Dollar General, higher-income shoppers are switching to discount stores amid inflation

As inflation continues to push up the price of consumer goods, shoppers from higher income levels are starting to abandon their regular grocery store in favor of a new favorite: the dollar store.

These no-frills retail stores, where shoppers can buy everything from cotton underwear to toothpaste for around a dollar, have traditionally served low-income and rural shoppers with few options to stock up on what they need. Over the course of the epidemic, middle-class shoppers have flooded dollar stores for their essentials.

Todd Vasos, CEO of Dollar General, told investors in an earnings call Thursday that shoppers swapping out higher-ticket items at big-box stores for dollar items continue to exceed our expectation retention rate.

In September, he said that the company continues to serve a broader subset of the consumer base while trying to appeal to a more broader cross-section of America. Over the course of the epidemic, Dollar General has made a lot of gains among middle-income shoppers thanks to its growing contingent of 18,000 black- and yellow-themed stores. Vasos told investors in June that the company's core consumer has a household income of $40,000 or less. The new, higher-income shopper of the company is in the $60,000 to $75,000 range, with some shoppers earning as much as $100,000, he said.

By the end of July, the company had doubled its anticipated retention of this new cohort of higher-income shoppers who are trading down some items for cheaper alternatives at Dollar General, Vasos said.

Vasos told investors that the brand is an all-weather brand and that's why it's even more pronounced now. We do pretty well when times are good. We ve got that new trading customer that seems to have a bit more money, even when times can be a little negative for our core customers. The dollar and discount stores exploded in the grueling aftermath of the Great Recession from 2007 to 2009. As unemployment grew, shoppers swapped more expensive items from stores like Walmart for cheaper alternatives at discount stores. Dollar Tree, which had previously only sold items for $1, has surpassed $5 billion in sales. In 2015, Family Dollar, acquired by Dollar Tree, reported $7.4 billion in sales, while Dollar General made a record $11.8 billion in sales.

Shopping habits persisted even as the economy recovered. The same consumers who opted for a small bottle of detergent at a dollar store rather than a pricier jug at Walmart stuck with their bargain-hunting habits, according to dollar and discount store executives.

Kenneth Bull, chief financial officer with Five Below, said in an earnings call with investors in March 2020 that we saw ourselves come back. Customers out there who discovered the value we were able to offer were the ones that really discovered the value we were able to offer because we were another choice at the end of the day. Unlike during the Great Recession, household wealth has been relatively stable during the epidemic. Joe Feldman, a retail analyst with Telsey Advisory Group, said that federal stimulus payments intended to keep the economy afloat have kept consumers fairly liquid. It means shoppers aren't widely ditching pricier retailers for discounters. He said that they were just buying more at discount stores.

He said that retailers such as Target and Walmart have seen soaring sales in this environment, and he believes that a lot of people are winning in this environment.

The bargain shopping has become an extreme sport for shoppers like Terrie Bergeron in Farwell, Michigan. Bergeron, a stay-at- home mom of three, said Dollar General now makes up about 40 percent of her budget, up from 5 percent pre-pandemic.

She said if I don't have a coupon, I don't buy the item, because of the Dollar General and manufacturer discount coupons she collects. The only thing I don't like about Dollar General is dairy, refrigerated products or frozen food. Dollar stores are doubling down on courting shoppers like Bergeron. By the end of 2025, Dollar General will roll out 1,000 new stores aimed at middle-income shoppers. Both Dollar Tree and Five Below have partnerships with Instacart that are aimed at higher-income shoppers. The company's CEO, Michael Witynski, told investors in March that the average ticket sizes of the Dollar Tree had gone up through its Instacart partnership.

He believes that the platform of Instacart is enabling us to broaden our customer base.

Kevin Adair, a Tuskegee, Alabama based singer and songwriter, told NBC News he became a routine dollar store shopper last year when people began to hoard toilet paper out of fear of an extended Pandemic lock-down.

Adair and his wife Carmen, who earns income from selling clothes on Poshmark, used to earn more than $100,000 a year to support themselves and the four children they have from previous marriages. Adair had fewer gigs and his wife s clothing orders were delayed because of supply chain issues as the pandemic took hold. Adair said that the couple's income fell to somewhere between $50,000 and $75,000 this year.

He said that we needed to find a way of living that would benefit our family and find an affordable way of living without sacrificing too much.

They now shop Dollar General's penny deals, where they mark down clearance items to just a penny. The couple bought all of their Christmas gifts from Dollar General. They filled their car trunk with everything from candy to kitchen utensils they bought through Dollar General s penny deals. Their total was about $4.

I wanted to kick myself in the pants because I realized that I had spent so much money on things and I could have spent half the price at the dollar store, he said. I don't see stopping this, even if things go back to pre-Covid.