Stretching the Dollar: How Dollar Stores Can Thrive in an Evolving Retail Landscape

? Written by Luke Merrimen

When every dollar counts, dollar stores make sense.

In recent years, as customers grappled with inflation, rising living costs, and recession concerns, their perceptions of ‘value’—defined as a balance of quality and affordability—have solidified as the primary driver in retailer choice. We continuously conduct proprietary consumer research for our retail and CPG partners, revealing a clear trend across industries such as grocery, health supplements, home improvement, and office supplies: price and value-related attributes consistently rank as top purchase drivers.

With propositions built on value, visits to dollar stores have been on the rise. Data from Placer.AI reveals over the past four years, dollar and discount stores in the U.S. have consistently outpaced overall retail, grocery, and supercenter categories in monthly visit growth (compared to their January 2020 baseline). This trend continues to hold strong: from April to June, visits to dollar and discount stores increased by 11.2% year-over-year, significantly outpacing the 4.2% growth in overall retail visits, as well as the 7.6% and 4.6% increases seen in grocery stores and superstores.

As traffic to their stores increases, dollar retailers are enhancing their value propositions beyond mere bargain-basement goods to secure a spot in customers' weekly shopping routines. Store expansion plans bring them closer to customers (Dollar General opened 987 new stores in FY23, with 800 additional openings expected by the end of FY24), broadened consumable offerings position them as viable grocery outlets (Dollar Tree expanded its multi-price-point frozen and refrigerated selections to over 6,500 stores), and new private brand introductions of affordable essentials help customers stretch their weekly budgets even further (last year, Dollar General introduced 100+ new national-brand-equivalent entrees, sides, and snacks to its Clover Valley private label).

These changes worked to enable a comprehensive one-stop shop at an affordable price, increasingly putting dollar stores in consideration alongside conventional grocers, mass-retailers, convenience stores, and corner drug stores.

The ripple effects of inflation and focus on value are tightening retail competition.

While the era of rapidly rising costs for groceries, gas, and daily essentials may be nearing its end—as shown by July's annual inflation rates in the U.S. and Canada dropping to their lowest levels since 2021—it’s important to note that, according to our estimates, the lasting effects of living costs exceeding wage growth by nearly 3% since 2020 are likely to continue impacting customers in both countries.

During these times, retailers converged their propositions to a singular focus, highlighting the best value possible. E-commerce retailers like Temu and Amazon emphasized discount marketplaces, grocery stores concentrated on value-messaging and affordable private labels, and convenience stores stepped up with foodservice offerings as customers increasingly turned to them for budget-friendly dining options. These strategies allowed them to develop their own style of value positioning, ultimately expanding the number of options a customer can consider for ‘best value’.

Just last week, Loblaw Companies Ltd. pushed these boundaries even further, announcing the pilot of a ‘no name’ discount store format. Stores will offer a mix of national and private brands and focus on a selective assortments of pantry staples and household essentials. With shortened store hours, no refrigeration for dairy or fresh meat, and minimal promotions, Loblaw aims to deliver the lowest possible prices to customers, similar to the operating model of other dollar formats.

Although the lingering effects of inflation work to benefit dollar and discount stores, as other retailers find bolder ways to offer value, dollar retailers need to push their propositions to stand out. This was made all the more evident just today, with the stock prices of major dollar retailers taking large slides as price-conscious shoppers trade down or shop elsewhere.

"As other retailers find bolder ways to offer value, dollar retailers need to push their propositions to stand out."

Timely and thoughtful shifts in value propositions are essential as habits evolve.

Habits shaped by price-conscious behavior won’t disappear overnight, but what’s less certain is when, or to what extent, we’ll start to see shifts away from a sole focus on value.

Even as inflation makes positive headlines, many consumers remain cautious that high (relatively speaking) prices are here to stick around. Despite reports from the Bank of Canada and the Federal Reserve Bank of New York showing significant improvements in consumer perceptions of both current and near-term inflation, financial stress remains steady. Nearly one-third of customers expect to be in a worse financial position a year from now.

Dollar and discount stores may continue attracting customers today, but the challenge lies in establishing long-term loyalty as priorities broaden beyond just price.

This creates a complex dynamic for dollar retailers to grow from, one where they need to evolve propositions to align with future customer sentiment, while navigating the risk of alienating customers who may remain intensely focused on price.

Dollar stores need to do more without compromising their core.

As the customer's emphasis on value begins to normalize, we can expect to see many retail propositions leverage established strengths in areas beyond price.

Mass-merchants like Walmart and Amazon can leverage their world-class logistics capabilities to offer omnichannel experiences that deliver more products faster and easier than anyone else. Conventional grocers can elevate freshness and experience as customers seek more from their food purchases. Meanwhile, convenience stores can tap into proximity and rapid service to win on ease.

For dollar stores, however, which have leaned on their inherent value positioning, the challenge is more pronounced. They must strategically identify opportunities to address new expectations while being realistic with what they can and cannot compete on. The boldest answer will determine how they adapt and thrive in a retail landscape where ‘value’ can be found in more stores.

"As the customer's emphasis on value begins to normalize, we can expect to see many retail propositions leverage established strengths in areas beyond price."

While their low-cost promise may limit some options in the retail toolkit, dollar stores can still sharpen key elements of their value proposition to maintain momentum and establish longer term loyalty.

1) Assortment:

Expanding the assortment of consumables and private brands has been perhaps the most prominent strategy for dollar stores recently. This shift allowed them to move beyond the traditional $1 price point for select categories and offer slightly more expensive items that attract a broader range of customers. Prominent dollar chains have been dipping their toes into higher price tiers for several years now (Dollarama introduced a $5 price point in 2022 while Dollar Tree is now selling products up to $7), and although customer reception has been expectedly wary, the precedent is slowly being set for dollar’s right to play alongside the Walmarts and Targets of the world with a wider selection.

At the same time, ingrained in the dollar store trip is the ‘thrill of the hunt’, which continues to create opportunities for surprise and delight. This makes for a unique combination—providing both affordable staples and exciting discoveries—in a way that other retailers can’t match in the same approachable and convenient way.

To optimize these aspects effectively, dollar stores need to build a strong connection between customer strategy and category planning. By identifying the primary shopping missions and the key categories within them, retailers can begin to refine their product mix to align with what customers truly value in each category. Ultimately, this approach positions them as both providers and sources of inspiration, excitement, or discovery.

2) Layout and Merchandising:

Dollar stores have been victim of viral moments for cluttered and chaotic aisles. Both Dollar Tree and Dollar General were criticized in a late 2023 episode of ‘Last Week Tonight with John Oliver’ for the dire states of certain locations, and earlier this year Dollar General settled a $12 million Labor Department lawsuit for safety concerns regarding blocked exits and fire routes.

That said and rightly so, much effort has gone into addressing these problems by optimizing staffing, activating store relief teams, and adjusting inventory. However, with new offerings serving new occasions, there’s further opportunity to rethink store layouts to work harder for both customers and the retailer.

Given that many customers visit for weekly essentials, it’s critical to make these items easy to find. Positioning high-frequency fresh, consumable, and everyday essential categories at the front of the store and organizing them logically for shoppers will not only build loyalty through convenience but also make it easier for associates to manage stock levels.

A greater opportunity exists in how retailers’ pair low-margin consumables with high-margin items like home/cookware, seasonal goods, and gifts. By integrating insights from customer strategy and category planning, retailers can discover where customers are receptive to moments of surprise and delight and how to effectively build on their baskets in a compelling way.

3) Customer Experience Innovation:

Other recent investments by dollar and discount retailers have been focused on elements beyond the store's four walls. Dollar General introduced a cash-back program, Dollar Tree launched a new mobile app with plans for mobile e-commerce, and Five Below is hinting at a loyalty program set to launch in 2025.

As these additions become a new part of dollar store experiences, it is critical they maintain simplicity and relevance to demonstrate true value.

The landscape of loyalty programs, retailer apps, and online content is more crowded than ever, making it crucial that the benefit of engaging with these experiences is immediately clear to customers. To maintain traction, these enhancements must stay closely aligned with dollar stores' core values, delivering convenience and savings without complicating the customer experience or pushing them to deviate far from their routines.

As you make change, true up to the dollar.

No matter where inflation and accompanying customer sentiments net out, the fact remains that dollar and discount stores occupy a unique position in retail. And now that big players have nailed the affordability side of the story in a price-sensitive market, the next generation of dollar success might see more of a focus on the quality side of the equation (while still staying true to the dollar).

Proving quality in the dollar sector is more nuanced when compared to conventional retail, but the levers at hand remain the same: great assortment, great stores, and great innovation. Excelling across all these areas while remaining low-priced is a tall order for any business; but in the world of retail, nothing worth having comes easy.