In a surprising turn of events for the US dollar store industry, Dollar Tree and Dollar General have been hit with a downturn, sending shockwaves through the retail sector. Shares of Dollar Tree plummeted by 20% on Wednesday after the company revised its outlook for the rest of the year, pointing to immense pressures on its low- and middle-income customer base. The decline in Dollar Tree's stock came soon after Dollar General slashed its full-year forecast, resulting in its worst day on record last week.

For years, Dollar General and Dollar Tree enjoyed impressive growth and were heralded as the fastest-growing retailers due to their strategy of opening new stores across America. They capitalized on factors such as entrenched poverty in various areas of the country, the diminishing middle class, and the closure of other retail chains. Investors flocked to these dollar stores, assuming that they were immune to broader economic challenges as customers relied on them to save money during tough times. However, this theory is beginning to crumble.

While dollar stores initially expanded to cater to financially strained Americans, they underestimated the extent to which many Americans would struggle financially. A combination of factors, including affordability of basic necessities, strategic errors, and intensified competition from retail behemoth Walmart and other chains, has brought these dollar stores to their knees.

Notably, Dollar General, with over 20,000 stores primarily in rural towns, has faced significant challenges due to higher prices, a softer job market, and increased borrowing costs, all of which have adversely affected its low-income customer base. The majority of Dollar General's sales, over 60%, come from households earning less than $35,000 annually. CEO Todd Vasos highlighted that inflation has negatively impacted these households, forcing them to make sacrifices in purchasing basic necessities. Moreover, customers are grappling with rising expenses, including rent, utilities, and healthcare costs, leaving less room in their budgets for discretionary spending.

Dollar Tree, on the other hand, which operates over 8,000 stores primarily in suburban markets, has also felt the strain as its middle-income customers face financial pressures. The company's chief operating officer, Mike Creedon, acknowledged the impact of inflation, interest rates, and other macroeconomic factors on their customers' buying behavior. As a result, Dollar Tree has witnessed a slump in sales of discretionary merchandise, such as party supplies and home decorations.

Additionally, both Dollar General and Dollar Tree have made strategic missteps that have further compounded their troubles. Dollar General shifted its focus towards growing its non-consumable product offerings in recent years, but this move backfired as the merchandise struggled to sell, leading to markdowns and inventory challenges. Meanwhile, Dollar Tree's acquisition of Family Dollar in 2015 has proven to be a burden, with the company now grappling with the process of closing over 900 Family Dollar stores and considering a sale or spinoff. Experts have expressed concerns about the complexity of untangling Dollar Tree from the struggles of its subsidiary.

In this distressing scenario, another blow to dollar stores has come in the form of increased competition. Walmart, Target, and other retail giants have resorted to lowering prices on certain items in an effort to attract consumers fatigued by inflation. This has resulted in a decline in customer visits to dollar stores. Walmart, in particular, has successfully appealed to price-conscious shoppers, even drawing in more affluent customers who were traditionally Dollar General's target audience.

The intertwining relationship between Dollar General and Walmart has proven to be a defining factor in their performances. David D'Arezzo, a former executive in the retail industry, noted that Dollar General and Walmart share a large number of customers due to their close proximity and dense locations, particularly in the southeastern region of the United States. When Walmart thrives, Dollar General struggles.

It is becoming increasingly clear that the dollar store sector is grappling with significant uncertainties and challenges. Analysts are closely monitoring the developments, as these once-thriving retailers navigate a turbulent market plagued by economic pressures, strategic missteps, and heightened competition. The landscape for dollar stores is evolving rapidly, leaving industry experts questioning their future.