What Can Dollar Stores Tell Us About the Economy?

During the recession and the slow recovery, dollar stores thrived as even customers of cheaper outlets like Wal-Mart (NYSE:WMT) looked to save a little extra cash. But when the economy began to improve, dollar store customers didn’t retreat back to their old shopping habits. Many higher-income consumers continued shopping at stores like Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG), Family Dollar (NYSE:FDO), and 99 Cents Only Stores (NYSE:NDN). The prices were low, the stigma attached to shopping at dollar stores began to fade, and the stores, bringing in record revenue, were able to organize and modernize.

However, the once-booming dollar stores are now slowing down, after the three major outlets all fell short of their earnings targets, citing high transportation costs as taking a huge bite out of their profitability. The stores also cited price-sensitive consumers who limited their spending to food and other basics, like cleaning products, which have a lower profit margin than many discretionary products like apparel.

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And if discretionary spending is declining even at dollar stores, that doesn’t bode well for higher-end retail stores like Target (NYSE:TGT) and Toys R’ Us. While consumers are trying to be responsible by limiting purchases to necessities while paying down loans and credit card debt, they’re actually hurting the economy. Less spending means less jobs; the issue is cyclical.