It’s not just Amazon: Why the pandemic will make Aldi and Dollar General more dominant

May 15, 2020

By Nathaniel MeyersohnCNN Business

The coronavirus pandemic has devastatedthe retail industry, with April sales plunging 16% and big names like Neiman Marcus and J.Crew filing for bankruptcy.

Yet discount chains like Dollar General and Aldi stand to thrive. These budget retailers are building on strong growth in recent years. They are likely to benefit now as consumers cut back on discretionary spending but continue to buy food and household essentials, retail analysts say.

Sales atdiscount stores are already proving to be a bright spot. For the week ending on May 10, sales in the category, which includes names like Dollar General (DG) and Dollar Tree (DLTR) as well as clothing chains like Marshalls, increased 53% compared with the year prior, according to Facteus, a firm that analyzes daily card transactions. That’s at a higher clip than sales at wholesale clubs, drugstores, and grocery stores.

“Dollar stores have likely gained from fill-in trips” because of their low prices and close proximity to customers, UBS said in a research report last week. Fill-in trips are those where consumers typically buy items they have run out of between their larger, routine shopping trips.

It could be a repeat of the last recession in 2008, when existing dollar store shoppers tended to “visit more often and spend more,” and “new customers traded down into the value space,” said Joseph Feldman, retail analyst at Telsey Advisory Group. “Dollar stores generally do well in times of stress.”

Indeed, with millions of Americans out of work and food prices rising, shoppers are more likely to gravitate toward stores that offer them lower prices.

Dollar General and Aldi have also increased the numbers of stores they have in the United States in recent years, and analysts say their close proximity to customers and small-size stores make them desirable to shoppers seeking convenient options.

Dollar General, the largest dollar store chain in the United States by store count, has more than 16,000 outposts today, targeting primarily low and middle-income shoppers in rural areas. It has opened around 1,000 stores a year over the past three years.

While Dollar General’s customer base has an average household income of around $40,000 a year, the retailer has also made a push in recent years to attract higher-income customers with remodeled stores and new merchandise like home decor.

Scot Cicarrelli, analyst at RBC Capital Markets, said in an April research note that around 75% of Dollar General stores are located in towns with 20,000 people or less, a strategy that makes Dollar General “often the convenience store, grocer and big box retailer for the surrounding population.”

Dollar General’s stock price has risen 16% this year, even as the S&P 500 lost 12%, reflecting Wall Street’s confidence in the retailer to thrive during the pandemic.Dollar General has been designated an “essential” business amid the pandemic and has remained open, hiring thousands of workers to meet demand.

Not all discount names may see equal benefit. Dollar General’s smaller rival Dollar Tree’s stock has lost 19% this year in part because the company withdrew its financial guidance in March, citing a “volatile economic environment related to COVID-19, including uncertain customer demand and government actions.”

Discount grocers

Aldi, the discount grocer that has been on a growth tear across the United States with low prices on its own private-label brands, is also poised to gain. The company is hiring workers to staff stores and warehouses during the pandemic.

Before the coronavirus outbreak, Aldi’s growth was “fueled by a combination of very low price points and a growing consumer acceptance of private label,” said Mikey Vu, partner at Bain & Co. “Recessions generally cause both an accelerated flight to value and an increase in private label penetration, which plays to [Aldi’s] strengths.”

Aldi, which is privately held, has more than 1,900 stores in 35 states and is on track to become America’s third largest supermarket chain by store count, behind Walmart and Kroger by the end of 2022. Its close competitor Lidl, another German grocer with a similar low-cost business model, is racing to grow in the United States, too.

“Aldi is perfectly positioned as the low-priced leader,” said Burt Flickinger, managing director of consulting firm Strategic Resource Group. “A family with five kids and a rescue pet spending $200 a week of groceries at a typical supermarket chain is spending $120 to $140 a week at Aldi.”

Retail analysts also say Aldi’s small stores will likely appeal to consumers looking to avoid large crowds during the pandemic.

A Walmart supercenter averages around 178,000 square feet; Costco warehouses average around 145,000 square feet; and a typical supermarket is around 40,000 square feet. Aldi’s small-box stores, however, take up just a fraction of that space, at 12,000 square feet on average.

Ralene Ramirez, who visited Aldi in South Gate, California, for the first time earlier this month, said she decided to try it out because other supermarkets were crowded.

“I’m so glad I went. I was in and out in less than 30 minutes,” she said.

Other discount grocers are building sales and drawing in new customers during the pandemic.

Grocery Outlet (GO), an “extreme value” supermarket chain, said Monday that sales at stores open for at least one year grew 17.4% during its most recent quarter compared with the same period last year.

“We have seen many new customers coming to our stores these past couple of months,” Grocery Outlet president RJ Sheedy told analysts.