Discount Distortion: How Dollar Stores Actually Charge You More

Dollar General Store
Dollar General Store

Thanks to the recession and its long, slow recovery, discount stores are in vogue, and the hottest of the markdown merchants are dollar stores like Family Dollar (FDO), Dollar Tree (DLTR), and Dollar General (DG). Their revenues are exploding, earnings are off the chart, and stock prices are on the rise.

That's good news for investors. But what about everyday shoppers? Are they really getting their money's worth when shopping at these discount stores?

You would think the biggest discounts could be found at dollar stores; it's right there in the name. If it's a dollar it must be cheap, and if it's a dollar it must be a discount.

But a discount is more than just the cost of an item -- it's the amount that item is discounted versus the competition.

A true discount retailer will make less money on each item it sells than its competitors. And this is where dollar stores start to look a lot more expensive than competitors.

For example, for every dollar it sells, Dollar Tree makes $0.35 in profit and $0.067 in net income for owners. At Walmart (WMT), just $0.24 of each sale is profit and only $0.035 ends up in the owner's pocket. So who is the best discounter?

Company

Q1 2012 Sales Growth

Gross Margin

Net Margin

Dollar Tree

11.5%

35.0%

6.7%

Dollar General

13.0%

31.5%

5.5%

Walmart

8.6%

24.1%

3.5%

Target

6.1%

30.2%

4.2%

SuperValu

(5.0%)

22.8%

(5.1%)

Nash Finch

(3.7%)

7.6%

0.0%

Source: Company earnings releases.

It turns out that grocery stores are actually the most discounted places to shop (although that is skewed somewhat with food's high turnover).

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And the least discounted? You read the chart right -- it's dollar stores.

Discount Stuff or Just Cheap Stuff?

Dollar stores tend to carry a lot of off-brand items that cost less to begin with. So in order to do a true apples-to-apples comparison, let's look at the cost of some well-known name-brand products that can be found both at dollar and big-box stores.

I looked up the price for Tide laundry detergent, Planters mixed nuts, and Huggies diapers at both Dollar General and Wal-Mart. These were the first three products I looked up (which you'll have to take my word for) so I'm not picking and choosing winners here, just looking to do an apples-to-apples comparison. What you can see below is that on a per-unit basis, Walmart is significantly cheaper than Dollar General with every one of these products.

Company

Tide Laundry Detergent

Planters Mixed Nuts

Huggies Snug & Dry Diapers, Size 4

Dollar General

$10.95 -- 75 fl. oz

$0.15 per oz

$4.30 -- 8 oz

$0.54 per oz

$19.50 -- 74 count

$0.26 per diaper

Walmart

$11.97 -- 100 fl oz

$0.12 per oz

$6.48 -- 15 oz

$0.43 per oz

$22.94 -- 98 count

$0.23 per diaper

Walmart discount vs. Dollar General

18%

19.6%

11.2%

Source: Company websites

Here's where it gets interesting: Walmart may be cheaper on a per-unit basis, but what is also true in every case is that the price tag on each of these items at Dollar General is less than the price tag of the item at Walmart.

Size matters. Sizing products differently is a trick retailers use to obscure the true cost of their products. And from this small sample it appears that your dollar doesn't go as far at Dollar General, and the retailer makes more money on each dollar you spend.

So be a smarter shopper. Just because a store has "dollar" in its name doesn't mean it's less expensive than the competition. In fact, it's likely that you're paying more at a dollar store than you would at Walmart or Target for the same item. Keep that in mind next time you are looking for a discount. It may just save you some money.

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Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services have recommended creating a diagonal call position in Walmart Stores and buying calls on SUPERVALU.

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