Dollar store syndrome: low prices, lower pay

For dollar stores, business is booming. As the ranks of low-income Americans have grown over the past decade and a half, with the official poverty rate rising from 11.3 percent in 2000 to 15 percent today and real median household annual income falling by about $5,000 in the same period, a lucrative market has emerged in the business of discount retail. America’s downwardly mobile consumers have changing shopping habits, and the three largest discount store chains — Dollar General, Family Dollar and Dollar Tree — have responded by adding nearly 1,500 stores in 2013, for a total of 24,000 stores employing 246,000 people across the country.

But the pressures beneath this growth have posed a number of problems for executives. The first is competition for a growing share of what is increasingly a subsistence market, where prices are already so low that further cuts could threaten profits. One response is to propose mergers to control competition; in August a bidding war broke out between Dollar General and Dollar Tree over the sale of Family Dollar and its 7,900 stores.

But there are other problems endemic to that subsistence marketplace — such as an increasing reliance on low-margin consumables, high employee turnover and a rise in shoplifting — that corporate leaders appear much less capable of fixing. The soon-to-be-merged retail behemoth will continue to face these challenges, and managers will respond by cutting investment.

There is a better — and simple — solution: bolstering the income of those who live and work in the communities sustained by the deep-discount retailers. 

Securities and Exchange Commission filings from all three megachains acknowledge the risks of superintending a subsistence economy.

As Family Dollar reports, “slow job growth for our core customer resulted in an increased focus on basic needs and a reduction of discretionary spending.” This trend has squeezed the profit rate as higher-margin items sit on the shelves. Unemployment, underemployment, inflation, debt and taxes are all cited as factors that can hurt business by reducing people’s disposable income, and, as a result, their overall spending. To these risks Dollar General adds the threat of “decreases in government subsidies such as unemployment and food assistance programs.” Altogether, these are the things understood to constitute aggregate demand.

“The consumables category,” Dollar General’s filing notes, “which generally has a lower gross profit rate than the other three categories [home, apparel and seasonal], has grown most significantly over the past several years.” Dollar General reports that the growing shift “could result in ... a reduction in profitability due to lower margins” — a risk not just acknowledged by all three corporations, but borne out by the industry leader’s latest sales numbers.

In addition to low-margin sales making up a growing portion of total sales, the industry is further undermined by the constant threat of increased inventory “shrinkage,” more commonly known as shoplifting. Though the stakes are relatively low for companies with billions in yearly sales, the amount of stolen goods has been rising. Family Dollar lost $77.5 million to inventory shrinkage in 2013, compared with $55 million in 2012. Dollar General also reported an increased shrink rate but did not provide numbers in its annual SEC report. Beyond the pecuniary loss, a rise in shoplifting from discount retailers — theft, that is, of bare essentials — is one index of the type of market that has come to limit the sustained growth of the industry.

It’s not surprising that, in their filings, both Family Dollar and Dollar General note the difficulties of attracting and retaining skilled employees and the costs and risks of historically high turnover. The quality of the quarter-million jobs that move goods through the massive retail machine is rather poor. And as retail chains have grown, they have replaced small businesses that circulate profits into local economies with unstable and low-paying positions at corporations that do not. Flagging local investment depresses employment and wages and, ultimately, sales.

Employees understand this, particularly as it hits their paychecks and depresses their communities. Perhaps the most telling sign that there is a widespread desire for change is the dozens of class actions that employees have been filing against these companies over the past decade. Dollar General currently has eight wage and hour lawsuits in various stages of settlement. Dollar Tree has five and in recent years has settled 10 others. Family Dollar is currently litigating six wage and hour class actions and one gender-pay class action. The numbers outstrip those of other low-wage corporations, such as in the fast-food industry, where only recently have judges begun to consider corporations legally accountable for the conditions in their franchises.

Settlements have reached as high as $8.5 million; classes as large as 4,300 workers have been certified. By and large, these are Fair Labor Standards Act lawsuits, in which low-level managers, exempted by our factory-era labor law from overtime pay, allege they were misclassified, that their jobs were similar enough to nonmanagers to merit legally mandated overtime pay. But included as well are alleged state-minimum wage violations and suits redressing systematic pay and hiring discrimination against women and African-Americans.

The simple solution to all these problems is to increase pay. Doing so would not only increase employee retention and prevent lawsuits; it would also supplement the incomes of those who live in the communities where dollar stores operate. Higher wages could help offset sustained high unemployment and underemployment, which thwart sales, by stimulating consumer spending, bolstering the income of low-income communities throughout the country — communities where wages are spent on immediate consumption rather than tucked away and out of circulation. Because retail chains’ economies of scale allow them to undercut locally based competition, executives could rest assured that a portion of their employees’ higher wages would be returned in their stores.

It’s a simple solution, but it’s not easy — at least not politically. The purpose and structure of a for-profit corporation makes such voluntary economic planning that might temporarily lower profits all but impossible because of the company’s responsibility to satisfy shareholders.

In the union-dense manufacturing era, managers in favor of such changes could count on organized labor to bolster consumers’ buying power by redistributing income within firms — but today, on their own, they have no such luck.

In fact, many managers today try to depress their employees’ financial and occupational well-being and prevent them from organizing to demand better conditions.

Take Dollar General director and chairman William Rhodes III — also CEO of Autozone — who is a director of the Retail Industry Leaders Association, a trade group representing 200 brands such as Walmart, Target, CVS and Dollar General. Together with Dollar General CEO Richard Dreiling, Rhodes and the rest of the association’s retail executives direct campaign funding to U.S. senators such as Georgia’s Johnny Isakson, who, once elected, go on to introduce legislation such as the Representation Fairness Restoration Act of 2013, a narrow law designed explicitly to overturn an National Labor Relations Board decision allowing employees to form microunions, which represent and bargain for small portions of the workforce. It’s not just labor law violations that have become an integral part of corporate strategy.

If the C-suites can’t be counted on to improve workers’ situations, unions and workers’ centers can advocate against managers’ prerogatives and force corporations to respond to demands beyond those of their shareholders. Unfortunately, given the extreme disadvantages American employees face when attempting to act collectively at work, relying on unions will not get anybody far.

If shareholders want to maintain the sprawling distributional networks they have financed for the long term, they could step up and play the structural role once played by unions — or at least demand that employees of the companies they invest in be paid fairly and treated well. They could take a hit on profits and avoid closing stores. And if their employees can suddenly afford more, that might be a good thing for everyone.