Business Insider/Mary Hanbury
Dollar Tree is known for its $1 deals.
- Experts say that Dollar Tree, the discount store chain that sells products for $1 and under, will be the retailer worst hit by tariffs.
- This is in part because it has a less flexible business model than its competitors.
- Dollar Tree is likely to have to find new manufacturers outside of China or take a hit on margins, which could have "devastating" impacts on its business, one expert told Business Insider.
In September, President Donald Trump announced his latest round of tariffs on imports of Chinese goods. For the first time, the tariffs took a direct hit on retailers, prompting stores such as Costco, Walmart, and Gap to announce that they would likely be increasing prices on the consumer side further down the line.
On Monday, Bloomberg reported that another wave of tariffs on $257 billion worth of Chinese goods could hit as early as December.
While the resulting price hikes are likely to have a negative impact on these retailers in the eyes of the consumer, analysts say they will be shielded somewhat by strong consumer spending. However, it is the stores that don't have the option to raise prices or to cut costs elsewhere that will experience the most drastic consequences, and Dollar Tree is a shining example of that.
Not only is Dollar Tree in the direct firing line of tariffs, as around 40% of its products are sourced from China, but its unique business model also means it's more likely to suffer than its competitors, analysts say.
Dollar Tree is known for selling items for $1 or less and for operating on a low-margin, high-volume basis, which is dependent on low prices.
"The tariffs are more difficult for Dollar Tree than rivals because the company has a one-dimensional business model that is not easily flexed or changed," Neil Saunders, managing director of GlobalData
Saunders is referring to Dollar Tree's fixed $1 price point, which makes it almost impossible for it to increase costs on the consumer side without changing its entire business model. Moreover, as the very nature of its business is to be cost-cutting, there are very few ways to cut costs elsewhere.
"There is not much fat at any stage of the supply chain," Saunders said, comparing Dollar Tree to Dollar General or Walmart, which have more room to maneuver.
"They could, for example, raise prices on less price-sensitive categories to offset margin erosion on lower priced items. Or they could try and push higher margin products with in-store marketing or campaigns. Dollar Tree will struggle to do any of this as it has a ceiling on its prices and not many options to flex ranges. In short, there is just no easy win for Dollar Tree," he said.
Dollar Tree runs a no-frills shopping experience. Its stores are basic and light on staff, and there's almost no advertising.
Business Insider/Mary Hanbury
Dollar Tree stores are no-frills.
This means it's faced with an ultimatum: take a hit on margins or find new manufacturers.
The former could have a devastating effect on the business given that its margins are already thin, Jack O'Leary, a senior analyst at PlanetRetail RNG, told Business Insider.
O'Leary believes the best way around this is to seek out new manufacturers outside of China that have a similar cost structure.
"I don't think this is the last round of these tariffs," he said. "It really does seem like if they are over-indexed to China, this is going to continue to be a major risk going forward."
Moreover, if Dollar Tree makes cuts on the store experience, it risks driving its shoppers into the arms of its main competitor, Dollar General, which is already on a path to rapid expansion in the US. Dollar General is slated to open 900 stores at a rate of about three stores a day in 2018.
