer interests.

Bob Amster
BrainTrust

If a retailer that is not serving the “poorer consumers” is going to target that class, it would have to be under a different brand with a curated assortment of products and pricing, leveraging what the retailer already knows about operating a retail chain successfully. Otherwise, don’t bother. You may just dilute your existing brand and disappoint your current franchise.

Adrian Weidmann
BrainTrust

“…we’re going to have a permanent underclass in America.” That’s a chilling statement. Every day another event from our current political administration drives this point further into our consciousness. We look for leadership and inspiration yet what we get is divisiveness and disillusionment. The fact that this store format is thriving is an economic reminder that we need to change our mindset and moral compass. We should expect and demand more. Permanent is a defining word.

Cathy Hotka
BrainTrust

There have been a host of tax proposals that would undermine the already shaky financial picture for low-income Americans. Dollar store companies are expanding because their client base is expanding, and they’re well-managed. Expect the trend to continue.

Dave Wendland
BrainTrust

Todd Vasos’ strategy is just plain smart. The key for any retail operation is to create a value proposition that resonates with the customer based served. Make no mistake, Dollar General has figured that out and is on a mission to build its base. Although targeting the so-called “underclass” may be the focus, Dollar General attracts all types of shoppers who favor convenience, limited selection and value-for-money. With much of traditional retail under duress, I expect Dollar General to continue its growth by delivering on its promise: “Save time. Save money. Every day!”

Kai Clarke
BrainTrust

Retailers will differentiate their target market to a small degree but Dollar General is not necessarily focused on the poorest Americans. Rather they are focused on Americans who focus on value. In reality this is no different than many major retailers, including Walmart and others. Dollar General simply differentiates all of their products by focusing on the lower cost products, whereas Walmart and others may include lower cost products along with higher cost products in their mix.

Differentiating the price of products that are offered in their retail mix is largely something which retailers determine based upon store location and model identification.

Tom Dougherty
BrainTrust

Powerful brands always have specific meaning to defined targets. Mainstream retailers are like Look and Life Magazine were in the past. They try to be meaningful to EVERYONE.

That day has past. It’s time to be focused and more segmented.

Can Macy’s or Target be a Dollar General? Absolutely not. And they should not try to be. The question is really about MEANING and not about the lower economic segments being here to stay. Despite the dollar stores’ success, the answer is not to copy their model. The answer is to copy the strategy and find a defined target audience and become MORE important to THAT.

Todd Trombley
Guest

Could not agree more!

Shep Hyken
BrainTrust

I don’t know about the “death of the middle class.” I do know that a business (any business) has to know its market/demographic. If the focus is on lower income, middle, upper middle income, etc. it doesn’t matter. Choose the lane you want to play in and stay in it.

Joy Chen
BrainTrust

In order to be successful in off-price retailing, it is about providing good value — getting something for a cheaper price than in other channels. Dollar General is driven by this core tenet and their strategic choice for their locations.
Everyone wants good value and there are many opportunities to win. For other retailers to be successful in this space, it is about offering products or services that consistently provide good value in a convenient way. Amazon is a perfect example of offering value to a different consumer than Dollar General.

Katherine Black
Guest
1 year 3 months ago

Part of Dollar General’s success is that they are not seeing their business migrate online in the way that other retailers are. For the consumer that shops them for value, they are much less likely to shift spend to online. Other consumers shop parts of their store for a “treasure hunt” particularly for seasonal merchandise. This, too, is much less likely to migrate online. Essentially, their value proposition is a lot less “leaky” than others.

Jane Sarasohn-Kahn
Guest

Fortunes can be made at the bottom of the pyramid, as C.K. Prahalad wrote in his book “The Fortune at the Bottom of the Pyramid.” He taught me that a long time ago at the University of Michigan and, though he was formulating this thesis 25 years ago (!), it’s even more important and resonating today.

Dave Wendland
BrainTrust

Excellent comment, Jane. Keeping in mind that DG focuses on the bottom of the pyramid, they have constructed a value proposition that appeals across a multitude of shopper types. I call this good business.

Robert DiPietro
Guest

I think the dollar stores are benefiting from the economic situation and target customers who fit their profile and segment. I’ve seen Target start to incorporate a “dollar” section at the front of the store but it seems seasonally focused rather than actually targeting the demographic.

If that end of the consumer segment is growing all retailers will have to target it in some sense. At a minimum retailers should be tailoring the store assortment based on demographic.

Ken Morris
BrainTrust
The cycle used to follow the economy when the economy was dipping or stagnant, off-price retail increased. The roots of the dollar store’s revival lie in the Great Recession. Lately it hasn’t mattered if the economy was up or down, these stores thrived and I believe that trend will continue. Never underestimate the power of a bargain! I think people have started to be more cost-conscious because they had to be – whether they are lower or middle class. This has helped off-price and dollar stores thrive. For these customers, and Millennials specifically, it has just become a habit – especially for certain products that they know are available at as significant discount from traditional retail stores. Dollar stores are not just for bargain shoppers anymore. There used to be a stigma probably of walking into a discount store. But now when you ask people where they purchased something, even wealthy people, they are not ashamed to say “I got that at the dollar store.” Over time the difference between the top one percent and… Read more »
James Tenser
BrainTrust

Thrift is a universal value for American consumers at every economic stratum. Dollar stores cater to this need by providing products at low price points; club stores do it by providing products with higher price points, but attractive unit costs. Many other retail formats try to capture slices of household consumption driven by alternative definitions of value — brand, status, convenience, assortment, promotions.

Dollar General’s approach may be a tad cold-hearted, but there’s no denying that it’s responsive to market reality and well-managed. In mass retail, it’s smart to target the demographic bulge. If that happens to consist of folks who can just afford the four-pack of toilet paper before payday, then don’t fault the retailer.

I can’t say I’d advise most “big middle” retailers to shift downscale, but it may make sense for some to stock a few more smaller packs or more basic items that are within the budgets of lower-income households. It could be the key to keeping more trips.

Craig Sundstrom
Guest

I’m dubious of using “the market” as a measure of anything — Quick: what was Enron worth? — but I’m willing to accept that “poor” is a large market. But is it really an opportunity or more precisely, a missed one?

Markets have value only to the extent that they have money, so they must be either large or wealthy. One that’s “poor” by definition doesn’t have much money, and barring a complete economic collapse, I don’t see it becoming significantly larger in the near term (not that some aren’t trying). And of course a flood of entrants would diminish whatever opportunities were somehow missed.

Ricardo Belmar
BrainTrust
All retailers need to understand their customer segment and ensure those customers understand what the retailer stands for. Consumers need to know “why” they should shop at any given retailer. Dollar stores are doing well in part because of the growth of the “underclass” as they call it, but also because consumers are just smarter about shopping for certain product categories and they’ve learned that whether you buy a commodity item at a dollar store vs a high-end specialty store you can get the same quality if you shop wisely. All consumers now seek out value and this is reflected not just in the growth of dollar stores but also off-price apparel stores. Mainstream retailers shouldn’t change their focus to the dollar store approach if it doesn’t fit their brand identity. This is similar to the discussion we recently had around the success of off-price apparel stores and how that segment will grow or not grow. These retailers need to avoid straying from their core identity or customers will no longer understand what value they… Read more »
Tony Orlando
BrainTrust
Thanks Al for the quote. As an expert in the area of what a Dollar General can do to your business, you must create your own extreme values, and pay attention to what they are up to in order to survive. Over the last 15 years, Dollar General, which shares a common wall (right next door), has destroyed my grocery business, amounting to a 50% drop in center-store volume. You can sit and plan your own funeral, or keep finding deals that will bring in the customers, and I was doing that long before they arrived. I just took on another job, going to work for my 4th company, that deals in closeouts, and I’m excited to get some of that business back, as our customers want ridiculous bargains. I have already established a vintage wine closeout section, which has been a success since day one, offering 40-70% off on premium label wines from all over the world. Now I’m going after grocery closeouts in a much bigger way. Throw in my crazy meat/deli/and dairy… Read more »
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