Dollar Tree Says Its Inflation-Driven $1.25 Price Boost Strategy Is Paying Off

The Dollar Tree logo on its store in Bowie, Maryland on Nov. 23, 2021. (Jim Watson/AFP via Getty Images)

The American discount retailer Dollar Tree has said that its inflation-driven strategy to boost prices to $1.25 is now paying off.

The retail chain was criticized by many customers and analysts for raising prices to $1.25 last November, breaking its 35-year reputation for selling only $1 items.

The company suffered massive profit losses last year due to supply chain logjams and a jump in freight rates.

The discount retailer turned its attention to price gaps between its Family Dollar banner and its other competitors.

In a bid to win over customers from its main rival, Dollar General, it made the surprise move to change its price tags, triggering controversy.

“It will be a shock to a loyal customer base,” Scott Mushkin, a founder and analyst at R5 Capital, a retail research and consulting firm, told CNN last December.

“It could end up being one the worst decisions in retail history if it is not dialed back.”

Raising prices above one dollar was once sacrosanct at the company and unthinkable not too long ago.

Its late co-founder, Macon Brock, once wrote in his 2017 autobiography, “I viewed the dollar-only concept as sacred. It was everything. Without it, we’d be just another discount retailer.”

“Ditch the dollar, I believed, and we’d surrender our niche.”

Dollar Tree no Longer Sells Items at a Dollar

Dollar Tree which alone owns more than 8,000 stores, not counting its ownership of the Family Dollar discount chain, said that it was forced to raise prices to offset rising inflation costs and boost the quality of its inventory.

“Our transition to the $1.25 price point has enabled our merchants to greatly enhance value for our shoppers,” said Mike Wytinski, President and Chief Executive Officer of Dollar Tree, in its earnings call transcript on Nov. 22.

The 25 cent move appears to be paying off, with a jump in sales a year after the decision.

The $1 limit on items also kept sales sluggish and limited its store selections.

The company was able to introduce new merchandise which it was unable to sell for being over a dollar and helped bring in new customers.

“We like the business and the reaction we’re seeing from the customers based on us being able to have a better assortment,” said Witynski.

Since other retailers across the country had raised prices as well, Dollar Tree was little affected by customer blowback.

The Discount Retailer Sees  Growth in Q3

The company’s top-line sales rose 8.1 percent year over year to over $6.9 billion in the third quarter.

Meanwhile, sales at Dollar Tree rose 8.6 percent from a year ago, while Family Dollar sales increased 4.1 percent.

The retailer was forced to discontinue several “customer favorites,” as it could not keep them under $1. Packaged and frozen food items and household essentials were affected in particular.

“Our consumable sales continued to decline quarter after quarter because of the product availability and the assortment we just couldn’t provide for the customer at that $1 price,” said Witynski.

Dollar Tree was able to bring back some of the favorite items that it had dropped at $1.25 and expanded its meat, pizza, breakfast meals, and other consumable item selections, which have led to sales growth after a slump.

More $3 and $5 items have also been added to its stores, giving it more price flexibility and building on an earlier successful strategy.

“Gross profit increased 17.5 percent. In the Dollar Tree segment, gross margin improved 520 basis points, primarily from higher initial mark-on related to the move to $1.25 price point, lower freight costs, and sales leverage, partially offset by greater penetration of lower-margin consumable merchandise and product cost inflation,” said Jeff Davis, Dollar Tree’s Chief Financial Officer on the earnings call.

Investors Still Remain Skeptical Over The Move

Investors still remain skeptical about Dollar Tree’s sustainability, with its share value tumbling 8 percent after its announcement and due to lower profit expectations for 2022.

Inflation has been putting more pressure on customers, who have begun to spend less on discretionary items and more on everyday necessities, which may hurt the discount retailer.

“Family Dollar’s gross margin declined 100 basis points, largely due to a product mix shift and product cost inflation. We expect to see continued pressure across both segments related to the inflationary cost environment and merchandise mix as our consumable sales are expected to continue outpacing discretionary,” explained Davis.

However, Davis said that the company is beginning to gain more higher-earning customers than its average base, as more middle-income Americans are buying necessities at their stores in order to save on their budgets.

“The economy continues to pressure middle and low household income customers, resulting in needs-based purchasing,” Dollar Tree finance chief Jeffrey Davis said.

In recent months, Walmart, Dollar General, and other discount chains have also noticed a surge of wealthier customers arriving at their stores due to rising inflation.