The dollar store models of Dollar General (DG) and Dollar Tree (DLTR) — essentially to pay workers federal minimum wages and move cheaply sourced merchandise at high volume — may be put to the test should a new Democrat proposal to lift the minimum wage to $15 an hour gain steam.
Dollar General and Dollar Tree could be forced to shell out as much as $700 million and $500 million, respectively, more in annual wages by 2025, according to new research out of Jefferies (see charts below) if The Raise the Wage Act of 2021 goes through as proposed. The act calls for gradually raising the minimum wage from $7.25 an hour currently to $15 an hour by 2025.
“A minimum wage increase would put more money in the hands of Dollar General and Dollar Tree’s customers, but it would also increase costs for the retailers,” warns Jefferies analyst Randal Konik. “Note, Dollar General and Dollar Tree employ roughly 157,000 and 193,000 employees (full-time and part-time combined), respectively.”
The federal minimum wage hasn’t been raised since 2009 despite across the board inflation in things like rent payments and medical costs. And the dollar stores have continued to pay those meager wages in their most densely populated locations.
“In our analysis, we found that in states where Dollar General is most concentrated (i.e. >50% of the company's store base is located in 10 states), the current average minimum wage is $7.79. In states where Dollar Tree is most concentrated (i.e. > 50% of the banner's store base is located in 10 states), the current average minimum wage is $9.36. In states where Family Dollar is most concentrated (i.e. > 50% of the banner's store base is located in 9 states), the current average minimum wage is $8.43,” Konik points out.
Dollar Tree operates more than 15,600 stores in 48 states, while Dollar General clocks in with about 17,000 stores in 46 states.
But the winds of change are starting to blow in the faces of the dollar stores.
President Biden has swung the door wide open on the minimum wage debate in the early days of his presidency. He called for it to be included in a new $1.9 trillion stimulus plan designed to fight the COVID-19 pandemic, although he has recently backed off on having it stuffed into the recovery plan. Democrats have since proposed The Raise the Wage Act of 2021.
In November 2020, Florida voters approved a ballot measure to gradually lift the minimum wage to $15 by 2026. The lowest paid workers in the state now earn $8.65 an hour, up from $8.56 an hour in 2020. It will move to $10 an hour on Sept. 30.
A total of 20 states raised their minimum wages on Jan. 1 as they march to the $15 an hour mark, Yahoo Finance Ben Werschkul writes.
The rising cost of labor could force the dollar stores to find clever ways to protect profits, seeing as they can’t exactly raise prices too much. They could slash inventory to contain costs, slowdown the pace of new store openings or venture further into new categories such as fresh food. Another option could be to expand the number of well-known national brands in a bid to get customers to spend more (and those employees who will have those higher hourly wages).
Konik believes Dollar General should be able to navigate the likely wage inflation.
“Dollar General could be better equipped to offset a potential rise in wages given the company's long list of top-line and margin enhancing initiatives (DG Fresh, NCI, Fast Track, Digital, etc.). Dollar Tree’s initiatives (DT Plus! at DT and H2 remodels at FD) should be beneficial to the company's top-line and profitability, helping to mitigate potential headwinds, but we recognize that the Dollar Tree banner is still in the early innings of DT Plus!, which we believe could be a meaningfully positive catalyst for the banner, in time, if executed properly,” Konik says.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Find the latest in business and finance news here.
What’s hot from Sozzi:
Melinda Gates: we are giving $250 million more to the COVID-19 relief effort
Olympics great Michael Phelps: the COVID-19 pandemic hasn’t been all smiles for me
Watch Yahoo Finance’s live programming on Verizon FIOS channel 604, Apple TV, Amazon Fire TV, Roku, Samsung TV, Pluto TV, and YouTube. Online catch Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, and reddit.