The majority of U.S. consumers are avid price shoppers. With a shrinking middle class and growing pressure on the lower class, shoppers are constantly seeking to cut costs in their personal budgets. Subsequently, major retailers like Walmart, Kroger, Dollar General, and Dollar Tree are competing with one another to slash prices on essential consumer staples as low as they possibly can.
That said, it would stand to reason that retailers like Dollar General and Dollar Tree would excel as consumers look for the cheapest options for common items. However, both chain’s earnings took a surprising hit last quarter.
The reason behind their slump isn’t what you’d think though. It’s not because Walmart beat them on pricing or because they failed to give consumers the products they want.
Instead, according to Dollar General CEO Todd Vasos, the problem lies in quickly decreasing spending power for the majority of U.S. consumers.
If there was any confusion about how the lower half of the US consumer class is doing these days, it was quickly lifted following today’s distressing earnings calls of dollar store titans, Dollar General and Dollar Tree.
Discount retailer Dollar General said it was cutting prices on its most popular items such as bread, eggs and milk, intensifying a price war among already commoditized products with retail giant Wal-Mart Stores to win back falling market share. It shares fell the most on record, plunging by 18% after the company missed on revenue, blaming aggressive competition, lower food prices and reduction in SNAP, or food stamp, coverage in 20 key states.
It’s larger ultra-discount rival Dollar Tree Inc also reported lower-than-expected sales, sending its shares down 10%, the biggest dollar drop decline since going public in 1995.
Dollar General, whose product selection prices are already among the lowest in the country, cut prices by 10% on average on about 450 of its best-selling items across 2,200 stores during the quarter, CEO Todd Vasos said on a conference call. It’s just the beginning: quoted byReuters, he said the company expects to extend the price reductions to more product categories and markets.
One factor for the declining operations is the aggressive cost-cutting by retail giant, Wal-Mart, which recently reported better than expected results. It now appears WMT solid performance was mostly on the back of margin reductions and major cost-cuts in an attempt to win market share from its lowest-priced competitors. As Reuters notes, Wal-Mart’s strategy of cutting prices has helped the world’s largest retailer to boost sales in the latest two quarters.
“Wal-Mart’s been doing better lately, lowering prices, and that’s been a concern that (it) could impact dollar stores,” Edward Jones analyst Brian Yarbrough said. “Historically, it hasn’t as much but maybe we are seeing something different here.” Retailers are also grappling with a drop in grocery prices, further cutting into margins. Dollar General said prices for milk were down about 8% and for eggs over 50 %.
But the biggest factor by far impacting the performance of both dollar stores was the sharp, adverse turn in the purchasing power of the lower half of US consumers.
Both Dollar General and Dollar Tree said pressures on their core lower-income shoppers contributed to the same-store sales misses that both retailers reported. On today’s conference call, Dollar General CEO Todd Vasos said that he was surprised to admit that while on the surface things are supposed to be getting better, the reality is vastly different for low-income US consumers:
I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that’s out there, that demographic, things have not gotten any better for her, and arguably, they’re worse. And they’re worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip.
Making matters worse, he added that the company’s core consumers base, 65% of which is comprised of lower-income shoppers, has been impacted by the recent reduction or elimination in foodstamps: “now couple that in upwards of 20 states where they have reduced or eliminated the SNAP benefit, and it has really put a toll on [the core consumer].”
He elaborated that the reduction in foodstamps benefits promptly filtered through the entire business model, and culminated with Dollar General being forced to cut prices to remain competitive. This is what he said:
That SNAP benefit reduction and/or elimination happened in April. That was the kickoff, and you could see it immediately in the numbers. So I believe that those are the things that are affecting her today. Again, our core customer, and by the way, we’ve seen this play out before. If you dial the clock back to October of 2013 and coming into November of 2013, when the last large SNAP benefit reduction happened, it happened almost exactly the same way on our comps and in how we saw traffic. Obviously, we’re up at a little higher level at that time, but rest assured, that our traffic slowed tremendously then, very similar to as it did now.
The difference here is we’re going to take aggressive price action to get that consumer back in the store. She needs a little motivation to get back in. We need to help her stretch her budget for a time period until she figures it out. Our core customer is very resilient. They’ll figure it out over time, but they need a little help as they tend to now try to figure out how to make ends meet with less money during the month.
Dollar Tree, which said that fewer than 5% of its customers were SNAP recipients, echoed its competitor when explaining the stress being felt by its own shopper base. As CEO Robert Sasser said on the call, “the consumer is still seeing a lot of pressure on cost increase with rent and just food and healthcare and taxes and all the things. So we see them as still being under pressure. I think that’s the number one issue that we see out there.”
But back to the Dollar General call, where analysts were incredulous and were wondering if the deterioration in spending may have been the result of, wait for it, the recovery and broader consumer improvement, leading to “trading-up” to higher price point competitors. The exchange was amusing:
Q. I understood the issues with SNAP and deflation, but is there a piece of this that’s just related to the consumer job – labor market getting better, so that consumers spending a little bit better and they’re trading up? Is that not possible?
Vasos: I am not going to say, it’s not possible, but we have not seen that in our data. Once again, remember that over 60% to 65% of our sales and consumer base is on that lower demographic area that – of the economic scale. And when you keep that in mind, her life hasn’t gotten any better. And that’s really that customer that we’re serving the most, and that we’re intent on making sure has enough money and enough products inside her house to be able to feed her families.
And then there are soaring healthcare and rental costs:
[The] core consumer, I tell you, has gotten no better as far as her economic well-being. Matter of fact, she tells us, while we’re out in the stores or even through all of our panel data that we do, that while things haven’t gotten a lot worse as far as income coming in, other than the recent SNAP decrease, my expenditures are going up at a very rapid rate.
Healthcare is one of the big ones, because most of our consumers, while she may be working, doesn’t have healthcare, and we all know that she’s having to now pay for this healthcare or be taxed on it, right? So that is starting to really play against that low-end consumer right now, and it will continue to play against her. You couple that with those rents that we talked about, those increased rents are real, and in many parts of where we serve our customer, the affordability and availability of rental units are getting more and more scarce, which is driving up prices. And we’re seeing that because most of our core customers cannot and do not own their own homes.
And when we’re out in stores and we drop prices like we do, I can tell you, I’ve been out in stores in the middle of the aisle and heard customers come up to our store manager in tears and thanking them for being there and thanking them for the prices that we offer in a real convenient nature for her, where she can walk to the store, because she can’t afford anything else. When you hear that, that really brings home where this core customer is.
We wonder if this particular tearful customer would also be accused by the president of peddling fiction.
What’s in store for the U.S. consumer base if they’re struggling this much? Do things have to get worse before they can get better?
Give us your take in the comments.