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Dollar store customers unconvinced by proposed change to pricing | Financial Times

A Manhattan-based hedge fund manager thinks he knows what is best for Dollar Tree. Starboard Value’s Jeff Smith argues the US discount variety chain should stop insisting on pricing every item — from spatulas to sunglasses — at only $1.

But 760 miles away in suburban Nashville, customers are unconvinced. “They’d lose a lot of business,” reckons Vicky Lewis, 37, laden with bags in a Dollar Tree car park. “We need more affordable stores, not less.”

The nurse returned to the Nashville area recently from a lengthy stint in California and was surprised at the cost of living. She visits the Madison dollar store frequently to supplement trips to Walmart and has just spent $12 on snacks for the family.

Despite the seemingly unstoppable rise of value-focused retailing, Dollar Tree’s recent financial performance has underwhelmed. The company has struggled to revive the fortunes of the underperforming Family Dollar, which it bought in 2015 for about $9bn. Dollar Tree shares have lost 4 per cent over the past year while its rival Dollar General is up more than a fifth.

Starboard, a $6bn fund that has pushed for change at other retailers including Macy’s and Staples, took a 1.7 per cent stake last month. Along with his call for the company to explore a sale of Family Dollar, Mr Smith has made his demand for it test differently priced items in Dollar Tree a centrepiece of the activist campaign.

Dollar Tree was originally known as “Only $1.00” before it changed its name in 1993, but in contrast to the two other chains it has continued to sell everything for a buck.

Starboard argues that inflation — one dollar in 1986 is worth about $2.30 today — has made the pricing strategy increasingly untenable. In a letter to Gary Philbin, chief executive, Mr Smith says the retailer had been forced to cut package sizes, reduce quality or stop selling some products that customers would otherwise buy.

Rising world trade tensions only make matters worse by exacerbating inflationary pressures, he writes. In any case, says the Wharton-educated former M&A banker, sales tax means customers do not in practice pay $1 at the checkout. In Madison, customers pay $1.09. He argues the pricing rigidity has resulted in “meaningful underperformance”.

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Dollar store customers unconvinced by proposed change to pricing | Financial Times.