The middle class is disappearing, which makes dollar stores very happy
As more and more US department stores close and malls are mothballed, Amazon is being blamed for the “retail apocalypse” (paywall). But there’s another dynamic crippling American retailers—a shrinking middle class exacerbated by a widening inequality gap. Between 1971 and 2015, the share of US income held by America’s middle earners has contracted from 61% to 50%, according to Pew Research. Wealthy families had three times as much wealth as middle-income families in 1983; by 2013, they had seven times as much.
The effect on retail has been delayed by low interest rates but now a wave of store closings highlights how more consumers are consistently tightening their belts in the face of stagnant wages and reduced employment opportunities. This has been the year of the death of the middle-class suburban mall, largely because department stores are struggling to remain relevant. Since 1975, America built malls at four times the rate of population growth and, according to research firm IHL, “the majority of malls that were built in the last 30 years were in areas thought to be middle class.”
In response to their own economic woes, middle-class consumers have shifted away towards discount retailers. The fastest-expanding retailers in the US are cheap, “fast-fashion” brands like Zara and H&M—and dollar stores. While the revenue of department stores in those malls is declining, Dollar General and Dollar Tree are growing at 6.4% and 7.5%, respectively. And investors have noticed, sending Dollar General’s and Dollar Tree’s stock up 23% and 36%, respectively, this year while the S&P Retail Index has been flat.
Dollar General CEO Todd Vasos puts it in the cold, hard terms of the stock market. The “middle-class continues to go away, unfortunately, to the lower end of the economic scale versus the higher end,” he said at a Goldman Sachs retailing conference in September. “So as this economy continues to chug along and creates more of our core customer, I think there’s going to be more and more opportunities for us to get in and build more stores.”
At the same conference, Vasos also described his core customer:
- Typically, she is a woman.
- She lives in a two-income household, making $40,000 per year before taxes.
- Employment has been stable but wage growth has been choppy. This year, her disposable income is around 2%, so $800 per year.
- This is well below her 20-year average of 3.5-3.8% and she is sensitive to price changes, by as little as a dime.
- She is increasingly likely to have a smartphone.
- She probably doesn’t have Amazon Prime but she is interested in shopping online.
Dollar stores are now investing in the same digital journey as other retailers and are well positioned for digitization, mostly because their customers are late adopters of technology. This has given them time to watch and wait before they adopt new technology too early. With 75% of the US population living within five miles of a Dollar Tree store, it is also in the race against Amazon for last-mile delivery.
Read this next: Amazon may have patented the next big thing in online shopping
December 8, 2017 at 08:08AM