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Dollar Tree (NASDAQ: DLTR) is known for its no-nonsense, everything-for-$1 pricing model. The company has been able to maintain it since it was founded in 1986, but given inflation and other pressures, some investors have called into question the long-term viability of this strategy.
Embracing a willingness to test new ideas, the company announced it would experiment with multi-tier pricing at a limited number of test stores. This is a major change to the business model that could have big implications for the company's brand and financial future if adopted across the chain.
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Dollar Tree's pricing model
Dollar Tree operates two retail brands, Dollar Tree and Family Dollar. The former is a discount variety store selling everything at a $1 or less; the latter, like Dollar General, is more of a discount grocery store and already sells items at various price points.
How has Dollar Tree kept up this strategy for the past 30 years? The company has primarily maintained its low prices by keeping its product sourcing costs low and delivering true value to its customers. Efficiently operating its global supply chain and network of over 7,100 stores has been the company's core competency and a key driver of its success.
The company has a few other tricks up its sleeve as well. At times, Dollar Tree has been able to acquire inventory from other retailers at a heavy discount and pass the savings along to customers. For example, movie theaters will sell Dollar Tree discounted candy with packaging depicting films no longer in theaters.
When Dollar Tree wants to "raise prices," it shrinks the size of the packages it sells. If the retailer sold a package of 12 pencils last year, it may sell a similar package with 10 pencils this year to pocket a higher margin.
Because Dollar Tree is opportunistic in how it sources goods, new items constantly show up in its stores. Customers enjoy the variety as well as the bargain pricing.
Pressures to change
More recently, however, Dollar Tree is under pressure from some of its shareholders -- mostly as a result of its 2015 acquisition of Family Dollar, which has failed to live up to expectations. In January 2019, activist hedge fund Starboard Value took a 1.7% stake in the company and called for it to sell its Family Dollar business and consider adopting a multi-price point model at its Dollar Tree stores.
Starboard fears that the $1-for-everything strategy sacrifices quality for price, meaning consumers will no longer see value in what the retailer offers. The hedge fund noted that selling some items at $1.50 or $2.00 would still be true to the company's brand image, not to mention the possibility of introducing new products and better quality. Finally, Starboard noted that competitors such as Dollar General have had great success with a more flexible pricing strategy.