America's 'permanent underclass' isn't going anywhere — and that's great news for stores like Dollar General and Dollar Tree

  • Dollar stores are thriving in 2018 because poorer Americans still can't afford shopping at other retailers, according to Morgan Stanley analysts.

  • "We think a 'Goldilocks' scenario is playing out for the Dollar Stores: low-end consumer health continues to improve ... while likely not improving so much as to cause significant trade-up," the note reads.

  • Retailers like Dollar General, Dollar Tree, and Family Dollar rely on what one expert calls a "permanent underclass" to drive business.

Dollar stores are thriving in 2018 as lower-class Americans seem unlikely to substantially improve their financial position enough to shop elsewhere.

Morgan Stanley analysts reiterated optimism on the future of companies such as Dollar General and Family Dollar in a note to investors on Tuesday. According to analyst Vincent J. Sinisi, poorer Americans' improving financial situation doesn't mean these shoppers will be able to afford other retailers.

"We think a 'Goldilocks' scenario is playing out for the Dollar Stores: low-end consumer health continues to improve, increasing spending power of the Dollar Stores' core customer, while likely not improving so much as to cause significant trade-up out of the Dollar Store channel," the note reads.

If poorer Americans can afford to spend more money, dollar stores benefit. And, according to Sinisi, lower-income households have been driving recent improvements in consumer confidence. However, if shoppers earn enough to regularly shop elsewhere, dollar stores can lose big.

"Essentially what the dollar stores are betting on in a large way is that we are going to have a permanent underclass in America," Garrick Brown, director for retail research at the commercial real estate company Cushman & Wakefield, told Bloomberg in 2017.

Executives realize that their business depends on customers essentially falling short of the American middle class.

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"The economy is continuing to create more of our core customer," Dollar General CEO Todd Vasos told The Wall Street Journal.

The company's target shopper comes from a household making $40,000 or less a year.

"We are putting stores today [in areas] that perhaps five years ago were just on the cusp of probably not being our demographic, and it has now turned to being our demographic," Vasos said.

From 2010 to 2015, dollar store sales grew from $30.4 billion to $45.3 billion in the US. Dollar General and Family Dollar opened hundreds of stores in the last year, with Dollar General planning to open 900 more in the US in 2018.

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