is a dollar store a good business to own and are dollar store stocks a good
investment to buy we disagree with almost everybody on this topic I'm going
to explain why today on franchise City. so before we begin I love dollar stores and
to date I've loved the industry as well for an investment but I'm going to show
you a few things that most investors have not considered so first off the
positives and this is why most people still suggest investing in dollar stores
or owning a dollar store at this point dollar stores sell more groceries
than high-end chains like Whole Foods 10 billion dollars a year more in fact
there are more dollar stores right now than all other six of the biggest outlet
stores combined that includes Walmart Kroger Costco Home Depot CVS and
Walgreens and while the retail apocalypse last year saw thousands of
stores closing their doors dollar stores they blew away every other industry by a
wide margin and if you look at this chart you can see the dollar stores by
far beat out convenience drug liquor stores
by a wide margin in fact on average three new dollar stores open up every
single day and there is expected to be about $38,000 stores by 2021 here in
Canada Dollarama they had a nine percent increase in sales for 2019 to 946
million and your average costs to open a dollar store is about two hundred and
fifty thousand dollars. Now if you were an investor you also saw nothing but
upside with solid returns for most of the publicly traded dollar store stocks
huge gains over the past decade now as of today however we are likely heading
into another recession or possibly a depression probably there already and if
we look at the statistics from the last downturn between 2008 and 2011 shares of
Dollar Tree soared almost 200 percent while the S&P 500 gained only 30 percent
over that same time period sales of inexpensive items during an economic
crunch, they go up people don't have money they
head off down to the dollar store so everything looks rosy why should we
be concerned well there's a few reasons one in particular I think could be very
disruptive to this industry but the first is market saturation every single
industry we see a market saturation points it happened with frozen yogurt
it's happened with food in general and people they see how well an industry is
doing everybody and their uncle rush in it's a herd mentality and ultimately
average unit margins on a store drop you see more and more dollar stores popping
up competing with each other right next door now this of course it's going to be
highly regional in your own City scenario is going to determine the
outcome now also keep in mind that many cities have come to dislike dollar
stores because they hurt other businesses some of these cities have
even implemented restrictions on stores that brings us to number two which is
something called dispersal restrictions in some cities they put limits on how
many dollar stores can open up in an area so Tulsa Kansas City Mesquite Texas
New Orleans just a few cities that have adopted these restrictions so far and
the rationale is that these dollar stores really make it difficult for
local stores to compete they're doing this because there's way too many dollar
stores which if you're an owner who has ten immediate stores in the vicinity
around you your profits are going to be limited due to this saturation and a
competitive market so before you open a store check your regulations see if
there are these disbursement restrictions or regulations and for
stores in the area or for stores that might be opening in the future. number
three is low margins and a lot of people don't think about it this way but the
average profit on a dollar store product is about thirty five cents and that's
assuming that you purchase very well that means it takes two hundred thousand
individual sales just to make seventy thousand dollars a year that's five
hundred and forty-seven sales a day or forty-five sales every single hour 365
days a year you need enormous volume
even just to make a livable income and while stores that opened up ten years
ago did phenomenally well it's much more difficult now when you have dozens of
other similar stores around you but let's say your own city has a great
opportunity there's low competition there's another potential issue that I
believe might be the biggest problem and that problem which is number four is
inflation and we really need to look at history on a grander scale to see what
might happen today take a look at these companies Ben Franklin stores, M.H
fishman, Butler brothers WT grand now it's likely you've never heard of these
stores but at one time they were thriving with thousands and thousands of
stores all across the USA back then these were the dollar store equivalent
they were called five and dime stores five and ten cent shops so everything in
these stores sold for a nickel or a dime they were very popular equally as
popular as our dollar stores today now eventually over time public sentiment
shopping styles changed but obviously something else happened that had a major
impact which was inflation and as the value of the dollar dropped you simply
couldn't make a product for three cents and sell it for a nickel or make a
product for six cents and sell it for a dime and right now the government is
injecting trillions of dollars into the economy basically making it out of thin
air and this of course creates a risk of debasing the currency making a dollar
worth less than it is today so in this scenario just like the
five-and-dime stores the dollar store model might not hold up anymore when
items simply can't be produced or shipped and produced for pennies which
brings us to the concern number five which is relations with China so we all
know the current administration they've had ongoing tense relations with the
Chinese can you imagine what would happen if we lost the ability to trade
with China you might say that's unthinkable but
come on so was a pandemic just a few months ago you could never ever produce
dollar store items in the USA for the prices that buyers are accustomed to
paying in the dollar store so if relations with China continue to
deteriorate that could create issues in these industries just a couple of
considerations to think about if you're seeking to invest in a franchise our
expertise is always free for qualified buyers you can learn more by clicking
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