Dollar stores are emerging as a silent killer of retail across the country. Fellow Forbes.com contributor, Warren Shoulberg, characterized them as the “true retail disruptors.”
Shoulberg reports that there are now more dollar stores than the six largest U.S. retailers combined – Walmart, Kroger, Costco, Home Depot, CVS and Walgreens. The two market leaders, Dollar General and Dollar Tree which also operates Family Dollar, have 30,000 stores between them.
“The role of the dollar stores in the massive deconstruction of American retailing is barely mentioned,” Shoulberg writes. He further states that dollar stores “are changing the landscape in ways that are not clearly understood,” citing their disruptive impact on grocery stores, big box stores, pharmacies, department stores and other specialty retailers throughout the country.
Now the Institute of Local Self-Reliance is filling that information void by studying the impact of dollar stores “invasive” spread throughout America’s communities. Taking a local rather than a top-down national look at the impact of dollar stores on the economy, its findings are stark.
“ While dollar stores sometimes fill a need in cash-strapped communities, growing evidence suggests these stores are not merely a byproduct of economic distress. They’re a cause of it ,” the ILSR concludes.
Dollar stores are an “invasive species” threatening local economies
Citing the two dollar store leaders’ annual reports, the ILSR says they’ve identified locations for a combined total of 20,000 new stores, to reach some 50,000 stores combined in the not too distant future.
Invariably, those targeted locations are found in lower-income, financially-distressed communities. In cities they go into largely black and brown communities with few or no grocery stores. In rural areas, they hit the most vulnerable places where manufacturing plants have closed and farmers’ incomes have dropped.
“Essentially what the dollar stores are betting on in a large way is that we are going to have a permanent underclass in America,” Garrick Brown, a researcher with commercial real-estate firm Cushman & Wakefield, said. Colliers International analyst Ann Natunewicz added, “Food deserts’ are its [dollar stores’] sweet spot.”
ILSR’s initial study looked primarily at the impact of dollar stores on local grocery retailers because that is where the first signs of dollar store contagion are felt. Its research found that a typical grocery store experiences a sales drop of about 30% after a Dollar General store opens nearby.
“Such disruption is generally enough to force a local grocery store to close, although it may take months or even years before the owner finally gives in,” ILSR reports.
Further dollar stores offer job opportunities to fewer people. Dollar stores generally operate with a staff of eight or nine employees on average, as compared with an average of 14 employees in an independent grocery store.
“The jobs, tax dollars, and even profits generated from a local grocery store go back to the community,” said David Proctor, director of the Local Grocery Initiative at Kansas State University. “Significant profits from Dollar General are going back to their corporate offices, not to the community.”
“The problem is that if the grocery store closes, this impacts the town in a big way,” Proctor continued. “Our research shows grocers are barometers for other businesses in town: as goes the grocery store, so goes other independent businesses in that community.”
The sky’s fallen on American retail before
Of course, rumors of the end of American retail have been circulating for decades, with Amazon most recently getting much of the blame. But before Amazon there was Walmart.
Amazon is a relentless competitor, but it is still a relative newbie on the retail scene, founded in 1994. Walmart on the other hand has been around since 1962. It has more profoundly changed the shape of American retail throughout the last 40 years.
Walmart has grown from only 125 stores in 1975 to 1,995 in 1995 and now to over 5,000 stores. It inevitably changed local communities in every place it landed.
A study led by economic professor David Neumark examining the results of 3,000 Walmart store openings found that on average one new store reduces retail employment in the affected areas by about 150 workers, due to local retail store closings and downsizing.
“This represents a 2.7% reduction in average retail employment,” the study found and added local retail earnings declined by about $1.5 million, or 1.5%, when a Walmart rolls into town.
Another study headed up by Stephan Goetz, professor of agricultural and regional economics at Penn State, found even more dire consequences when Walmart comes to town. Its arrival correlated with a greater increase in family poverty rates, at least through the strong economic-growth period from 1987 to 1998.
The researchers propose the causes of the growth in poverty are not just reduced employment in mom-and-pop local retailers, but the closing of other local businesses that provide products and services to those businesses, such as wholesalers, accountants, bankers, lawyers and others.
The result is a cascade effect where the more highly-educated, high-potential individuals move out of the local communities in pursuit of opportunities elsewhere. This leaves behind “those with fewer opportunities and raising the poverty rate by reducing the number of nonpoor households in the denominator,” the study reports.
It is the collateral damaged caused by the loss of these local community leaders and entrepreneurs “which may be the single-most important and far reaching impact of Wal-Mart Corp.,” the authors wrote in 2006.
Resilient America retail
Looking across America’s retail landscape, we find dollar stores are moving into the very communities decimated by Walmart a decade or so ago. They are filling a retail gap that on the one hand competes with Walmart and other big-box retailers and on the other provides basic products to communities vacated by local retailers.
As much as doomsayers warn about the dire consequences of Walmart, other big-box chains and small-box discount stores, as ILSR calls dollar stores, these retailers bring benefits to local communities too.
A Journal of Urban Economics paper in 2015 led by Devin Pope, professor of behavioral science at University of Chicago, found that the housing market benefits in a 1% to 3% rise in prices by being located close by a Walmart store.
“On average, the benefits to quick and easy access to the lower retail prices offered by Walmart and shopping at these other stores appear to matter more to households than any other negative externalities that would be capitalized into housing prices,” the authors write.
In other words, local residents value close access to everyday products at lower prices. That is just the public service that dollar stores provide to communities left behind by other retailers.
And while the ILSR takes aim at dollar stores specifically for providing poor-quality food to local communities, claiming that “dollar stores are now feeding more Americans that Whole Foods,” Dollar General recognized the gap and has been adding fresh produce to some 400 stores as part of its Better For You program. It just announced an additional 200 stores in 2019 will be stocked with fresh fruits and vegetables as part of plans to remodel 1,000 stores.
That number is small by comparison to the 15,000 Dollar General stores nationwide, but it is a move in the right direction.
Complicated problems with no simple solutions
ILSR’s Marie Donahue, research associate community-scaled economy, doesn’t describe its efforts as “anti-dollar stores.” Rather it seeks to level the playing field so that all businesses get an equal shot, not just the big corporations that come into town with an unfair advantage, often in the form of tax breaks that are paid for by local businesses and citizens.
“There is a larger issue here than just dollar stores chipping away at local economies,” Donahue shared. “We are concerned how powerful retailers, chain stores and platforms like Amazon impact independent businesses, when they come into a community and expand in a way that is not necessarily attuned to the best interests of the local community.”
ILSR believes building stronger local economies is the way to build a stronger national economy, rather than the current trend toward an increasingly bifurcated economy that is prospering in just a few large, mostly coastal cities leaving the rest of the country behind.
ILSR sees tremendous potential for local independent business to add value to their communities and to give back in a way that national retailers won’t and can’t. “The resilience and adaptability of independent stores will serve them well in a rapidly changing economy,” Donahue concludes.
As much as ILSR is providing valuable support to local communities to build stronger local economies, dollar stores, Walmart or Amazon, for that matter, are not the essential problem. Rather they are retailers taking advantage of opportunities that other retailers may have missed, ignored or failed to proactively respond to.
Small-town retailer Sam Walton shows just what is needed today to bring prosperity and growth back to the rapidly evolving American retail landscape. It doesn’t start with more capital or government and tax policies, but with vision to identify emerging consumer needs and provide a solution where and when it is needed.
If it can be done by someone in Bentonville, Arkansas, it can be done anywhere in America.
Date: January 3, 2019