From the rise of Temu to the closing of 99 Cent Stores

In the past few days, the “99 Cent Store” in the United States has been crowded with customers, and customers have rushed to buy goods, hoping to enjoy the last “cheap” before the store closes.

Since its establishment in California in 1982, 99 Cents Only has focused on low-cost products, with all products priced at 99 cents or less. It has become an important channel for low-income people to shop and maintain their lives. In 1996, the company went public on the New York Stock Exchange, making founder Dave Gold a billionaire. For decades, 99 Cent Stores has been one of the representative chain brands in the discount retail industry in the United States, with 371 stores and more than 10,000 employees.

However, the 42-year-old store struggled in the battle against U.S. inflation for 14 years and ultimately failed to win. Last week, interim CEO Mike Simoncic announced that the company was in bankruptcy and planned to close 125 stores by the end of this month, and the remaining stores will be closed by May 31. 99 Cent Stores has not been profitable for years, and according to the bankruptcy filing, the company’s assets and liabilities exceeded $1 billion, meaning its net worth was close to zero.

Although other “dollar stores” in the United States such as Dollar Store and Dollar Tree are also facing greater operating difficulties, the situation is not as bad as the 99-cent store. For example, Dollar Company’s revenue for the fiscal year ending in February 2024 was US$38.7 billion, a year-on-year increase of 2.2%; net profit was US$1.7 billion, a year-on-year decrease of 31%. As of the same period, Dollar Tree’s operating income was US$30.6 billion, a year-on-year increase of 8%; but its net loss was US$1 billion, a year-on-year decrease of 160%. In order to maintain market share, Dollar Tree and Dollar Tree have also made the decision to close stores and suspend their original store expansion plans.

In the 1980s when the 99 Cent Store was established, the United States was experiencing an economic crisis, with severe inflation, high unemployment, and plummeting consumption power. The U.S. Census reported that the national poverty rate in 1983 was the highest in 18 years. Against this background, everyone tends to buy bargains, especially those in the lower-income market who are trying to save money.

The 99-cent store is positioned in the sinking market and provides a variety of products, including daily necessities, fresh vegetables, food, etc., and most of the products only sell for 99 cents. This “single price” retail concept greatly meets the shopping needs of low-income consumer groups. Starting in California, 99 Cent Stores gradually expanded to Arizona, Nevada and Texas.

As early as the 1930s, a number of retail discount stores had appeared in the United States, mainly targeting the middle class and below, with product prices mostly below $5. Among them, Dalle was an early representative company. It was listed on the New York Stock Exchange in 1968 and was the first to enjoy this market dividend.

In the 1950s, with the rapid development of the American economy, the gap between the rich and the poor gradually widened, and “dollar stores” began to become popular in poor villages and towns in the southern United States. Family Dollar was established during this period, with products priced mainly at one dollar, and was successfully launched in 1970. Although the Dollar Tree was also established during this period, it was initially just a grocery store.

The rise of the 99-cent store was an important turning point, further popularizing the “one price” model. Through differentiated pricing strategies, 99 Cent Store has successfully found a gap in the market and avoided direct competition with large retailers such as Wal-Mart, Kmart, and Costco.

In 1986, Dollar Tree underwent a strategic transformation from a grocery store to a “dollar store”, targeting low- and middle-income groups that were not fully covered by Wal-Mart and other stores.

In the mid-to-late 1990s, a large number of Latin American immigrants poured into the United States, and the demand for cheap goods grew rapidly. At the same time, the establishment of the North American Free Trade Area and China’s accession to the WTO in 2003 have provided broader global purchasing channels for “Yuan Stores”.

Since then, “Yuan Stores” have gradually expanded to major cities in the United States, and their year-on-year revenue growth has significantly exceeded the sluggish performance of the U.S. retail industry.

In 1995, Dollar Tree was listed on Nasdaq. The following year, 99 Cent Stores also traded on the New York Stock Exchange.

After going public, Dollar Tree launched an acquisition campaign and expanded rapidly, acquiring five dollar store companies within ten years. In 2015, it spent $8.5 billion to acquire Family Dollar stores.

At the same time, 99 Cent Stores has adopted a steady development strategy. It is understood that its annual procurement and import volume reaches 13,634 standard containers, showing its activeness in global procurement. Dollar has shown long-term stable growth, even attracting Buffett’s short-term investment in 2012.

From the 1980s to the present, the above-mentioned companies have been leaders in the decades-long American cheap goods market.

However, the decision to close 99 Cent Stores caused a huge shock in the global retail market. This incident means that this business empire that was once regarded as a “shopping paradise” by countless low- and middle-income consumers has officially declined.

After the 2008 global financial crisis, the United States fell into a period of inflation, with food and fuel prices soaring, the cost of goods rising, and minimum wage increases. Against this backdrop, retail stores face a difficult choice: maintain prices and take losses, or raise prices. The 99 Cent Store made adjustments, announcing that it would increase the price of all items by 0.99 cents and price some items above $1, thus departing from its long-standing pricing strategy.

However, this adjustment did not solve the profitability dilemma. In 2011, private equity firms Aris Management and the Canada Pension Plan Investment Board purchased 99 Cent Stores for $1.6 billion.

After 2018, the U.S. government began to impose additional tariffs on Chinese goods exported to the United States, resulting in increased logistics, transportation and wage costs. Since most of the 99 Cent Store’s orders come from China, logistics and tariff costs become a huge expense, further squeezing profit margins.

The outbreak of the epidemic has exacerbated inflation and consumers have become more cautious. At the same time, the U.S. government has cut or stopped welfare policies, which has put great pressure on low- and middle-income consumers. This group of consumers is the main customer group of “dollar stores”. For example, about 10% of Dollar General’s sales come from this group of consumers. Therefore, the consumption impact stimulated by subsidy benefits alone may cause sales at these “dollar stores” to decline by approximately 1-1.5%.

While high inflation appears to be attracting more consumers to dollar stores, industry insiders point out that overall consumer spending has shrunk further after persistently high inflation and the end of government aid, which has hit discount store profits.

Against this background, in November 2021, Dollar Tree announced that it would increase the price of its original $1 products to $1.25, which means that one-dollar products have become history. As American consumers continue to downgrade, Dollar Tree is gradually becoming Americans’ RT-Mart. In 2022, among the 5 million new customers added by Dollar Tree, 2.6 million have household incomes of more than $125,000, and many users choose to pay with credit cards instead of cash.

However, the economic downturn has also led to an increase in theft incidents, bringing direct economic losses and greater management pressure to these dollar stores. According to the 2023 U.S. Retail Security Survey, theft cost the U.S. retail industry $86.6 billion in 2022. Both Dollar Tree and Dollar General mentioned in their financial reports that out-of-control theft was one of the main reasons for the decline in revenue. 99 cent stores face the same problem.

In March of this year, Dollar Tree announced that it would close nearly 1,000 stores (mainly Family Dollar stores) nationwide. Subsequently, 99 Cent Stores also announced that all stores would be closed. Dollar General also plans to close some stores with excessive management costs and gradually withdraw from big cities and turn to rural markets.

Additionally, these dollar stores face the challenge of rejection from home. Smith, a senior fellow at the National Institute for Local Economic Self-Reliance, said many local communities are beginning to resent the chain of dime stores. According to his statistics, more than 70 cities and towns have recently rejected plans to open $1 stores, and more than 50 U.S. cities have enacted laws restricting the expansion of dollar store chains.

Some industry insiders believe that during times of greater economic pressure, some communities may prefer to reserve daily necessities business and related employment opportunities to local small and medium-sized businesses and employees.

Since Temu was launched in the United States, it has had a significant impact on the U.S. retail market, especially on retailers such as “dollar stores.” Temu’s market positioning, consumer groups and product categories are highly overlapped with these “dollar stores”, but it has some unique competitive advantages.

Temu’s biggest advantage lies in its fierce price war strategy. Taking advantage of China’s excess light industrial production capacity and the temporary tariff concessions in the United States, Temu has successfully reduced the price of goods to extremely low levels, and provides free shipping and no-question returns. This strategy has great appeal to low- and middle-income Americans.

In addition, Temu also excels in marketing. Backed by Pinduoduo, Temu has the courage to invest huge sums of money in advertising, such as twice placing heavy-dollar ads in the US Super Bowl. Its slogan “Shop like a billionaire” is deeply rooted in the hearts of the people. This generous marketing strategy is difficult for American “dollar stores” to imitate at this stage.

According to data from data analysis company Earnest Analytics, Temu accounted for nearly 17% of the market share in the U.S. discount store category in November last year, while the market shares of traditional “dollar stores” such as Dollar General and Dollar Tree have declined to varying degrees. decline. In addition, Temu’s low-priced home furnishings and consumer goods pose a greater threat to brick-and-mortar discount stores.

However, despite Temu’s notable success in the U.S. market, traditional dollar stores are still struggling to maintain their market position. They face multiple pressures such as inflation cycles, revenue declines and market competition. In order to cope with these challenges, some “dollar stores” are pursuing innovative strategies, such as 99 Cent Stores, which is working hard to save 143 stores in Southern California to continue to provide consumers with high-quality goods and great prices.

Overall, the rise of Temu has accelerated the increase in e-commerce penetration in the United States and changed the consumption habits of locals. However, for traditional “dollar stores”, they still need to deal with challenges such as inflation cycles, market competition and declining revenue. It remains to be seen how the competitive landscape will evolve in the future.