The Decline of Dollar Stores in the U.S.: A Consequence of Their Own Actions

Two major US dollar store chains are facing challenges during these difficult times. Family Dollar announced the closure of nearly 1,000 stores, while 99 Cents Only revealed plans to shut down.

The companies attribute their struggles to inflation and shoplifting. Inflation has affected their low-income customer base, while shoplifting has impacted their profits. However, these factors are not the sole reasons for their current difficulties.

Years of strategic mistakes and underinvestment have troubled Family Dollar and 99 Cents Only, according to retail analysts. Both brands were bought by different companies and struggled to succeed under their new owners.

99 Cents Only filed for bankruptcy this week.

99 Cents Only filed for bankruptcy this week.

Ron Holman/Visalia Times-Delta/USA Today Network/Sipa

Family Dollar, with approximately 8,000 stores primarily located in cities, has faced challenges since being purchased by Dollar Tree in 2015 for $8.5 billion. Dollar Tree had hoped that acquiring Family Dollar would enhance its competitiveness against larger competitors. However, the outcome of the acquisition did not meet expectations.

According to Neil Saunders, managing director of GlobalData, the acquisition of Family Dollar has been more of a burden than a benefit for Dollar Tree. Nearly a decade later, Dollar Tree is still grappling with the aftermath of the deal and has not been able to fully rectify the situation.

99 Cents Only, a chain located on the West Coast and in Texas, faced challenges due to having stores that were too big and not running efficiently.

According to David D’Arezzo, a former executive at Dollar General and other retail companies, 99 Cents Only never had the correct business model in place and was unlikely to succeed.

Here’s a look at what’s gone wrong at both chains.

‘They didn’t know how to run Family Dollar’

Family Dollar CEO Rick Dreiling announced plans to close 600 locations this year, and an additional 370 stores over the next few years as their leases expire. These stores are not making enough profit for the company.

Dreiling explained that Family Dollar is struggling due to the current economic conditions.

Family Dollar has been facing difficulties for over ten years. According to analysts, the company has struggled with disorganized stores, high prices, and expanding too quickly.

Retail analyst Kelly Bania from BMO Capital Markets stated that Family Dollar's issues go back even further. She mentioned that the company has not invested enough in improving their stores over the past two decades.

In 2014, activist investors like Carl Icahn and Nelson Peltz urged Family Dollar to put itself up for sale. In 2015, Dollar Tree ended up purchasing the company.

Despite their similar names, Dollar Tree was actually smaller than Family Dollar back then. Even though they may seem alike, the two companies actually had different business strategies.

Dollar Tree mainly serves suburban areas, offering party supplies and small items for middle-income customers. It expanded its reach by acquiring Family Dollar, which focuses on selling basic foods and household necessities to cater to lower-income shoppers in urban and rural areas.

Years of mismanagement and poor conditions in stores have hurt Family Dollar’s brand.

Years of mismanagement and poor conditions in stores have hurt Family Dollar’s brand.

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The combined company aimed to increase its customer base, lower expenses, and compete against larger retailers such as Dollar General, which mainly operates in rural areas. However, analysts believe that the merger between the two chains was not a good match, and Dollar Tree has faced challenges in overseeing the larger Family Dollar store network.

"When Dollar Tree acquired Family Dollar, they were not well-prepared," according to D'Arezzo. "They struggled to effectively manage Family Dollar."

The condition of Family Dollar stores was worse than anticipated by Dollar Tree management, and initial efforts to boost sales, like selling beer, did not yield the desired results.

Many Family Dollar stores were situated in close proximity to each other, resulting in a negative impact on their own sales, according to D’Arezzo.

The Wall Street Journal highlighted in 2018 that Family Dollar has been experiencing a decline in sales due to various factors such as neglected stores, limited product offerings, and dissatisfied employees. It was noted that the company requires more extensive improvements than initially anticipated.

A year later, an activist investor advocated for the sale of the "underperforming" Family Dollar business. In response, Family Dollar revealed plans to shut down 390 stores.

Despite renovating numerous stores in recent years, analysts point out that many Family Dollar locations are still not well-maintained. This year, the Justice Department imposed a record-breaking fine of $41.6 million on Family Dollar for breaching product safety regulations. This was due to the discovery of items being sold from a warehouse in West Memphis that was infested with live, dead, and decaying rodents.

Family Dollar can still succeed, according to Dollar Tree and Family Dollar executives. The retail chain has made changes by appointing a new CEO and management team. Additionally, they have been reducing prices to attract more customers, introducing more private-label brands, and enhancing their supply chain.

"We are currently in the initial phases of our transformation journey with our new management team. We are pleased with the progress we have achieved so far and are optimistic about the growth opportunities that lie ahead for our business," shared a spokesperson from the company.

According to CEO Dreiling, a Family Dollar store that is efficiently managed and situated in a strategic location holds significant retail power.

Facing setbacks

99 Cents Only recently announced that it had filed for bankruptcy. The company cited ongoing challenges in the retail industry over the past few years, which have included the effects of the pandemic, inflation, and an increase in shoplifting incidents.

But 99 Cents Only’s challenges stem back further. The retail chain has not been profitable since 2015.

Customers wait in line to order below signage for the Costco Kirkland Signature $1.50 hot dog and soda combo, which has maintained the same price since 1985 despite consumer price increases and inflation, at the food court outside a Costco Wholesale Corp. store on June 14, 2022 in Hawthorne, California.

Customers are seen lining up at the food court outside a Costco Wholesale Corp. store in Hawthorne, California. They patiently wait to order the famous Costco Kirkland Signature $1.50 hot dog and soda combo, which has remained at the same price since 1985, even with consumer price hikes and inflation. The picture was taken on June 14, 2022, capturing the crowd eagerly waiting for their affordable and delicious meal.

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The company operates over 370 stores in California, Nevada, Arizona, and Texas, with 265 of them located in California. In 2011, it was acquired in a $1.6 billion leveraged buyout and subsequently accumulated more debt to remain operational.

During the acquisition, Bloomberg noted that 99 Cents Only had the second-highest profit margin and the highest sales per square foot compared to its competitors.

99 Cents Only quickly fell behind when it introduced a strategy called Go Taller to raise the height of shelves. However, this led to more spoiled food and broken products as items fell to the floor, as reported by Bloomberg.

The company had difficulty competing with bigger retailers like Walmart, Costco, and Dollar General. Starting in 2016, 99 Cents Only began losing money every year. In its bankruptcy filing this week, the company mentioned that the competitive nature of the discount retail industry was taking a toll on their business.

99 Cents Only was unable to invest in improving stores, its supply chain, or digital strategy due to its high debt load, while competitors were expanding.

According to the company's filing, 99 Cents Only was "disadvantaged by limited financial flexibility and inability to devote greater resources to pursue new store growth."

99 Cents Only faced challenges due to its large store sizes, which were expensive to run, and its emphasis on selling low-profit grocery items.

On average, the company's stores are around 20,000 square feet in size, which is more than twice as big as the usual dollar store chain.

“It was like trying to run a McDonald’s on five times the size,” D’Arezzo said. “They were doomed.”

Editor's P/S:

The downfall of Family Dollar and 99 Cents Only, two major US dollar store chains, highlights the complexities of running a successful retail business in today's challenging economic landscape. Their struggles stem from a combination of external factors such as inflation and shoplifting, as well as internal issues like strategic missteps, underinvestment, and poor management decisions.

The case of Family Dollar is particularly instructive. After being acquired by Dollar Tree, the chain faced challenges in integrating its operations and catering to its low-income customer base amid intense competition from rivals like Dollar General. Years of neglect and mismanagement led to declining sales and a tarnished brand image, culminating in the recent announcement of store closures. 99 Cents Only's problems, on the other hand, were exacerbated by its large store sizes, which proved costly to run and hindered its ability to adapt to changing consumer demands. The company's heavy debt burden further limited its ability to invest in store improvements and digital strategy, leaving it vulnerable to competition from better-positioned rivals. These cautionary tales underscore the importance of sound business strategies, adaptability, and a strong financial foundation for any retailer looking to navigate the increasingly competitive and volatile retail environment.