Surprise: Dollar Tree’s $1.25 price strategy actually works

New York
CNN Business

When Dollar Tree said it would raise prices to $1.25 after 35 years of staying at $1, some fans protested and industry analysts questioned the decision.

A year later, the controversial move appears to be paying off.

The highest prices have been added to the Dollar Tree sales. The switch also allowed the company to introduce merchandise it couldn’t previously sell due to the $1 price restriction, helping it attract new buyers. Other companies also raised prices, so Dollar Tree was protected from significant customer backlash.

Sales at Dollar Tree stores rose 8.6 percent last quarter from a year ago, the company, which also owns Family Dollar, said Tuesday. Family dollar sales rose 4.1% last quarter.

“Our move to the $1.25 price point has allowed our merchants to significantly improve their value,” Dollar Tree CEO Michael Vitinsky said on a call with analysts Tuesday. Dollar Tree has more than 8,000 stores.

Dollar Tree said a year ago that it raised prices to offset higher costs and improve the quality of its merchandise, which comes in small packages.

The company’s product selection had suffered because it had to keep everything under $1, and its sales were sluggish.

Dollar Tree was forced to discontinue many “customer favorites,” the company previously said, because it couldn’t keep them under $1 — particularly packaged and frozen foods and household essentials.

“Our consumables sales continued to decline quarter over quarter due to product availability and the variety we couldn’t offer the customer at that $1 price point,” Witynski said Tuesday.

Dollar Tree has since brought back some of those items to $1.25 and expanded its deals on meat, pizza, breakfast and other consumables. These additions again led to an increase in sales.

“We like the business and the reaction we’re seeing from customers based on being able to have better variety,” he said.

Dollar Tree is also adding more $3 and $5 items to stores, building on an earlier strategy.

However, Wall Street remains cautious about the company’s long-term prospects. Shares of Dollar Tree ( DLTR ) fell 8% on Tuesday after it cut its earnings expectations for the year.

Customers have been squeezed by inflation and are switching from discretionary items to everyday necessities, which are less profitable for Dollar Tree.

“The economy continues to squeeze middle- and low-income household customers, resulting in needs-based purchases,” said Dollar Tree Chief Financial Officer Jeffrey Davis.

The company said it is attracting more higher-income customers than its typical demographic. These customers buy essentials in stores to try to stretch their budgets.

Walmart ( WMT ), Dollar General ( DG ) and other discount chains have also said in recent months that they are gaining new, wealthier customers who are trading down on inflation.

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