How Do Dollar Stores Make a Profit?

Everyone is familiar with dollar stores. They represent alternative shopping experiences to big box chains with the expectations of savings.

With over 35,000 stores across the U.S., the dollar store model is successful. Dollar General and Dollar Tree are the two companies leading the market, and their success relies heavily on demographics and the perception of value.

As a consumer, it is challenging to understand how a store that sells merchandise for a dollar makes a profit, but in many situations, dollar stores are making more per unit than bigger retailers. For each dollar of revenue, Dollar Tree typically earns a $0.35 profit. Alternatively, Walmart only makes a $0.25 profit per dollar of revenue. However, the raw profit is not the only way dollar stores make money.

Psychology and Profitability

Dollar store owners know marketing psychology. The companies position their brick-and-mortar stores in rural areas or locations 15 to 20 miles from the nearest grocery store or big-box retailer. The name alone piques shopper interest. By purposely placing their business in between shoppers' homes and other retailers and enticing the shoppers with promises of value, the business owners present their dollar brand as a "cheap" alternative to a long drive and busy stores.

Dollar stores are also much smaller than typical grocery chains and big-box options. The average Walmart Supercenter is 178,000 square feet. Compared to the average dollar store of 7,400 square feet, what would you rather peruse?

The smaller size of dollar stores also encourages customers to walk around the store. The longer you spend in the store, the more money you are likely to spend.

Operations and Profitability

Dollar stores do not carry a lot of overhead costs. Unlike larger retailers with over 90,000 SKUs, the average dollar store has roughly 10,000. Business owners focus on longer shelf lives, minimal packaging, and off-brands when stocking shelves.

Also, the average dollar store only employs about eight or nine people. An independent grocer of a similar size might employ as many as 14 people.

Finally, dollar stores shrink package sizes, allowing them to charge more per volume. However, this strategy is controversial and frustrates many consumers who feel taken advantage of. Store owners argue that consumers are paying for the benefit of not having to travel to a larger retailer

Consumer Disadvantage and Profitability

Despite how things may seem on the surface, the dollar store business model is lucrative and efficient. Unfortunately, consumers may fail to realize that they are paying more than necessary for everyday products.

For example, one report quoted a popular dollar store selling 16-oz bottles of milk for $1. Perhaps the dollar offering sounds fair until you do the math. Paying $1 for 16 ounces is equivalent to paying about $8 for a gallon of milk.

Raisins also demonstrate the cost disparity between dollar stores and other retailers. Buying a 4.5-oz bag of raisins at a dollar store equates to a 52% increase in price compared to a 72-oz bag for $10.50 at a larger retailer.

The comparisons can go on and on. Dollar stores make most of their money by shrinking packages and charging more per volume. Many consumers do not realize it because the stores are experts in consumer psychology.