The unique business model followed by dollar stores has been quite successful over the years. Most of them have remained resilient to market headwinds often supported by long-term customer loyalty, especially in rural areas.
Dollar Tree (DLTR) has been striving to integrate Family Dollar and revive the business after acquiring the rival retailer a few years ago, while also expanding its network to more than 15,000 stores. The latest round of tariffs imposed by the Trump administration on Chinese imports has come as bad news for the company and its customers.
The fresh taxes, on imports worth $200 billion, have resulted in price escalation and have started affecting the arrival of low-priced consumer items from China. On the earlier occasions, the government had slapped tariffs mostly on industrial goods imported from the Asian country. Currently, the only options before the company and its peers are either to sell the products at the old prices and bear the loss or to pull off them from the shelves.
The latest round of tariffs imposed on Chinese imports has come as bad news for the company and its customers
Nearly half of the products sold at Dollar tree stores are imported, and China is the primary supplier. Maybe it is the first time President Trump’s new trade policy impacting the common man directly. For the many low-income customers of Dollar Tree, having to pay higher prices or not being able to make purchases due to non-availability of products could be a difficult situation to handle.
The merchandise category identified for the tariffs this time include low-end electronic goods, food items, health and beauty products and household items, which constitute about one-tenth of Dollar Tree’s merchandise. It is feared the monthly budgets of lower-middle-class people who depend heavily on discount stores will go awry once the government implements its plan to impose additional taxes on these products next year.
The condition of other discount store operators like Dollar General (DG) will not be different once the new tariff regime comes into effect. If the taxes are not rolled back, profitability will be under pressure in the long term, resulting in headcount reduction and store closures.
The latter part of 2018 has been a period of volatility for Dollar Tree shares, marked by a sharp fall after reaching the peak at the beginning of the year. Over the past twelve months, the stock dropped about 10% and is currently trading below the long-term average.