Dive Brief:
- Dollar Tree Inc. is adding price points above its traditional $1 offer at all of its Dollar Tree Plus stores following what the company said was "positive customer reaction."
- The retailer is also adding higher prices to "selected" legacy Dollar Tree stores, it said in a press release.
- The announcement comes as Dollar Tree Inc. expands the reach of its Dollar Tree Plus concept, with 500 planned by the end of the fiscal year. The retailer expects to add another 1,500 locations in 2022 and to have at least 5,000 by the end of fiscal 2024.
Dive Insight:
For most of modern economic history, the value of the U.S. dollar has declined with time and inflation. For a dollar store, the promise of $1 prices gets a little tougher to keep every year.
This year the $1 price point is especially constraining. During the company's most recent earnings call, Dollar Tree executives detailed the specific pressure the company is under as its freight costs spiral out of control amid bottlenecks in the global supply chain. While other retailers are raising prices on customers to recoup their own costs, Dollar Tree is more bound to its current prices because of its fundamental promise to customers.
"We believe the Dollar Tree banner imports more containers per $100 million in sales than other large retailers," CEO Mike Witynski told analysts and investors in August, according to a Seeking Alpha transcript. "And combined with our low $1 price point, we have an outsized impact from freight costs."
The company projected an additional $185 million to $200 million in estimated freight costs for the year on top of already high costs, all of which create a major drag on profits. By comparison, executives at Dollar General, which doesn't share the same commitment to the $1 price point, has acknowledged the challenge of rising costs but hasn't painted the same gloomy picture of its impact on the year as Dollar Tree.
Dollar Tree Plus, which the retailer has incorporated into existing stores and is building out to new stores, is one fix to the broader problem of being a dollar store in a world of inflation. It offers products at $1, $3 and $5 price points, allowing the company not only to protect its profits but also broaden its assortment. Witynski said in August that Dollar Tree Plus stores had an overall lift in sales of 6% and a similar increase in profit.
Telsey Advisory Group analysts led by Joe Feldman described the higher price points as "part of a broader strategy at Dollar Tree in the medium term to help offset rising costs, including raw materials, supply chain, and labor."
The move reflects those of other players in the sector, with Five Below expanding its Five Beyond concept, and Dollar General playing with higher price points at its Popshelf concept that targets suburban shoppers.
Dollar Tree's experiment is not, however, without risks. "The success of higher price points at Dollarama and Five Below makes us believe that Dollar Tree should benefit from changes in its pricing strategy, although we worry about the customer reaction, given their high sensitivity to prices," the analysts said.
Along with Dollar Tree Plus, the retailer is expanding its new format that combines its Dollar Tree and Family Dollar banners into a single store targeting rural markets. The combo stores also allow for higher price points via the Family Dollar banner, which isn't as fixed at the $1 price tag. The company said it currently has 105 combo stores and expects to add 400 in fiscal 2022. In all, the retailer thinks it could add 3,000 combo stores in the coming years.
