What a Strengthening Economy Means for Dollar Stores

Will the healthy economy trip up the dollar store sector?

The answer mainly depends on your definition of a healthy economy. Friday's jobs report marked the second straight month that US unemployment levels were below 4%, a feat last achieved in late 2000. 

Meanwhile, since the end of the last economic recession in 2009, the US economy has notched growth in 33 of the past 35 quarters. 

US consumers, bruised by the recession and generally cautious in its wake, shifted more and more buying to dollar stores. And the big dollar stores—Dollar Tree, Family Dollar (now a part of Dollar Tree), Dollar General, Dollarama and 99 Cents Only Stores—responded with a massive wave of store openings. In the first quarter of 2009, in the midst of the recession, those five stores operated 19,622 outlets. As of Q1 2018, the total had risen almost 60% to 31,269 outlets.  

The latest jobs report came just a day after Dollar Tree and Dollar General reported earnings that fell below Wall Street's expectations, leading some to question whether consumers will continue to favor low-price options in times of plenty.

But if dollar stores are in a difficult spot, it's not reflected in most measures. Even in recent quarters, the major chains have delivered almost unbroken strings of quarterly comparable sales gains. (See complete data in the companies database.) 

In the latest quarter, Dollar General's net sales climbed 9%, while same-store sales rose 2.1%. Within those numbers was one worrisome sign: Comparable gains were driven by an increased transaction amount, as traffic declined. 

At Dollar Tree, net sales gained 5% while same-store sales increased 1.4%. As with Dollar General, there was a hint of trouble: Comparables at its Family Dollar chain decreased 1.1%.

Those warning signs may signal struggles to come but are largely outweighed by the longer-term trend of same-stores sales growth amid a continually strengthening economy.

There are two factors helping to keep the sector strong: One is psychological, the other economic.

The Great Recession had an impact on consumers that is still felt today. Gallup data reaching back to the years ahead of the recession shows a sharp change in attitude about how to handle money.  In 2005-2006, consumers were generally split whether they preferred saving or spending money. In the wake of the recession, those preferences shifted markedly, and even now, some 10 years after the meltdown, a strong majority, 59%, still say they enjoy saving over spending.

The privations of the recession and its lingering aftereffects not only changed attitudes about saving, they also spurred changes in the way consumers think about using their money. In a widely cited study by GfK, consumers from every socioeconomic level said they would prefer to have more time than money.

The same study found widespread agreement among respondents of every age group that experiences are more important than possessions.

On the economic front, meanwhile, while some marquee metrics like GDP growth and employment are healthy, the gains have mainly benefited top earners. In the past two years, lower-income earners have begun to see gains, but their earnings remain hardly more than before the recession.

A widespread push for a higher minimum wage, or sustained economic growth that continued to bolster lower earners' wages, could pressure dollar stores over time, but even those trends might not make a significant dent in the general shift to thrift among many consumers.