Accounting has its Big Four, and the world of dollar and variety stores is confined to a Big Three: Dollar General, Dollar Tree and Family Dollar. These companies dominate the low-end retail realm, accounting for more than 75 percent of market share.
Dollar stores are no different from other retailers in that they are trying to drive top-line revenue. Over the past ten years, this has meant more locations. The industry has experienced steady store count growth in recent years, averaging upwards of 700 new storefronts annually.
With more locations, these companies have to broaden their buyer pool. According to Daniel Waszak, senior vice president at Quantum Real Estate Advisors, that’s exactly what’s happening now as fewer consumers view low-cost stores as objectionable.
“There’s been a bit of a fundamental shift toward frugality. Aside from the dollar stores, you have TJ Maxx, Marshalls, Ross Dress for Less or even Nordstrom Rack that have this treasure hunt appeal to them,” Waszak said. “That’s gone a long way with higher-income earners and it’s become a less stigmatized way to shop.”
This greater acceptance of bargain hunting only amplifies another general retail trend. As e-commerce disrupts brick-and-mortar stores, high-end and low-end retailers alike continue to draw foot traffic while middle-market retailers like Sears and J.C. Penny have felt the most pain from online shopping.
Dollar store investment
According to a new report from Quantum, the dollar and variety store sector has grown by 2.8 percent between the first quarters of 2018 and 2019, reaching revenues of $77 billion in 2018. In the same time-frame, the number of businesses has grown by 2.3 percent with an increase of 3.5 percent in employment growth.
Even before the recent shift in income demographics, dollar stores haven’t solely targeted low-income shoppers; location is also a major determinant of where these operations thrive. Historically, dollar stores have taken advantage of demographics in smaller communities that are too small for larger retailers like Walmart and Target to justify placing a 100,000-square-foot or larger big box location. For investors, some markets may be too sparse to expect high returns.
“I’ve seen Dollar Generals literally in markets where there might be 50 people who live within five miles of the property and it’s more of a tourism-based market serving campers, fisherman and hunters,” Waszak said. “I’d be a little more leery of those locations just because of the cyclical and seasonal nature of the consumer base there.”
Even as the number of dollar stores in the U.S. is projected to grow to about 38,000 by 2021, does that make them a good target for real estate investors? It depends on the brand, the location and other factors. Quantum’s review of the market indicates a saturation of properties with lower NOIs, though better-performing locations are still available with incomes above six-figures.
Since 1939, Dollar General has grown to operate more than 15,227 neighborhood general stores across 44 states, with the goal of opening an additional 975 stores in 2019. Cap rates for Dollar General increased 9 basis points in 2018 to 7.03 percent (6.85 percent in the Midwest). In Q1 2019, the company reported an 8.3 percent net sales increase to $6.6 billion over the year prior.
Same-store sales grew 3.8 percent due to increases in average transaction amount and customer traffic. However, gross profit as a percentage of net sales decreased 23 basis points to 30.2 percent compared to year prior. This is primarily attributed to higher distribution and transportation costs, as well as a greater proportion of sales coming from products with lower gross profit.
In Q1 2019, total additions to Dollar General property and equipment were $145 million. So far in 2019, the company has opened 240 new stores, remodeled 330 stores and relocated 27.
Founded in 1959, Family Dollar has grown to over 8,000 stores across 47 states. In 2015, Dollar Tree acquired Family Dollar and assumed $1 billion in debt. As a condition of sale, several stores were required to be sold off as Dollar Express and were reacquired in 2017.
Three years into the acquisition, Family Dollar has continued to drag Dollar Tree’s comp sales growth. In the fourth quarter of 2018, Dollar Tree took a $2.3 billion loss against its Family Dollar business. In the first fiscal quarter 2019, however, the company reports the business turnaround is gaining traction.
A continued effort to optimize the real estate portfolio has improved same-store sales, results that should carry increased costs through the first half of 2019. Family Dollar rolled out the H2 store model in 2018 across 350 stores—including improved merchandise offerings and an expanded number of freezers/ coolers—increasing traffic with average comparable store sales by 10 percent.
The company rolled out an additional 250 stores in 2019 but is slated to close up to 390 stores, while renovating another 1,000 locations. From 2017 to 2018, cap rates dropped 81 basis points on sold single-tenant sites. Current asking rates are up to 7.50 percent (up 110 basis points).
Dollar Tree operates more than 15,073 stores across 48 states, employing over 176,000. This tenant carries a higher cap rate at 7.38 percent (7.12 percent in the Midwest), a 39 basis point increase in 2018. First quarter 2019 numbers indicated a 2.5 percent increase in same-store sales.
Consolidated sales of $5.81 billion (for both Dollar Tree and Family Dollar business) increased 4.6 percent from one year prior. Gross profit also increased 1.6 percent to $1.73 billion from $5.55 billion year-over-year. This year, Dollar Tree plans to open 350 new locations and re-banner 200 Family Dollar stores to Dollar Tree. The company plans to introduce Dollar Tree Plus! across 100 test stores to provide shoppers with multi-price point products.
As a percentage of sales, Dollar Tree gross margin decreased to 29.7 percent compared to 30.6 percent in the prior year, driven by lower initial markup at Family Dollar, higher domestic freight and distribution costs, shrinkage in the Family Dollar segment, and $6.7 million of increased occupancy costs related to the accelerated rent expense for Family Dollar stores scheduled to close in 2019.