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Improving Economy Hits Discount Stores in the Pocketbook

The most recent earnings for Dollar General and Dollar Tree were healthier than rival Family Dollar's, but each one missed Wall Street's estimates as the economy has begun to improve.

Growth in the discount-store sector "really started to slow in the last six to nine months," says Nick Mitchell, a senior vice president at Northcoast Research.

That's an about-face from the huge success the sector saw during the recession and in its wake. As the downturn squeezed the pocketbooks of the middle class, sales growth in the variety store sector which includes dollar stores surged. Sales grew 6.4 percent in 2008, then 7.9 percent, and 9.6 percent in the following two years, respectively, according to Euromonitor. Growth has been stuck at 7.6 percent for the past two years, and Euromonitor projects that sector sales will increase by 3 percent in 2013, and by 3.7 percent this year.

There are a multitude of factors causing sales to slow. Some of it is due to the fact that penny-pinched customers who downgraded to discount stores during the recession are now reverting back to their preferred retailers. "The middle- to upper-class consumer, making $75,000 to $80,000 a year traded down in 2009, 2010, [and] 2011 because maybe one family member lost their job. Those households are trading back up; they're giving more money to grocery stores and a little to the Targets and Costcos of the world," says Mitchell.

Luckily for dollar stores, the recovery hasn't hit all shoppers equally. Those making $40,000 or less still feel the need to shop at discount stores, Mitchell says. That would be good news for dollar stores it it weren't for the $8.6 billion cut to food stamps that Congress passed as part of the farm bill in February and the long-term unemployment benefits that the House of Representatives has failed to extend. Those benefit reductions are hitting the dollar stores especially hard, since an estimated 40 percent of their customers receive some sort of government assistance.

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