Market Overview
Dollar stores, classified as variety stores, often focus on retailing a plethora of inexpensive household goods. Four publicly traded chains are the topic of this analysis: Dollarama (DOL.TO), Dollar General (DG), Dollar Tree (DLTR), and Five Below (FIVE).

Merchandise that are commonly sold includes apparel, processed goods, hardware, branded groceries, home furnishing, and other miscellaneous goods. All are typically sold at discounted prices.

Per capita disposable income (PCDI) is crucial to understanding the dollar store industry. As of right now, goods sold at these stores are not, as often misconceived, inferior-quality goods, though in the 20 years, shifts in perspectives may change such a misconception. This fact changes the relationship between disposable income increases and sales.

Following $DG’s success from its $21 IPO price in Q4 2009, we see that it significantly outperformed the S&P over the last decade. Around that time, the late 2000s financial meltdown ended 17 years of positive growth in PCDI and many roaring businesses were muted in its wake. Unemployment skyrocketed and people were saving more (3% → 6%), humbling the consumer retail industry. Undeterred by this development, $DG, $DLTR, and $DOL.TO significantly outpaced the S&P from Nov. 2009-Nov. 2010 — $FIVE was not publicly available at the time. It can be argued that the notable growth during this time was directly correlated to a lack of stability on Main Street. From June 2007 highs to March 2009 lows, the S&P lost half of its value while industry leader $DLTR broke even during that time, sharply trending upwards as the markets collapsed.

Even after consumers regained confidence and started spending money more freely, the growth has not slowed. Many consumers did not view dollar stores negatively as PCDI increased; on the contrary, many consumers found themselves returning to these stores after the recession as they prided themselves on the money they saved. In 2018 and 2019, the per-capita disposable income grew by over 3% each year, and quantitative easing policies by the Fed has further encouraged economic stimulus from consumers. The dollar store industry has directly benefited from such changes. Moreover, the lagging wage vs employment gains have been pressured, and it is expected that when complemented by progressive tax policies and wage increases, after-tax PCDI will significantly increase.



Personal Views

My personal view of the economy forecasts annualized PCDI to increase near 2% over the next half-decade. However, the next presidential election term can fundamentally change the markets. In the event left-leaning tax policies dominate the next decade, people may be more inclined to save money and reduce the amount spent at a variety store. However, it is worth noting that these stores are highly resilient to lowered PCDI and ecommerce pressure than big retailers such as Walmart.

Though the unemployment rate is low, it is observed that there is an ever-increasing Gini-coefficient. Poverty-rate changes are minimal, and as job growth begins to slow, it suggests the economy may become more stagnant. The derivative of the poverty rate over time is directly related to the economy and job growth.

Over the last few years, consumer demands have resulted in increased hiring. This has generally decreased applications-per-job-opening, which has historically increased PCDI over the last century. As baby boomers move into retirement, the job makeup in the USA has increasingly shifted towards service and white collar jobs. While this is beneficial to the technological shifts, the increased supply has lowered the monetary incentive towards many fields, and it is likely that many white collar occupations cannot compete with the threat of automation. It is likely the Gini-coefficient will only increase as jobs struggle to keep up with inflation. It is likely the labor force will suffer a large decline as the markets slow momentum.

Generational Risk

There is an estimated 330 million people residing in the US in 2020. The estimated compound growth in the next half decade (highly disputed) is at around 0.70%. The population change has been increasing at a decreasing rate since well before the 2000s - partially due to decreases in marriages, families, and a slight decline in immigration. Baby Boomers are moving to old age as longevity means the older generation is living longer than ever before.

A significant cultural difference between the younger generation and the older one is the mindset of money. With the advent of social media, the general consensus among the youth is to maintain a well-off appearance as can be observed through high end luxury brands and expensive accessories including Gucci and Airpods. Adapting to the cultural stigma, many generation Z members may harbor is crucial to the long-term success of the dollar store industry.

New section

One unexpected boom product at dollar stores is common, over-the-counter medications (e.g. Advil, Ben Gay, Band Aid, etc.).  These simple, common healthcare aids, traditionally purchased at drug stores, have become among the most popular and marketable products available at dollar stores.
Online retail has not exerted the same deleterious effect upon dollar stores as it has upon more traditional retailers.
Big box stores such as Walmart show no interest in directly competing against dollar stores by opening competing, smaller stores under their corporate banners.
Dollar stores have demonstrated remarkable adaptability and resilience in unstable and difficult economic conditions.
The aforementioned adaptability can also be used proactively to add new categories of products and provide a more “full-shop” experience.
Easy liquidity is an asset as approximately 50% of transactions at dollar stores are conducted in cash.
Dollar store clientele commonly operate on extremely limited budgets and are looking to maximize the value of each dollar that they spend, including minimizing need for delivery of products.