Dollar stores suffer as inflation hits customers

Michael Robert Langdon does most of his shopping at outlet stores like Dollar Tree. But even at the store’s base price of $1.25, his money doesn’t go far.

A year ago, Langdon spent $150 a month on food and toiletries at local dollar stores. Today, his monthly expenses are about $80. Inflation has taken its toll on his budget, he said. And while he lives in a loss-of-cost apartment, his one-bedroom apartment in Arcata, California, takes up a third of the roughly $1,000 he brings in each month in Social Security Disability Insurance and survivors’ benefits.

People living in poverty “have to really struggle here,” Langdon, 70, told USA TODAY. “Everything is so expensive, and the housing is so cramped.”

Langdon’s story runs counter to broader economic trends that point to solid spending by American consumers despite high interest rates and inflation. But not all shoppers are feeling the sting of relief at the checkout. While the job market is slowing and renters continue to feel squeezed by higher housing costs, economists say there are parts of the U.S. population that are still struggling.

There are “pockets of weakness in a pretty solid consumer story,” buoyed by spending by the middle and upper classes, said Michael Pearce, deputy chief U.S. economist at Oxford Economics. “We’re seeing some differentiation in (consumer) outcomes by income, but also by wealth.”

Dollar General says customers are ‘financially constrained’

The divide among consumers is reflected in the quarterly profits of various companies.

Dollar General lowered its full-year sales forecast last week after reporting same-store sales rose 0.5% year over year in the latest quarter, falling short of expectations.

Discount stores tend to attract more customers during economic downturns, but they face increasing competition as big-box stores like Walmart and Target slash prices, according to Neil Saunders, managing director of analytics firm GlobalData.

Dollar General also pointed to “financially constrained” core customers tightening their budgets. CEO Todd Vasos said 60% of the company’s core customers — mostly households earning less than $35,000 a year — are pulling back on purchases of basic necessities due to higher prices and pressure from rising housing, utility and health care costs.

“Our customers have less ability to stretch their budgets to the end of the month,” Vasos said on last week’s earnings conference call. He later added: “While middle- and upper-income households are also looking for value, they don’t say they feel the same level of pressure as lower-income households.”

The outlet store’s profits in the latest quarter were a “mixed bag” of retail sales, according to Saunders.

Shares of other retailers popular with low-income people — including Dollar Tree, Five Below and Big Lots — have fallen this year.

Five Below reported a 5.7% drop in same-store sales last week, with interim president and CEO Kenneth Bull noting that lower-income demographics continue to fare poorly.

Dollar Tree — which operates both the Family Dollar and Dollar Tree brands — saw its shares fall Wednesday after the company lowered its full-year outlook. It cited greater financial pressures on middle- and upper-income customers, with Chief Operating Officer Michael Creedon saying demand from Family Dollar’s core lower-income customers “remains weak.”

“The customer (The Family Dollar) is under budgetary pressure right now,” said Chief Financial Officer Jeffrey Davis. “We see the customer taking advantage of all the opportunities. Not just government assistance, but also credit where it makes sense.”

Meanwhile, retailers focused on wealthier households have outperformed. Best Buy shares have outpaced the S&P 500 this year, and Target reported nearly 3% revenue growth in its latest quarter.

“How people feel and react depends on their personal circumstances,” Saunders told USA TODAY. “Some people are doing pretty well, some people are really struggling. So it’s very polarized, and we’re seeing that in retail sales.”

Unfair economic recovery

A period of “really solid income growth” has helped the U.S. consumer, according to LPL Financial Chief Economist Jeffrey Roach. U.S. consumer confidence hit a six-month high in August, and consumer spending rose a solid 0.5% in July, despite signs of weakened discretionary spending.

But there are signs of weakness.

Credit card balances are up 5.8% from a year ago, and Americans owe a record $1.14 trillion and are seeing higher rates of missed payments, according to an August report from the Federal Reserve Bank of New York. And Census Bureau data shows more households report that they sometimes or often did not have enough food in the past seven days: 11.4% of the population in July, up from 10.4% in January.

“The average U.S. consumer is in pretty good shape,” said Bill Adams, chief economist at Comerica Bank. “But there are demographic groups in our country where people are still struggling with inflation or haven’t benefited from wage growth.”

One factor driving that gap, according to economists? Homeownership.

Homeowners — especially those who took out a low-rate mortgage before the Federal Reserve raised interest rates — have seen relatively stable housing costs and growth in household wealth. U.S. home prices have risen about 50% over the past five years, according to real estate firm Zillow.

Meanwhile, Zillow data shows rents have risen about 35% during the same period, putting a strain on tenants’ budgets.

“Consumers who bought homes five or 10 years ago and have stable living costs are seeing inflation very differently than people who are renting or trying to save up for a down payment today,” Adams said.

Pearce of Oxford Economics said stock market investment has also contributed to record levels of household wealth. The S&P 500 is up more than 15% this year.

But lower-income households tend to lose out on those gains. Only a quarter of the lowest-earning U.S. households, those earning less than $40,000 a year, owned stocks, according to an April Gallup poll. And fewer than half of lower-income households earning less than $30,961 last year owned a home, compared with 81% of households with the highest incomes, according to the Federal Reserve Bank of Minneapolis.

Meanwhile, Pearce said the weakening labor market is putting more pressure on lower-income consumers, who tend to be more dependent on the health of the labor market.

“The slowdown will be most pronounced in sectors where average incomes are lower,” he said, pointing to industries such as retail and hospitality. “Those people were much more exposed to the slowdown in income. And that’s why I think there’s a lot of pressure on lower-income households.”

But there could be brighter days ahead. If the job market holds up and inflation continues to fall, “that should help support spending, even for lower-income consumers, over the next few years,” Pearce said.