Family Dollar: Is bad news for store good news for US economy?

By the looks of things, Family Dollar – a mainstay American dollar store franchise – has been doing bangup business: From rural Rutledge, Ga., to high-end neighborhoods here in the Atlanta metro area, newly built storefronts have been opening in rapid succession.

It's that expansion that made the news that Family Dollar is now suddenly retrenching by closing 370 stores so surprising. The announcement illuminates, at least to some economic analysts, the changing attitudes of the American consumer and how that impacts the big money behind cheap deodorant and chips.

The dollar store business – dominated by Family Dollar, Dollar General, and Dollar Tree – added 5,700 stores since 2009, expanding the five-and-dime footprint in American communities by a stunning 30 percent. But on news of Family Dollar’s problems, investors have now largely hit the brakes.

“Almost none of the analysts covering Family Dollar recommend buying" its stock, writes Bloomberg News in an analysis.

That turnarnound in investor sentiment may suggest a rumble of change in the American economy. After a half-decade of economic headwinds, Americans are, bit by bit, feeling richer as household worth has hit 5.1 percent annual growth. That, in turn, means more Americans may be eschewing the cut-rate merchandisers in favor of Walmart or even the mall.

“The current recovery period has been characterized by slower growth in household asset values than in previous recoveries, and until recently, muted growth in house prices,” writes LaVaughn Henry of the Cleveland Federal Reserve in a February analysis. “However, despite consumers being somewhat constrained in their ability to draw from expanding income and wealth sources during the recovery, the growth in their consumption remains stronger than one might expect.”

Others doubt that trend is really what’s at work in the dollar store segment. Americans are saving more than before the recession, and food stamp spending continues to rise, suggesting that the bargain lot business is still a good one, writes John Aziz in The Week.

“While the economy is recovering as a whole, times are still very tough for a lot of people – including most of those who make up dollar stores’ target audience,” writes Mr. Aziz. 

Family Dollar blamed the harsh winter for its disappointing returns, with profits down by 14 percent. But analysts say hefty local competition from other ultra-discounters and just regular discounters like Target and Walmart is what may really be at play.

“The saturated low-end marketplace makes it even more important for each retail chain to run a tight ship,” writes Business Week’s Kyle Stock. “The company with the best management … is the one that can afford to offer the lowest price.” [Editor's note: In the original version of this paragraph, the quotes were attributed to the wrong individual.]

To that end, Family Dollar, which is valued at not such a bargain-basement $6.4 billion, isn’t giving up. Its strategy going forward is a well-known one: Offer even lower prices.