Dollar Tree - Store Concept in the United States - Case Study Example

? Dollar Tree Case Study Dollar Tree Case Study Introduction Chains of discount stores have come and gone across Americafor decades. The reality is that the American consumer has already yearned from discounts when purchasing products, so stores like the Dollar Tree have always had a certain niche in the market. The effective management of such companies, however, is quite difficult to achieve. Not only must massive amounts of product be procured on a regular basis in order to attract customers, but expenses must be minimized as much and as consistently as possible in order to realize any type of revenue. As such, multiple branches are needed of any one retailer in order to truly realize profit on the scale that would sustain the viability of any company for any length of time. Dollar Tree has been able to become such a company, gradually acquiring other discount chains over the years, to now have a presence throughout the entire continental United States and Canada. This paper serves to explain some of the reasons behind their success, as well as providing a description of some future challenges on the horizon. Case Challenge 1 The first challenge facing Dollar Tree rests in the reality that the company’s initial growth was accomplished almost exclusively through acquisition. The question then becomes whether or not this will be an attractive option in the near future. The reality is that expansion through acquisition will likely be quite difficult in today’s economic climate. The company is already struggling to keep its pricing model in tact (all items at $1), and the cost of acquiring other companies will make this increasingly difficult. With the company now poised to pass the 5,000 location mark in the near future, the reality is that it does not need to continue to grow in the manner. Already being considered the industry leader, there are few chains that are in direct competition with it to begin with. If they desire to acquire even more discount dollar chains, it will likely only be in areas of the country where they do not already have an established presence. Case Challenge 2 Dollar Tree also faces the challenge moving forward of being able to continue to offer it products at prices below those of discount chains, such as Wal-Mart and Target, which are firms that possess great economies of scale. This has been accomplished to this point largely because Dollar Tree has fewer associated costs with doing business. We need to remember that their structure years ago moved away from expensive storefronts and malls, and they have opted to relocate to lower priced strip malls throughout the country. That enabled them to also develop their own distribution network, and they have far lower costs associated with staff training and inventory. There is no need, for example, to have an elaborate inventory and price control system, as everything is priced the same. In addition, Dollar Tree orders many of its products from the same suppliers, focusing on less consumer options, in exchange for buying in bulk in even greater numbers than Wal-Mart or Target. The typical consumer in Dollar Tree, for example, may purchase multiple items of the same product, where the Wal-Mart purchaser will buy fewer and will tend to deviate in terms of the manufacturer that they choose. In short, Dollar Tree has been able to price its products lower than competitors to this point, but it has been at the sacrifice of consumer choice. If the consumer continue to go with this trend, then Dollar Tree will be situated well for the future, based on the factors previously mentioned that enable it to drastically lower company expenses, being able to pass those savings onto the consumer. Case Challenge 3 Many businesses face the challenge of inflation, but with Dollar Tree’s company philosophy of pricing all of its products at $1, they are especially prone to its effects. The challenge, then, has become how Dollar tree will be able to continue to offer almost all of its products for $1 in the face of continued annual inflation. It is quite feasible that Dollar Tree will need to offer its products at different pricing points in the near future, so they will need to develop a strategy that eases into that reality. This will allow customers to adjust to the changing price structure, while still being able to fully see the value that Dollar Tree brings to them. One consideration would be to offer tiers of prices for various types of products. This could involve keep a large portion of smaller products at $1, while providing a wider selection of products at other pricing points ($2, $3, $5), by way of example. Changing a pricing structure that has been in place for decades is certainly a decision that should not be taken lightly. Many consumers have come to respect the Dollar Tree image for the precise reason that they have consistently honored and upheld the vision that started the company back in 1986. Times do change, however, and most consumers will accept that. That does not take away from the reality, however, that the situation must be approached delicately. If they implement changes gradually and fairly, then there reputation should remain intact and their company image should certainly remain intact. It is important to remember that not everyone can be pleased all of the time. In the end, Dollar Tree will likely lost some long-standing customers once they have to change their pricing structure, but that is an inevitable part of doing business. It is far better to lose a few questions in exchange for increased profitability, than it is to retain those same customers for a season only to then go out of business because no revenue is being realized. Appendix A Current Situation/Issues/Problems Dollar Tree today is a Fortune 500 company and is headquartered in Chesapeake, Virginia. It has continued it expansion projects and to date have more 4,700 locations under its brand throughout the 48 Continental United States, and they have also expanded into Canada. Despite speculation that the concept of the dollar store chain would be a dying fad, the company continues to grow. In fact, many see it as competing directly with major discount chains, such as Target and Walmart. The major problem, then, facing Dollar Tree is simple economics. Founded in 1986, the idea of having everything under one roof price at $1 seemed like a novel concept. Not only did it streamline store operations, and me inventory much easier and cheaper to manage, it appealed to the American consumer who was growing increasingly price conscious. Today, however, times are different. It is becoming increasingly expensive to manage such stores, and the cost of merchandise is increasing. The reality is the Dollar Tree will likely not be able to sustain its model of pricing everything at $1 and will need to explore other viable options. This could potentially make it seem more like the other chains that it is competing directly with, eliminate their comparative advantage as a true leader in the discount store industry. Currently, Dollar Tree is still keeping with its pricing model at $1 for most products, but are increasingly realizing a shift on the part of the consumer towards desiring more low cost food products. This is understandable considering the rise cost of many food items in major retail supermarket chains, Wal-Mart including, so this is a certainly a segment of the discount business that Dollar Tree seems positioned to capitalize on. In exchange, however, they have had to add freezers throughout their stores, and they still must do with perishable food items that must sell by a certain in order to avoid a lost of product (Parnell, 2014). The freezers add expense to the overall business, decreasing their bottom line, while the need to move product quickly requires that prices remain at their current levels in order to attract consumers to buy before product expiration dates are reached. Alternatives for each Situation/Issue/Problem Dollar Tree should consider changing its pricing model to allow for the added expense of freezers, and the continued annual inflation that is being experienced throughout the country. They can do this gradually by keeping their pricing pattern the same, such as pricing points on the dollar. For general merchandise that the company can still import cheaply from China, they can retain a product line at $1. For non-perishable food items that have not been adversely affected by inflation, the company can do the same. For items that have been hit by inflation, and for perishable food items, including foods the must remain frozen, pricing will need to be gradually adjusted upwards to compensate for rising costs. Selection and Justification of Alternative The reality is that Dollar Tree will need to move away from pricing most of its products at $1. Simple inflation dictates this. To conduct a massive shift upward in price, however, could drive too many customers, causing revenue to spike downward. Many consumers, however, will respond positively to gradual price increases of products that they realize are being hit by inflation or increased expenses, particularly if they see that the company is retaining many of the products at $1. In addition, by keep pricing schemes simple, consumers will continued to relatively pleased by the ease of the shopping experience and the reality that can quite easily determine how much the items in their cart will costs. Also, if Dollar Tree can continue to offer products comparable to other discount chains, at a fraction of the cost, consumers will accept small price increases with the realization that they are still saving money on the products that matter most to them. Conclusion Dollar Tree is surely a marvel of the ultra-discount store concept in the United States. While others have come and gone, Dollar Tree has thrived, largely owed to their consistent business model and their ability to buy out competitors along the way. This has created a formidable chain of stores numbering nearly 5,000 today, with more plans for expansion on the horizon. The concept pricing most products at $1, however, is under threat due to the simple reality of inflation and the cost of doing business today. This paper has explored the various factors contributing this reality, in addition to proposing possible solutions that Dollar Tree can implement moving forward. It the company implements gradual and strategic change, they should continue to remain viable and competitive for years to come. References Gonzalez-Benito, O., and Martos-Partal, M. (2011). Store brand and store loyalty: The moderating role of store brand positioning. Marketing Letters, 22(3), 297-313. Hosken, D., and Reiffen, D. (2001). Multiproduct retailers and the sale phenomenon. Agribusiness, 17(1), 115-137. Parnell, J. (2014). Strategic management: Theory and practice. 4th Edition. Sage Publishing. Perrott, L. (1998). When will it be coming to the large discount chain stores? Psychotherapy as commodity. Professional Psychology, 29(2), 168-173. Vias, A. (2004). Bigger stores, more stores, or no stores: Paths of retail restructuring in rural America. Journal of Rural Studies, 20(3), 303-318. Read More