Surprise: Dollar Tree’s $1.25 Price Strategy Actually Works

New York

When Dollar Tree said it would raise the price to $1.25 after 35 years at $1, some fans protested and industry analysts questioned the decision.

A year later, the controversial move appears to be paying off.

Higher prices boost Dollar Tree’s sales. The shift also allows the company to introduce items that were previously unavailable due to the $1 price limit, helping it attract new shoppers. Other companies also raised prices, so Dollar Tree was spared objections from major customers.

Sales at Dollar Tree stores were up 8.6 percent compared with the same period last year, the company said Tuesday, which also owns Family Dollar. Family Dollar sales rose 4.1% last quarter.

“Our transition to the $1.25 price point allows our merchants to significantly increase value,” Dollar Tree Chief Executive Michael Witynski said on a conference call with analysts Tuesday. Dollar Tree has more than 8,000 stores.

Dollar Tree said a year ago that it raised prices to offset rising costs and improve the quality of its merchandise, which comes in smaller pack sizes.

The company’s product selection suffered from having to keep everything under $1, and its sales were sluggish.

The company previously said Dollar Tree was forced to stop selling several “customer favorites” because it couldn’t keep them under $1 — especially packaged and frozen meals and household staples.

“Our consumables sales were down quarter-over-quarter due to product availability and the variety we couldn’t offer customers for $1,” Witynski said Tuesday.

Dollar Tree has since brought back some of those items for $1.25 and expanded its offerings of meat, pizza, breakfast and other consumables. These increases led to sales growing again.

“We like the business and the response we’ve seen from our customers based on the fact that we’re able to have a better assortment,” he said.

Dollar Tree also built on previous strategies by adding more $3 and $5 items to its stores.

Still, Wall Street remains cautious about the company’s long-term prospects. Shares of Dollar Tree (DLTR) fell 8% on Tuesday after the company lowered its profit forecast for the year.

Customers, pressured by inflation, are shifting from discretionary items to everyday essentials, which is less profitable for Dollar Tree.

“The economy continues to put pressure on consumers in low- and middle-income households, causing them to make need-based purchases,” said Jeffrey Davis, Dollar Tree’s chief financial officer.

The company says it is attracting more high-income customers than the general population. These customers shop for essentials in an attempt to stretch their budgets.

Walmart (WMT), Dollar General (DG) and other discount chains have also said in recent months that they are gaining new, wealthier customers because of inflation.

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