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How Do Dollar Stores Make Money?

By Edited Mar 26, 2016 13 19

These Stores are Multiplying

A Threat to the Big Box Stores

A Family Dollar Store
The concept doesn’t sound like a winner.  How do dollar stores make money if everything they sell is cheap?  Could be there is a method to the madness and things aren’t as cheap as they sound.  Dollar stores are multiplying quickly.  The three major dollar store chains, Dollar General, Family Dollar and Dollar Tree, all have major expansion plans.[1]  It only feels as if they are everywhere now, soon they really will cover every territory.  They must be making money hand over fist if they are pushing hard for more stores.  How do they do it?

Prices Often are Higher Than Walmart

The actual price you pay for a given item may look cheap, but the price per unit is often not as good as the Walmart price.[2]  The dollar store sells smaller packages of the same thing.  You pay less because you get less product.  The Walmart price per pound or price per unit of volume is often better for the same brand when compared head to head, but the “bargain” store sells smaller packages.

Aisles of a dollar store
This type of pricing isn’t really retail trickery because we all know that the plus size packages cost less at Sam’s Club, BJ’s or Costco.  For many shoppers, paying more per unit even makes sense if they won’t actually use the larger package.  Smaller is more economical even if the bigger box or can is a better “deal.”  Nevertheless, some think that the dollar marketers do tend to charge more than the Walmart’s of the world by strategically discounting certain items so they can upcharge other merchandise.[3]  If you know one thing is priced very low than other merchandise must be a great deal. 

Wholesale Closeout Purchasing

The dollar stores often buy in bulk items that the manufacturer or wholesaler wants to dump or unload.  If the manufacturer or wholesaler can’t sell their inventory of a product line to the full price stores, they are often willing to sell large bulk inventories to the dollar folks.  It’s similar to a giant garage sale, the wholesaler with the giant inventory needs to move it and the dollar retailers are happy to oblige by taking off their hands.  Manufacturers of cheap consumer items like party supplies, plastic toys, snack foods and paper goods often have a problem with excess inventory.  The dollar stores offer a solution to the problem.

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Niche Marketing

Niche Sales Items

The small bargain stores have a niche marketing strategy for certain categories of goods.  The dollar stores are a major seller of party supplies, snack foods and party favors.  They also sell a lot of inexpensive toys and home décor items.  The dollar sellers aren’t trying to be all things to all people along the lines of Walmart or Target.  They concentrate on what will sell for their market.

A Family Dollar Store at night
Convenience

Another niche type strategy adopted by the dollar stores is to focus on convenience.  They aren’t trying to be your source for a whole shopping cart full of grocery products.  Almost no shoppers make them the “go to” source for weekly shopping.  Instead, the bargain retailers try to capture as much “fill in” shopping as possible.  Even if a Walmart is close to you, going to the large store and navigating through the giant parking lot may be too much if you’re looking to buy one or two things.  The dollar store makes more sense for a small purchase.

Many of these stores are now free-standing with small parking lots.  You can get in and get out quickly.[1]  A quick Walmart visit is tougher to carry out.  With a free-standing dollar store, you can often park in front, jump in the store and get out very quickly.  The convenience is a virtue of this genre of stores.

Location, Location, Location

Taking Away Drug Store Market Share

The tag words for real estate marketing are definitely applicable here.  The dollar retailers are

A Dollar Tree Store
popping up on many street corners.  They are taking some market share away from the big box retailers and the chain pharmacies.  The drug store chains, such as CVS and Walgreen’s, have been the “fill in” source for many shoppers because of their convenience.  The dollar stores are taking away some of their shoppers.  In a different way, the dollar retailers are siphoning into Walmart’s market share.

Walmart and Target Too

Walmart has traditionally been more of a rural retail store.  Retailers in smaller towns hate them because they take away customers for just about everything.  While there are dollar stores in smaller towns, the growth of $1 marketers more recently has been in more urban areas.[3]  The idea is to have locations convenient to high traffic areas, particularly bus routes, so customers can get in and buy a few things on their way home from work. 

Walmart is trying to delve more deeply into urban areas, but opening a Walmart store takes much lead time and requires quite a bit of land.  Both of these factors make urban expansion for Walmart more difficult.  The dollar retailers can use smaller parcels of land that are

A Family Dollar Store during the day
easier to develop.  Walmart is attempting to adapt by using smaller “neighborhood stores” in more urban areas.  In a sense, they are trying imitate the dollar stores in these markets.  There are even a few “Walmart Express” stores in a pilot program.  These stores range from 10,000 to 12,000 square feet, which is more typical of a $1 store than a Walmart.[4]  Likewise, Target is beginning to roll out something called CityTarget stores, although these will be much larger in size than the Walmart Express locations.

If imitation is the sincerest form of flattery, then the big box retailers are definitely flattering the $1 store chains in a large-scale way.  The big boxers can see the threat to their business is not merely on the horizon, the smaller discount chains are starting to eat their lunch, and dinner too. 

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Comments

Apr 4, 2014 9:33pm
shar-On
My mum used to manage a dollar store in Australia, and she was amazed at some of the quality of the gear they sold. The thing was also that you may pay $20 in the big stores and yet they did not last any longer than the $2 ones.

Even our supermarkets are reducing the sizes of baked beans, potato chips and many other things yet still charge the same as for when they were bigger. It makes you wonder how they are allowed to rip the people off that way. They think we do not know what they are doing, we do but cant do much about it.
Apr 5, 2014 4:36am
BoomerBill
Thanks for reading! We are starting to get some dollar store supermarkets now.
Apr 6, 2014 10:32am
slimjim270
@BoomerBill -

It's funny to hear the 5 and Dime stores are making a comeback.

We have a Family Dollar store going in down the road. It's a small community, so not sure how they are going to have enough sales volume to cover their cost.

Most of the Dollar style stores I've seen going in locally are in rural areas that have too small a population base for the big box stores to consider. 10 years ago a Walmart went into the next town over and everyone cried they were going to crush small business. Family Dollar is now coming in to pick up the crumbs of daily "quick" purchases of items the local convenience mart (gas station) doesn't carry.

-Jim
Apr 6, 2014 11:49am
BoomerBill
Thanks for reading! I've seen three built close to me and three more under construction.
Apr 18, 2014 4:10am
RoseWrites
I've often wondered how dollar stores stay in business - and yet sometimes (not always) I notice that inventory is 'irregular' in some way (such as a slight design flaw). I soon realized that buying in bulk from wholesalers or factories that need to move merchandise is probably the reason. The other thing is, in Canada at least, the dollar stores don't seem to sell perishable items. So, I suppose inventory can sit on shelves for a long time (unlike milk and bread, etc). There's certainly a niche for them - and sometimes smaller portion sizes are ideal for singles living alone, seniors, or small families. Thumbing.
Apr 18, 2014 6:00am
vicdillinger
I love Dollar Tree stores, but caution is necessary when shopping there. Dollar Trees make money by charging you a dollar for many items that may otherwise be purchased for 50 cents, and for which they paid nearly nothing by buying close-out lots many times. The preponderance of items in their stores fall under this category, but they do have some great deals on many items, among which is hardcover books. They buy the books in lots and sell them for a buck, and I've found some really amazing titles in their stores.
Apr 18, 2014 7:58am
mommymommymommy
I go to my Dollar Store for plastic table covers, helium balloons for my children's birthdays and greeting cards for special occasions (I dislike spending $3.95 on a card at the Hallmark Store that is actually next door to the Dollar Store).

I bought piggy banks as party favors for my twins' birthday one year and filled it with some candy.

However, most of the stuff they sell is cheap and things I cannot use. Their toys are not quality at all.

I go to Target's Dollar Spot after each holiday to grab things for as much as 75% off.

Very interesting article and feature worthy!
Apr 18, 2014 12:10pm
BoomerBill
Thanks for reading guys!!
Apr 18, 2014 2:26pm
dogman007
Dollar stores are good for a few items but for the most part I find the quality of the products sold are inferior. Indeed you are getting less product for a dollar and the cost per unit is high.
Apr 18, 2014 6:22pm
Larah
Good article BoomerBill, I often visit dollar stores with my daughters for cheap gifts or if they want to buy something with their pocket money, they are also great for birthday cards, bags and wrapping paper.
Apr 19, 2014 4:14am
BoomerBill
Thanks for reading!! I went to a Dollar Store supermarket not long ago. It was better than I expected, although I have to admit I walked in with the expectation bar set somewhat low.
Apr 19, 2014 8:44pm
SilverandGold
Dollar stores are great for things like cards, balloons, gift paper, wired writing tablets, ribbons, shampoo, toothpaste, pot scrubbers, etc. Depending on what kinds of deals they've gotten in to sell, sometimes a bunch of other things, but that changes from time to time. I don't buy their food unless they have name-brand snacks. Overall, the one by our main grocery store can save quite a few dollars over the main grocery store prices IF you were wanting to buy some specific things.and can find them at the dollar store.
Apr 21, 2014 11:35am
BoomerBill
Thanks for reading! Yeah, you need to go into a dollar store with a plan of what you want to buy. They probably get you on impulse buys.
Apr 24, 2014 8:01pm
AstroGremlin
I learned that if you find a deal in a dollar store, buy it. Chances are good they won't have it when the odd lot supply runs out.
Apr 25, 2014 4:51am
BoomerBill
You're right about the odd lot deals. Thanks for reading!
Apr 25, 2014 12:18pm
DionSmith
Good article. I get all of my cleaning supplies from our local Dollar Store. You're right, the quantity you get per dollar is less, but when you consider items that you need to have on hand but don't use very often (CLR, SoS pads, etc.) it's a win in my book. Also, I think it's odd that there is sometimes a stigma attached to these kinds of stores. So I should stand in the checkout line of Target with a $10 box of trash bags so I don't look thrifty? Negative Ghostrider. Thumbs up.
Apr 25, 2014 2:15pm
BoomerBill
Thanks for reading! Yeah, excess pride does have its costs if you avoid the dollar store based on stigma.
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Bibliography

  1. Brad Thomas "Dollar Stores Take On Wal-Mart, And Are Starting To Win." forbes.com. 16/4/2012. 27/03/2014 <Web >
  2. Travis Hoium "Discount Distortion: How Dollar Stores Actually Charge You More." dailyfinance.com. 25/6/2012. 27/03/2014 <Web >
  3. Christopher Matthews "Will Dollar Stores Rule the Retail World?." time.com. 1/4/2013. 27/03/2014 <Web >
  4. Randy Drummer "Wal-Mart, Target Roll Out Smaller Urban Store Formats to Do Battle with Dollar, Drug Store Rivals." costar.com. 2/10/2013. 27/03/2014 <Web >

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