Dollar Tree Raises Prices 25%, Most Items Will Cost $1.25

The Dollar Tree announced Tuesday that it will raise prices from $1 to $1.25 on the majority of its products by the first quarter of 2022. The change is a sign of the pressures low-cost retailers face holding down prices during a period of rising inflation. Dollar Tree said in a quarterly earnings release Tuesday that its decision to raise prices to $1.25 permanently, however, was "not a reaction to short-term or transitory market conditions." Rather, the price increase will give Dollar Tree more flexibility to reintroduce some of its best-selling items, expand its product selection, and bring new products and sizes to its stores. Dollar Tree also said that hiking prices will help the company increase its profit margins by "mitigating historically high merchandise cost increases," including freight and distribution costs, as well as wage increases.

Total Retail's Take: The rising costs we've seen for manufactured goods as well as freight and distribution have put historically low-margin businesses, including grocery and dollar stores, under immense pricing pressure. In an email sent to Total Retail, Shelley Kohan, a professor and retail expert at Syracuse University’s Whitman School, offered her thoughts on Dollar Tree's decision to increase its prices:

“The problem with the Dollar Tree business model is that at some point inflation would eventually lead to many prices of product to be more than a dollar. While customers will be sad to see the 35-year-old mantra die out next year when the company has no choice but to raise prices, shareholders are more positive about the pivot of the business.

“The extreme value sector of the retail business had a strong performance throughout the pandemic alongside discount stores and other essential retailers. Dollar Stores Incorporated experienced 8 percent sales growth in 2020 on top of 3.5 percent the year prior. Profits increased to 6.8 percent of net sales as compared to 2019 at 4.7 percent, however, recent pressures on the supply chain have caused the cost of goods to rise.

“The Dollar Store has experienced gross margins between 30 percent to 31 percent over the past three years, however, in 2021, the margin has narrowed to under 28 percent for the third quarter. Net profits for Q3 were 3.4 percent of sales compared to the same period last year at 5.3 percent. The bottom line is the current model isn't sustainable in a highly competitive marketplace.

“By increasing pricing beyond a dollar, Dollar Tree can offer customers a broader assortment of products and maintain a profit model that can support the long-term success of the business. But will customers buy into higher prices?”