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Surprise: Dollar Tree’s $1.25 price strategy is actually working

<i>Frederic J. Brown/AFP/Getty Images</i><br/>A shopper walks by a sign displaying $1.25 price
AFP via Getty Images
Frederic J. Brown/AFP/Getty Images
A shopper walks by a sign displaying $1.25 price

By Nathaniel Meyersohn, CNN Business

When Dollar Tree said it would raise prices to $1.25 after 35 years sticking to $1, some fans protested and industry analysts questioned the decision.

A year later, the controversial move appears to be paying off.

Higher prices have added to Dollar Tree’s sales. The switch has also allowed the company to introduce merchandise it couldn’t previously sell because of its $1 price constraint, helping it draw new shoppers. Other companies have also raised prices, so Dollar Tree has been shielded from major customer blowback.

Sales at Dollar Tree stores increased 8.6% last quarter compared to a year ago, the company, which also owns Family Dollar, said Tuesday. Family Dollar sales increased 4.1% last quarter.

“Our transition to the $1.25 price point has enabled our merchants to greatly enhance value,” Dollar Tree CEO Michael Witynski said on a call with analysts Tuesday. Dollar Tree has more than 8,000 stores.

Dollar Tree said a year ago it raised prices to offset higher costs and to improve the quality of its merchandise, which comes in small packaging sizes.

The company’s product selection had suffered from having to keep everything under $1 and its sales were sluggish.

Dollar Tree was forced to discontinue several “customer favorites,” the company previously said, because it couldn’t keep them under $1 — particularly packaged and frozen foods and household essentials.

“Our consumable sales continued to decline quarter after quarter because of the product availability and the assortment we just couldn’t provide for the customer at that $1 price,” Witynski said Tuesday.

Dollar Tree has since brought back some of these items at $1.25 and expanded its offerings of meat, pizza, breakfasts and other consumable items. These additions have led to sales growth again.

“We like the business and the reaction we’re seeing from the customers based on us being able to have a better assortment,” he said.

Dollar Tree is also adding more $3 and $5 items to stores, building on a previous strategy.

Still, Wall Street remains cautious about the company’s long-term prospects. Dollar Tree’s stock tumbled 8% during Tuesday because it lowered its profit expectations for the year.

Customers have been pressured by inflation and are switching from discretionary items to everyday necessities, which are less profitable for Dollar Tree.

“The economy continues to pressure middle and low household income customers, resulting in needs-based purchasing,” Dollar Tree finance chief Jeffrey Davis said.

The company said it’s drawing more higher-income customers than its typical demographic. These customers are buying necessities at stores to try to stretch their budgets.

Walmart, Dollar General and other discount chains have also said in recent months that they are gaining new, wealthier customers trading down because of inflation.

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