Economic Uncertainty Driving Consumers to Discount Stores

But the retail category is struggling to differentiate, says one expert.

Economic uncertainty and discount prices (of course) are driving consumer traffic to discount and dollar stores, according to a new report from Placer.ai.

This segment performed well in Q2 and that trend is expected to continue as discount stores have benefitted “from an economy feeling the after-effects of the pandemic and persistent inflation,” according to Placer.ai reporter Bracha Arnold.

Arnold said that strength has carried into the second half of the year as many of the chains expanded their footprints.

Visits to Dollar Tree, Five Below, and Ollie’s Bargain Outlet were particularly strong, with year-over-year (YoY) positive foot traffic for all months examined, Arnold said.

“Dollar Tree’s growth is especially impressive given its significant visit share of 40.6% of total visits to the five discounters examined,” she added.

She noted that Family Dollar (owned by Dollar Tree) experienced some YoY declines, “but this might be attributed to a particularly successful 2022 and not indicative of any real decrease in the chain’s popularity among bargain seekers.”

Gary Glick, partner, Cox, Castle & Nicholson, tells GlobeSt.com that in times of economic uncertainty – like what the U.S. economy has experienced (and is continuing to experience) with COVID, inflation, and high interest rates – consumers flock to discount retailers such as Dollar Tree, Discount Dollar, Five Below and others.

“It is no surprise that these chains have not only done well during these last few years but expanded,” Glick said. “With economic uncertainty likely to continue into the foreseeable future, it appears that these discount retailers with continue to thrive.

“It is also interesting to note that very high-end retailers tend to do well in these economic conditions, since the very well-healed consumer continues to spend on luxury items. This is considered the “barbell effect.” The far ends of the economic spectrum will continue these traditional spending patterns.”

Contrarily, Mark Sigal, CEO of Datex Property Solutions, tells GlobeSt.com that several trends stand out when looking at the performance of dollar stores, such as Dollar Tree, 99 Cents Only, Five Below and Ollies, compared to a year earlier.

For one, 2023 year-to-date performance for the category shows under-performance relative to the same period in 2022.

Specifically, the three core metrics that Datex tracks across hundreds of dollar store locations nationwide, including Sales Per Square Foot, Merchant Health Ratios (aka, Occupancy Costs) and Timeliness of Rent Payments, show weaker performance, with particular weakness on Sales (down 15.81% year over year) and Occupancy Costs (up 28.38%).

“While September 2023 Sales and Occupancy Cost are indeed trending favorably relative to the same numbers for August and July 2023, even the September numbers are weaker than the year ago comparison, where Sales are down 6.01% and Occupancy Costs are up 11.61% relative to September 2022,” Sigal said.

“This suggests a retail category that is struggling to differentiate, all the while selling to a consumer who is already financially constrained. Coupled with historically low vacancy levels, which are driving rents higher, it makes the dollar store category one to watch in the months ahead.”

That noted, Sigal the combination of the Placer.ai data on strengthening traffic levels and an absence of a material weakening of rent payment trends, point to a category whose long-term durability is not yet at risk.

Andrew Fallon, Executive Managing Director, SRS National Net Lease Group, Market Leader, Washington DC, tells GlobeSt.com that inflation is causing consumers to pay more attention to spending and shopping habits, and since they cannot control the price of certain essentials like gas and grocery they can choose where to shop.

“As a result, we tend to see an uptick of customer traffic to discount retail and dollar stores,” Fallon said.

“As retailers like Dollar General, Family Dollar, and Dollar Tree increase their store counts, they are making access and convenience a priority for their daily shoppers and bargain hunters, and these top tenants will continue to maintain or add market share.

“Also, due to the favorable corporate credit and triple net lease terms, developers continue to build new discount stores which are popular investments to REITs, private investors, and 1031 exchange buyers seeking durable, passive commercial real estate investments.

Article courtesy of Richard Berger of GlobeSt.com.

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