Dollar Tree ‘break the buck’ pricing to go chainwide

So far, Dollar Tree’s plan to raise its price point from $1.00 to $1.25 across its store base hasn’t appeared to discourage customers, according to President and CEO Michael Witynski.

In reporting fiscal 2021 third-quarter results yesterday, Dollar Tree said that after more than three decades the company will “shift away from the constraints of the $1.00 price point” and move most of its chainwide assortment to a $1.25 pricing level. The transition is slated to start with more than 2,000 Dollar Tree stores in December and reach all of the banner’s nearly 8,000 locations by end of the fiscal 2022 first quarter next spring. Family Dollar, the Chesapeake, Va.-based retailer’s other deep-discount store subsidiary, operates under a multi-level value pricing strategy.

“We strongly believe this is the appropriate time to shift away from the constraints of the $1.00 price point in order to continue offering extreme value to our customers.” — Michael Witynski, Dollar Tree CEO (Photo courtesy of Dollar Tree)

“Our leadership team has been planning for the expansion of this initiative since late summer. As you know, in September, we announced our plans to add price points above $1.00 to all Dollar Tree Plus stores and on a test-and-learn basis to select legacy Dollar Tree stores. As a result of the positive customer feedback and store performance during the initial phase, we have introduced the initiative to nearly 200 additional legacy Dollar Tree stores,” Witynski told analysts yesterday in a conference call. “[Today] we announced for the first time in Dollar Tree’s 35-year history we are lifting the $1.00 price point cap at Dollar Tree stores on the majority of our assortment. 

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“The $1.25 price point enhances our ability to materially expand assortments, introduce new products and sizes, and provide families with more of their daily essentials,” he explained. “We will have greater flexibility to continue providing incredible value and help customers get the everyday items they need and celebratory and seasonal products that Dollar Tree is best known for. Additionally, we are now reintroducing many customer favorites and key traffic-driving domestic and consumer products that Dollar Tree had previously discontinued due to the constraints of the $1.00 price point. The new price point will also enable us to mitigate historically high merchandising costs increases, including freight and distribution costs, as well as higher operating costs such as wage increases.”

Most shoppers in the initial stores were aware of the upcoming pricing change and have been “responding favorably,” Witynski noted, adding that surveys show Dollar Tree is still providing “undeniable value” to customers. 

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“The independent surveys of shoppers across the U.S. have indicated that 77% of the shoppers were almost immediately aware of the price point change and, out of those 77%, 31% already knew before they visited the store and 17% became immediately aware upon entering the store, while 29% were all aware within minutes of entering the store,” he said in the analyst call. “Critically, 91% of those surveyed indicated they would shop with the same or increased frequency. We will continue to monitor the success of these initiatives. And we believe we will see improvement in the survey results, since now we have the ability to further expand the product offering and introduce key traffic-driving items.”

The Dollar Tree Plus concept — offering a selection of value-priced $1, $3 and $5 items — is slated to be in nearly 600 stores by the end of the year.

Stores undergoing the pricing upgrade have seen a bump up in comparable sales, partially offset by a smaller decline in unit sales, as well as an initial lift to product margins, which are expected to normalize over time as merchandising teams evolve assortments, Dollar Tree reported.

“Importantly, we expect this initiative will enable us to mitigate the higher freight and other inflationary costs in order to return to our historical gross margin of 35% to 36% in fiscal 2022, while improving the merchandising we’re providing for our customers,” Witynski said.

Dollar Tree, too, is continuing to expand its assortment of $3 and $5 products under the Dollar Tree Plus concept. Plans call for the Plus format — offering a selection of value-priced $1, $3 and $5 items — to be in nearly 600 stores by the end of the year, roll out to another 1,500 stores in fiscal 2022 and reach at least 5,000 stores overall by the end of fiscal 2024. Meanwhile, the Dollar Tree Combo Store format, which brings some of the Family Dollar multi-price assortment to Dollar Tree shoppers, is slated to grow by another 400 locations in fiscal 2022, up from over 100 currently, with the potential of reaching 3,000 locations over the next several years, according to Dollar Tree.

“We are enthusiastic about the opportunity to improve the performance of Dollar Tree by continue to deliver extreme value to our customers at the new $1.25 price point, driving comp sales and improving store productivity, enhancing flexibility to better manage the overall business in an inflationary environment,” Witynski said in the call.

The Dollar Tree Combo Store format, which brings some of the Family Dollar multi-price assortment to Dollar Tree shoppers, is expected to grow by another 400 locations in fiscal 2022.

For the third quarter ended Oct. 30, Dollar Tree saw total net sales rise 3.9% to $6.42 billion, with enterprisewide same-store sales edging up by 1.6% year over year by 6.7% on a two-year stack. Dollar Tree comparable-store sales rose 0.6% on a constant currency basis (0.8% including Canadian currency fluctuations, while Family Dollar comp-store sales rose 2.7%. During the quarter, the company opened 125 new stores, expanded or relocated 34 stores, and closed 23 stores. Also, the retailer completed 450 renovations to the Family Dollar H2 or Combo Store formats.

Efforts to enact the price point shift include removing signage and display elements referring to the “Everything’s $1.00” slogan; implementing new signage for $1.25 price point on displays, end caps and shelf strips throughout stores; posting customer communications at entryways and checkout; and providing store teams with messaging to respond to shopper inquiries.

“For 35 years, we’ve been able to manage through inflationary periods to maintain the ‘Everything for $1.00’ philosophy that distinguished Dollar Tree and made it one of the most successful retail concepts for three decades,” said Witynski. “However, we strongly believe this is the appropriate time to shift away from the constraints of the $1.00 price point in order to continue offering extreme value to our customers.”

Dollar Tree reported gross margin of 27.5% of net sales in the third quarter, compared with 31.2% a year earlier and 30.5% for fiscal 2020. But Jefferies analyst Corey Tarlowe agreed that the $1.25 pricing initiative should help Dollar Tree return to its historical gross margin range of 35% to 36% in the next fiscal year.

“We believe Dollar Tree’s price-point expansion and Combo Stores could yield comp upside ahead,” Tarlowe wrote in a research note yesterday. “We believe these initiatives could drive margin upside as well over time.”

As of Oct. 30, Dollar Tree operated 15,966 stores across 48 states and five Canadian provinces under Dollar Tree, Family Dollar and Dollar Tree Canada banners. The company stands at No. 2 in store count and No. 19 in sales on the 2021 Supermarket News Top 50 Retailers list.