Rising prices are pushing shoppers to dollar stores

By Nathaniel Meyersohn, CNN Business

    (CNN) -- The Great Recession in 2008 pushed struggling Americans to rely more heavily on dollar stores and prompted other shoppers to visit them for the first time.

Now, more than a decade later, a similar pattern is showing up at US discount chains as shoppers try to manage record-high gas prices and the fastest growth in inflation in 40 years.

To be sure, the economy today is in a much better place than it was during the financial crisis 14 years ago. Just about anybody who wants a job can find one and wages are rising at their fastest pace in decades. Other economic indicators remain strong.

But inflation has surged, with the Consumer Price Index rising by 8.3% in the 12 months ending in April. This means the cost of essentials is eating away at workers' fatter paychecks.

Consumer spending is still strong, say top retailers including Walmart and Target, but many customers are changing their purchasing habits. More consumers are balking at buying bigger-ticket items like electronics and furniture and switching their spending to necessities, such as food and household staples.

This spending shift benefits dollar stores, which mainly sell food and everyday items in smaller sized packages.

Since the Great Recession, three dollar chains have grown faster than nearly any other retailers, adding thousands of new stores, often in underserved areas. They've also widened their product selection to lure customers away from pharmacies, convenience stores and supermarkets.

Dollar General, the largest US dollar store chain, is seeing its core customers — those with household incomes under $40,000 a year — "start to shop more intentionally," CEO Todd Vasos said on an earnings call last month.

Gas prices at $5 a gallon are leading some customers to focus on driving to stores located closest to their homes, Vasos said. This is an advantage for Dollar General, which has around 19,000 stores and is often the only retailer in some rural towns.

Even customers with higher incomes are beginning to shift more of their purchases to the chain, he said. "Shopping patterns are definitely changing, and we're seeing it happen right before our eyes."

Dollar General plans to add more $1 items as well as lower-priced, private-label brands to its shelves, the better to appeal to cash-strapped shoppers.

Dollar Tree said that customers stressed with higher rent, gas, heating and food bills are increasingly turning to its stores.

The chain, which targets slightly higher-income consumers in the suburbs and recently raised its base price from $1 to $1.25, said customers are "going to come to Dollar Tree and Family Dollar now more than ever" in response to these pressures, CEO Michael Witynski told analysts in March. (Dollar Tree owns Family Dollar.)

Dollar Tree's 25% price hike hasn't deterred shoppers, despite backlash from some loyal customers. Sales at Dollar Tree's stores open for at least one year increased 4.4% last quarter compared with the same stretch last year.

Other discount chains also say they're attracting new customers seeking cheaper alternatives.

"Consumers are clearly feeling pinched by inflation and looking to stretch their grocery dollar," R.J. Sheedy, president of Grocery Outlet, said last month. "We have seen more new customers shopping us."

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