Business
9:13 am
Tue January 21, 2014

Family Dollar Profits Drop As Core Customer Struggles

Family Dollar, based in Matthews, has 8,000 stores in 46 states. The company plans to add 525 stores by the end of the year.
Credit WFAE

Matthews-based discount chain Family Dollar started to report record profits about 5 years ago when the country was in a recession.

And now as the economy is recovering, the company seems to be having a bit of trouble holding on to customers it gained during the leaner times. 

But Family Dollar's recent decrease in profits is a little more complicated than that.

In a conference call this month, Family Dollar CEO Howard Levine told investors an economic recovery is underway:

“Higher income households who have benefited from market gains, better employment opportunities or improvements in the housing market have become more comfortable and confident in their financial situation ... " (What Levine didn't say is that more of those customers may be doing more shopping at other stores.) "Our core lower-income customers have faced high unemployment levels, higher payroll taxes and more recently reductions in government assistance programs," Levine said. 

So Family Dollar’s core customer – a female head of household earning less than $40,000 – doesn't have as much to spend. Family Dollar says half of its customers rely on some form of government assistance, including social security and disability. About 5 percent of its total sales are paid for with food stamps.

Dan Berthiaume, senior editor of Chain Store Age, calls it the "one percent effect.”

"Just the way today's society is, as the economy improves, a lot of that improvement is going to be contained within a narrower range of consumers as opposed to previous recoveries," Berthiaume says.

And those higher-income shoppers who shopped at dollar stores when times were tight are now moving back to larger retail stores, says Charles Bodkin, a retail and marketing professor at UNC Charlotte.

"Over the years, they have done exceedingly well. And now as we come out of the recession, it's possible that consumers may revert to the behaviors that they had prior to the recession," Bodkin says.

Family Dollar reported that between September and December net sales increased 3.2 percent but net income decreased 2.8 percent compared to the last year. 

But Family Dollar’s chief competitors like Dollar Tree and Dollar General are still doing well. They have yet to release their latest financial earnings, but they are expected to continue reporting an increase in sales and income.

Dennis Harlow teaches management at the Wingate University's Porter B. Byrum School of Business.  He say the success of Family Dollars competitors, "indicates that somehow this company has dropped the ball. They're not providing the products that their customers want at the value the customers want and they're not gaining profit."

For one thing, Harlow suspects the company could be doing a better job at merchandising – or how products are displayed and advertised.

During the conference call, investors expressed their concern that Family Dollar rapid expansion is hurting profits. New stores add to sales, but can take away money and resources from existing stores. And Family Dollar has added more than 1,200 stores in the last three years.

Levine says it’s the new stores that are performing well, and the company plans to add another 525 new stores by the end of the year. Family Dollar currently has 8,000 stores in 46 states.