Dollar Stores: Getting More Bang From the Buck

The battlefield for the mind and wallet of the American consumer is splayed across a strip mall in Charlotte, N.C. On one side of the parking lot, nestled between an empty storefront and the Family Christian store, is a Dollar Tree. At Dollar Tree, a chain of 4,009 superdiscount outlets, every item indeed costs a dollar or less. If anyone needs a reminder, the signage on top of the store and three stickers on the front window scream, "Everything's a Dollar! Everything's a Dollar! Everything's a Dollar!" (See the most unforgettable images of 2010.)

This Dollar Tree faces a sprawling Walmart Supercenter — a runt ready to take swings at a schoolyard bully. And it's connecting. Hard. Sales at Dollar Tree and other outlets in the rock-bottom sector of retailing are booming, the companies earning record profits. Meanwhile, at Walmart, U.S. same-store sales have declined for six straight quarters. Walmart is instead seeking growth in Africa, where it plans to purchase control of Massmart, a sub-Saharan discount retailer. (See the 15 people who got their 15 minutes of fame in 2010.)

This fascinating contrast can be explained in part by Bridget Frankel, a mother of five, who says the economy is always on her mind. Her husband has been forced to switch jobs four times since the family moved to North Carolina from Ohio five years ago. A 10.4% unemployment rate is dogging the Charlotte area, so she's not confident about her family's prospects. That's why Frankel makes more trips to Dollar Tree, where she snaps up school supplies and holiday decorations and other stuff she used to buy at Walmart. At Dollar Tree, she'll sometimes give her kids $5 and send them on a treasure hunt. They usually pick up toys, but her daughter once returned with some kind of lighted toenail clipper. "Hey, if it's something ridiculous," she says, "it's only a dollar."

The darkest days of the Great Recession hammered retailing. Same-store sales for upscale merchants like Saks and Abercrombie & Fitch fell by comical numbers, more than 25%. Circuit City and Linens 'n Things got wiped out. There are shuttered stores everywhere, emptying jobs along with their shelves. (See pictures of the global financial crisis.)

Out of the economic collapse came what consumer analysts called the new normal or the great reset; after years of borrowing to spend beyond their means, Americans were going to change their habits. Cheap was the new chic. Or is it? In 2008, retail sales fell 6% during the 50 days before Christmas, according to MasterCard Advisors SpendingPulse. During the same period in 2009, sales jumped 4%; this year, sales rose 5.5%, a figure that exceeded optimistic forecasts.

Americans are spending again, but not uniformly. Luxury buying has rebounded, but shoppers are also channeling more of their money into the dollar stores. "We didn't expect to be promoting the stocks of the discounters at this stage of the recovery," says Laura Champine, a retail analyst at Cowen & Co. "This reflects the high unemployment levels and a value-focused consumer. Usually, we'd be recommending the growth-oriented retailers, not the bottom feeders."

From Second-Rate to Record Sales

Walk into that dollar tree in Charlotte and you'll find the usual collection of made-in-China clutter: whoopee cushion over there, a garish plastic headband over here. But Dollar Tree and its deep-discounting cousins Dollar General and Family Dollar, which offer about 25% to 30% of their merchandise for a buck and keep the bulk of it under $10, are no longer pushing just garage-sale junk. At Dollar General, for example, about 70% of the products are consumables like dry goods, drinks, paper towels, toothpaste and diapers.

See the worst business deals of 2009.