Top 5 Reasons to NOT Buy a Dollar Store

Is a dollar store a good business to own, and are dollar store stocks a good investment? We disagree with almost everyone on this topic and I'll explain why today on Franchise city.

So before we begin I love dollar stores, so to date I love the industry as well, But I will show you a few things most investors have not considered.

So first off the positives, and why most people still suggest investing in Dollar Stores:

Dollar stores at this point sell more groceries than high end chains like Whole Foods. 10 billion dollars a year more.
There are actally more dollar stores than all other six biggest outlet stores combined including Walmart, Kroger, Costco, Home Depot, CVS, and Walgreens. While the retail apocolypse saw thousands of stores close last year, Dollar stores blew every other industry away by a wide margin. If you look at this chart you can see that Dollar Stores by far beat out convenience, drug, liquor stores by a wide margin. In fact on average 3 new dollar stores opened every single day and there are expected to be 38,000 dollar stores by 2021.

If you were an investor, you also saw nothing but upside with solid returns from most of the publicly traded dollar store stocks.
Now as of today, we are likely heading into another recession, or a depression, probably already there - and if we look at the statistics from last downturn between 2008 and 2011, shares of Dollar Tree soared nearly 200 per cent while the S&P 500 gained just 39 per cent over the same time. Sales of inexpensive items increase during an economic crunch, people dont have money and they go to the dollar store. So dollar stores *seem to be a great pick for recessions.
So everything looks rosy, why should we be concerned?
1. Market saturation. In every industry we see a market saturation point. It happened in frozen yogurt, with fod in general. and People see how well an industry is doing and everyone rushes in, herd mentality, ultimately average unit margins drop, you see more and more dollar stores pop up competing with each other. This of course will be highly regional and your own city scenario will determine the outcome. Now also keep in mind many cities have come to dislike dollar stores as they hurt other businesses, and some have implemented restrictions on stores.
2. "Dispersal Restrictions" Some cities are putting limits on how many Dollar Stores can open in an area. Tulsa, Kansas City, Mesquite TX, New Orleans, just a few cities that have adopted the restrictions. The rationale is that all these dollar stores make it impossible for local stores to compete. They are doing this because there are way too many Dollar Stores, which if you are an owner with 10 immediate stores around you - your profits will be limited due to saturation and a competitive market. So before you open check for regulations, restrictions and for stores already in the area or opening in the future.
3. Low margins - Think about this - the average profit on dollar store products is about 35 cents. Assuming you purchase well. That means it takes 200,000 individual sales to make just $70,000 a year. That is 547 sales a day or 45 items every hour, 365 days a year. You need enormous volumes even just to make a livable income, and while stores that opened up 10 years ago did very well, it is much harder now when you have dozens of other stores around you.

Number 4 is inflation.And we really need to look at history on a grander scale to see what may happen today. Look at these companies. Ben Franklin Stores, M.H Fishman, Butler Brothers, W.T. Grant. Its likely you have never heard of these stores but at one time they were thriving with thousands of stores around the USA. Back then these were the dollar store equivalent called five and dimes. So everything in these stores sold for a nickel or a dime. Eventually over time public sentiment and shopping changed, but obviously something that also had a major impact was inflation. As the value of the dollar drops, you simply can't make a product at 3 cents and sell it for a nickel.

Right now the government is injecting trillions of dollars into the economy. Ultimately, this creates a risk of debasing the currency, making a dollar worth less than it is today. In this scenario, just like the five and dime stores, the dollar store model might not hold up anymore when items simply cant be produced, or shipped for pennies. Which brings us to concern, #5, which is relations with China. The current administration has had ongoing tense relations, can you imagine what would happen if we lost the ability to trade with China? You might say its unthinkable, but so was a pandemic just a few months ago. You could never produce dollar store items in the USA for the prices buyers are accustomed to paying. If relations with China continued to deteriorate that could create issues in the industry.
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