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Discount stores Dollar Tree and Dollar General thrive in this turbulent economy

STEVE INSKEEP, HOST:

Discount stores Dollar Tree and Dollar General are thriving. Both chains saw their stock price rise after they delivered optimistic earnings reports this week. So does this reveal anything about the broader economy? Willy Shih is here to find out. He is a professor at Harvard Business School. Good morning.

WILLY SHIH: Good morning, Steve.

INSKEEP: OK, so Dollar Tree and Dollar General are up. Walmart and Target are doing a little bit worse than expected. What's that say?

SHIH: Well, I think it says that a lot of people in this country are feeling the effects of inflation and they are looking for lower prices. And when you're looking for lower prices, that's one of the places you go, especially a place like Dollar Tree, where you now know that everything costs $1.25. So if I'm trying to save money, that's probably a good place to go.

INSKEEP: I guess we should just try to rank things here. Walmart, of course, advertises itself as a place for cheap goods. The dollar stores are like the next notch down in bargain hunting. Is that right?

SHIH: Well, some people would call it trading down. Actually, they're really a convenience store. The key thing is their price points are lower. Now, often that means you have smaller package sizes, as well. But if you're living paycheck to paycheck - and, you know, unfortunately, many people in this country are that way - you know, and you're feeling pressure in terms of how much it costs to fill up the car with gas, maybe I'm only going to buy what I need right now. Oftentimes, it'll be a smaller package.

INSKEEP: Let's figure out what's squeezing people because, of course, this is a period of time where unemployment is quite low. Wages are going up. But of course, there's inflation and a lot of people are out of the workforce. What exactly is making the budget tight for people?

SHIH: Well, I think food and fuel are the two big ones. We're seeing big increases in prices of meat, poultry, fresh fruits and vegetables and then, of course, at the gas pump. I was in a gas station the other day, and I saw somebody who could not afford to fill up the tank on his pickup truck. He could only fill it up partway. I heard him talking to a friend who was with him. And so, you know, with those types of big expenses, there's a lot of pressure on household budgets.

INSKEEP: Do you think there are people shopping at dollar stores who would not have thought of themselves a few years ago as the kind of person who would shop at a dollar store?

SHIH: Well, back in the 2008-2009 downturn, we saw a similar effect where when people are kind of stretched, feeling a little pressed, they'll trade down, if you will, and go to the dollar store. That's part of it. The other thing is we've seen a lot of growth in both of these chains, particularly Dollar General, where they've really become the convenience store in rural America, right? So in - near my house in New Hampshire, there are 4 Dollar Generals, for example, within a 10-mile radius, right? So they're also a convenience store. And when people know, I can go there to pick up some milk, or maybe I need some dish detergent or some laundry detergent - and I know it's going to be a low price. So it's something that we've seen in previous downturns.

INSKEEP: I'm amazed by the statistic that's in front of me here. It says there are more Dollar Generals in the United States than McDonald's. So how profitable is that business, selling things at low prices?

SHIH: Well, obviously, it's pretty good. I think McDonald's has been growing, as well, lately. But, you know, to have that many dollar stores nearby, it really says something about their strategy, which is to fill in maybe lesser-served or underserved communities in rural America. So particularly in the case of Dollar General, you've seen that they are pervasive across the countryside. And it's been a very good business for them.

INSKEEP: You know, you alluded to this a moment ago. The base price at a dollar store, at Dollar Tree, for example, is a $1.25, not a dollar. Here we are in a period of inflation. Are they going to have to become the 2 dollar store?

SHIH: Well, I hope not. You know, one of the things that when you had a $1 price point, it kind of limited what they could sell. Now, when they raised the price point to a $1.25, that had an immediate boost to their bottom line because they were selling a lot of things that they formerly sold for a dollar. But when you go up in the price point, then it increases the number of things that you can sell. And that gives people more reason to come into the store.

INSKEEP: Willy Shih, thanks for your insights. I really appreciate it.

SHIH: Thanks for having me.

INSKEEP: He's a professor at Harvard Business School. Transcript provided by NPR, Copyright NPR.