You know, it's funny, usually when you watch
a magic trick, you're fully aware that you're
being fooled. Oh yeah, definitely. You're expecting.
Exactly. You watch the magician's right hand
doing all that theatrical waving with the wand,
and you just completely ignore the left hand
casually slipping the coin into their pocket.
I mean, it's classic misdirection. Right, it's
the grand illusion. You pay for the spectacle,
you inherently understand the rules of the game,
and you willingly suspend your disbelief to just...
You know, enjoy the show. Yeah. But, um, what
if I told you that you willingly walk into this
exact same kind of grand illusion all the time,
completely unaware? Really? All the time? All
the time. Every time you step out of your car
to grab, like, some cheap party supplies or a
heavily discounted greeting card or just a quick
snack, you are stepping onto the stage. Oh, I
see where you're going with this. Yeah, I'm talking
about the variety store. You know, the dollar
store, the pound shop, the five and dime. The
absolute titans of modern retail. Exactly. So
welcome to the Deep Dive. Today, our mission
is to explore how these seemingly simple, ultra
cheap stores morphed into this massive $77 billion
industry. Which is just a staggering number when
you think about it. It really is. I mean, an
industry that, believe it or not, actually has
more locations than drug stores and generates
higher annual sales than massive traditional
giants like Macy's. So, OK, let's unpack this.
Yeah, and to set the table properly here, we
really need to clearly define the of what we're
actually looking at in these sources. Right,
because not all discount stores are the same.
Exactly. A variety store is specifically a retail
environment selling general merchandise. So that
encompasses apparel, toys, basic hardware, dry
goods, and, well, an increasingly large selection
of groceries. Which we will definitely get into
later. Oh, for sure. But the absolute key differentiator
here, the engine of the whole operation, really,
is that they sell these goods at discounted and
very rigid fixed price points. So like the classic,
you know, five and 10 cents back in the day.
Right. Historically, it was five and 10 cents.
More recently, it's a single dollar or a single
pound and we are deliberately separating these
from general merchandise super stores like Target
or warehouse clubs like Costco. Because they
just operate differently right? Yeah totally
different. Those giants operate on completely
different fundamental economic principles. Okay
so before we figure out how these stores completely
took over the modern retail landscape we really
have to understand the foundational mechanics
of their survival. Which is honestly the most
fascinating part. Right. Because how exactly
does a massive corporation make billions of dollars
in revenue when the things they are selling literally
cost pocket change? I mean, the math feels like
it shouldn't work. I'm assuming there's like
a heavy reliance on the classic volume play.
Oh, absolutely. The volume play is the bedrock.
You are buying and selling vast, almost unfathomable
amounts of goods at heavily discounted prices.
Like mountains of plastic combs and stuff. Exactly.
A store might only make a microscopic fraction
of a penny in actual profit margin on each individual
plastic comb or say a pack of batteries. Just
a fraction of a penny. Just a fraction. But you
multiply that fraction of a penny by millions
of daily transactions across thousands of stores
globally, and suddenly you have a multi -billion
dollar enterprise. But sheer volume alone can't
be enough to sustain a massive corporate infrastructure,
right? I mean especially when supply chain costs
fluctuate. This is where my magician analogy
comes back into play. Let's hear it. Okay, so
you walk into a dollar store and you see a sturdy
kitchen spatula for a dollar. Your brain instantly
registers like, wow, what a steal. A spatula
is usually four or five bucks. Right. You feel
like you just won the lottery. Exactly. But you
are so completely distracted by the amazing deal
on that spatula that you toss a tiny travel size
bottle of generic shampoo into your basket. also
for a dollar. And you don't even realize you
just severely overpaid for that shampoo based
on its volume. Yes. It is brilliant retail misdirection.
What's fascinating here is how effectively this
taps into human psychology. The consumer's brain
basically shuts off its usual rigorous price
checking mechanism the exact moment they cross
the threshold of a designated discount store.
Wow. So we just stop thinking critically. Pretty
much. retailers purposely price certain items
higher than a standard grocery store would, specifically
to capitalize on this psychological blind spot.
That is wild. Yeah, because you see heavy, legitimate
discounts on anchor items in the store. Your
brain falsely assumes everything in your basket
must be an equal bargain. Man, that is legitimately
terrifying. It's like this cognitive vulnerability
that they have completely monetized. That's exactly
what it is. If I'm running one of these stores
and I am fundamentally forced to sell everything
for a single rigid dollar, I mean, I can't just
call up a premium brand and bully them into taking
a 90 % pay cut, right? No, definitely not. So
I have to fundamentally alter the product itself.
Yeah, you have to engineer the product backward
from the price tag. Shrinkflation is a massive
tactic here. Oh, shrinkflation. Right. You are
not getting the standard family size bottle of
body wash. The manufacturer will actually retool
their factory line to produce a smaller unit
size specifically manufactured for that dollar
store contract. Oh, wow. So they make a special
tiny version just for them. Exactly. So the next
time you, the listener, pick up your favorite
brand name deodorant at a variety store, look
closely at the net weight. You are paying a dollar,
but you might be getting like half the product
you would get at a local pharmacy. Meaning your
cost per ounce is actually significantly higher.
Way higher. You think you're getting a deal on
a brand name, but you're actually paying a premium
for the illusion of a deal. Right. And if they
aren't shrinking the package, they're swapping
out the materials, relying on like generic brands
or private labels that use cheaper plastics,
cheaper textiles, or just lower cost chemical
formulations. Yep. And then, of course, you have
to factor in the gray market. OK, wait. Let's
define the gray market for a second because it
sounds super illicit. It does sound like a cartel
thing. Yeah. But it's actually just a massive
loophole in global distribution, isn't it? It
is. It's completely legal. But it operates outside
of brands' intended distribution channels. Yeah.
Let's say a major toy manufacturer overproduces
100 ,000 action figures intended for the European
market. OK. And they don't sell. Right. They
flop. So Liquidator buys that massive surplus
for absolute pennies on the dollar and redirects
those shipping containers to a U .S. discount
chain. Oh, I see. The brand never intended for
their premium toy to be sold in a discount bin
in Ohio, but because the Liquidator bought them
legally, the dollar store can stock them. They
act as a vital release valve for the global supply
chain's mistakes. So they're basically the ultimate
buyers of Last Resort. Exactly. And it's not
just plastic toys either. There's this fascinating
regional dollar store in the Syracuse, New York
area called Real Deals. Oh, yeah. Real Deals.
Yeah. They apply this exact same buyer of Last
Resort logic, but to surplus and out -of -date
food. Which is wild. Real Deals operates almost
entirely on surplus groceries. And looking at
how they operate... reveals a massive legal divergence
globally when you check the sources. Really?
How so? Well, in the United States, it is generally
perfectly legal to sell most items completely
regardless of their printed sell -by date. Wait.
Really? Just totally ignore the date? Pretty
much. The FDA generally views those dates as
indicators of peak freshness, not strict safety
deadlines, with a few exceptions for certain
perishables, of course. OK, so a box of cereal
or like a can of soup that is technically past
its prime is perfectly legal to put on the shelf,
slap a massive discount sticker on it, and just
sell to a consumer. Exactly. The U .S. regulatory
environment allows it, which provides this massive
pipeline of ultra -cheap inventory for discount
stores. That makes sense. Yeah, food distributors
who are about to take a total financial loss
on expiring warehouse goods can just offload
them to these stores. Right. But if you look
at the United Kingdom, the legal landscape is
entirely different. Oh, they don't allow that.
No, the Food Standards Agency over there makes
selling goods after their use -by date strictly
illegal. Wow, strictly illegal. That's a huge
difference. It is. That fundamental difference
in regulation totally alters the mechanics of
what kind of surplus stock these stores can utilize
to maintain those ultra -low price points, depending
on the country. This entire model, I mean, the
psychological pricing, the rigid backward engineering
of package sizes, the ruthless scavenging of
global supply chains, it all feels so calculated.
It's a machine. It really is. You'd assume it
was cooked up by a modern algorithm in Silicon
Valley or something. But this is the foundational
DNA of modern retail, isn't it? Oh, yeah. It
goes back well over a century. The true pioneer
of this model was Frank Winfield Woolworth. Right,
Woolworth's. Yeah. Back in the late 1870s, he
noticed the localized success of these early
scattered nickel stores operating in Michigan
and Western New York. Just selling stuff for
five cents. Right. So he decided to test the
concept on a larger scale. On February 22, 1879,
he opened his great five -cent store in Utica,
New York. The prevailing business logic of 1879
dictated that he was completely out of his mind.
Yeah, they thought he was crazy. Yeah, the idea
that you could pay commercial rent, pay a staff,
handle logistics, and maintain a functional business
by selling nothing but five -cent items. It completely
defied every standard economic principle of the
era. Retailers assumed the margins were far too
microscopic to sustain a standalone business.
Because five cents is just nothing. Exactly.
But Woolworth proved that if the volume was high
enough and the sourcing was tight enough, the
microscopic margins aggregated into massive wealth.
He literally created the American institution
of the five and dime. And as soon as Woolworth
proved the math worked, the floodgates just opened.
You ended up with this massive graveyard of dime
stores that popped up over the subsequent decades.
Right, they were everywhere. They dominated local
main streets and eventually died out. You know,
names like Neisner's, TG &Y, WT Grant's, Sprouse
Wright's. But some of those early experiments
didn't die. They just mutated into something
much bigger. I mean, S .S. Kredge Company eventually
evolved its format and became Kmart. Walton's
Five and Dime famously became Walmart. It's amazing.
The biggest big box retailers on Earth share
the exact same evolutionary ancestor. Yeah. But
the traditional variety store model did hit.
a massive mid -century slump. Oh, right. The
suburbs. Exactly. As populations moved out to
the suburbs in the 50s and 60s, consumer habits
shifted heavily toward massive indoor malls.
Which were huge back then. Huge. And the variety
store started losing significant ground to highly
specialized discount drug stores, massive office
supply chains, and dedicated toy stores. By 1997,
Woolworth's had closed its very last US store.
You know, retail historians love to say the mall
killed the variety store, but that doesn't actually
track with what the sources show happened next.
No, not at all. The late 90s saw an absolute
explosion of dollar stores. They didn't die.
Wait, didn't they just shed their skin? That's
a great way to put it. Yeah, they stopped trying
to compete with the mall and instead made themselves
the hyper convenient alternative you hit on your
way home because, you know, you don't want to
park half a mile away at a mall just to buy a
roll of scotch tape and some AA batteries. If
we connect this to the bigger picture. that pivot
to convenience is the key to their modern dominance.
They completely abandoned the massive footprints
and instead focused on freestanding smaller stores.
Just popping up everywhere. Right. They acted
like water, basically filling in the cracks of
the retail pavement where massive supermarkets
and malls simply couldn't fit. small rural towns,
dense downtowns, and tight neighborhood corners.
Convenience became their ultimate weapon. It
drove impulse purchases. You run in for paper
towels, you leave with candy, a cheap screwdriver,
and a greeting card. And that convenience allowed
them to actively replace other retail types.
Since 1998, this dollar store industry has grown
by 43%. 43%. Yes. To visualize that scale. By
2018, Dollar Tree had 14 ,000 distinct locations
in the U .S. The very next year, Dollar General
hit 15 ,000 locations. They embedded themselves
into the daily routines of millions of people.
And because they are so perfectly calibrated
for that quick, frictionless trip, they've infiltrated
places and demographics you would never, ever
expect. This is where it shatters a lot of myths.
Totally. We have this ingrained cultural association
that dollar stores are exclusively for like lower
income rural towns or struggling urban neighborhoods.
But here's where it gets really interesting.
Relate on us. Atherton, California. Atherton
has a variety store operating right within its
city limits and the median household income there
is nearly one hundred and eighty five thousand
dollars a year. That's incredible. Right. It
proves that a good bargain is an irresistible
universal human trait. It doesn't matter how
much wealth you have accumulated. Nobody wants
to feel like a sucker paying five dollars for
a basic roll of gift wrap when they know it costs
pennies to make. Oh, absolutely. And we see this
psychological shift confirmed in the global data,
too, particularly where following major economic
shocks. Economic trauma basically acts as a cultural
reset button. Oh, interesting. Like how? Well,
for example. In the aftermath of the 2008 global
financial crisis, the 99 P stores over in the
United Kingdom reported a massive sustained surge
in higher income customers. Oh, wow. It's like
the collective economic panic gave everyone cultural
permission to shop at the discount store. Exactly.
The stigma evaporated because everyone was suddenly
looking for ways to cut corners. Right. A country's
economic downturn serves as a highly effective
incubator for these stores. It permanently changes
shopper habits and normalizes discount shopping
for the upper middle class long after the broader
economy recovers. That makes total sense. Look
at Japan. They have their famous 100 yen shops,
which is roughly equivalent to a single dollar.
These stores proliferated incredibly rapidly
starting around 2001. Kind of after the crash.
Yes. That timeline is widely considered a direct
after effect of Japan's lost decade, their prolonged
economic recession. A major player there, Daiso.
started earlier in 1991, but really caught fire
during that recession. Oh, Daiso, I've heard
of them. Yeah. They now have around 2 ,400 stores
in Japan alone, and they are expanding by roughly
40 stores every single month. Wait, 40 new stores
a month? That is a staggering pace of expansion.
And it's not isolated to Japan either. China
has a massive chain called Miniso that specializes
in household goods, cosmetics, and toys. Gumiiko
is huge. In 2016 alone, their sales revenue hit
$1 .5 billion. And they've exported that model
globally as well with 1 ,800 stores across Asia,
Europe, Oceania, Africa, North and South America.
But if you want to examine the absolute bleeding
edge of hyper competitive discount retail, you
have to look at Hong Kong. OK, what's going on
in Hong Kong? The market there is so intense
that major traditional department stores actually
opened their own $10 shops. which is about $1
.28 U .S., just to prevent losing foot traffic
to the discount sector. Wow, they had to cannibalize
their own business. Pretty much. And now the
market has fractured even further. There are
$8 shops and even $2 shops competing fiercely
in poorer communities. That is roughly 26 U .S.
cents per item. Wait, wait. Let's look at the
mechanics of that. How is 26 cents mathematically
possible? I mean, even if the product is terrible,
the logistics of physically moving a plastic
bucket from a factory to a store shelf has to
cost more than a quarter. It requires a ruthlessly
efficient supply chain. First, Hong Kong has
no sales tax, which removes a whole layer of
friction. OK, that helps. Second, it has direct,
immediate geographic and economic access to mainland
manufacturing hubs like Shenzhen. You eliminate
the middleman, you eliminate international shipping
container costs, you strip away any marketing
budget, and you utilize completely unbranded
direct from factory items. So it's just raw efficiency.
Pure efficiency. Yeah. You then rely entirely
on the massive, dense foot traffic of Hong Kong's
urban centers to drive the volume. It is the
ultimate extreme expression of the microscopic
margin model Frank Woolworth invented. Man, it's
a localized retail experience fueled by a massive
global engine. You see this in India too. The
US dollar store chain there, founded in 2003,
originally imported merchandise directly from
America. But as they expanded to over 200 stores,
they had to build a vastly more complex sourcing
network. They now pull inventory from China,
Indonesia, Thailand, Spain, Portugal. the U .K.
and the U .S. all to maintain that fixed price
point on the shelf in India. OK, so we've established
they have engineered supply chains capable of
moving incredible volumes of cheap goods. And
they appeal to everyone from tech millionaires
in Atherton to bargain hunters in Hong Kong.
Yeah, they are everywhere. But this massive,
largely unchecked dominance brings us to a highly
complex, thorny consequence of their success.
Because as they fill in those cracks in the retail
pavement, they aren't just selling plastic toys
and stationary anymore. They have deeply embedded
themselves in local economies by expanding heavily
into groceries. Which brings us to the incredibly
heated debate around food deserts. You know areas
defined by their limited access to healthy affordable
fresh food. The allegations leveled against dollar
sores in this arena are incredibly heavy. This
raises an important question and it's honestly
one of the most fascinating tensions in modern
urban planning. The mechanics of the allegation
work like this. Critics and various community
organizations argue that dollar stores actively
proliferate these food deserts. Okay, how so?
Well, a dollar store moves into a community.
and heavily discounts their shelf -stable foods,
canned goods, processed snacks, cereals. They
basically undercut the local independent grocery
store on those center aisle items. And a local
grocer operates on a really delicate balance,
right? They make lower margins on the fresh produce
and meat, but they make their reliable profit
on those center aisle dry goods. Precisely the
issue. When the dollar store steals the dry goods
business, the local grocer can't survive on fresh
produce alone and they fold. Oh, wow, so they
just go out of business. Exactly. Suddenly, the
local grocery store is gone, and the dollar store,
which typically doesn't sell fresh apples or
raw chicken, is the only option left for food
in that community. As a direct result of this
mechanical chain of events, several U .S. states
and municipalities are actually utilizing local
zoning laws to pass strict restrictions on where
new dollar stores are legally allowed to open.
But I mean, the companies push back on this narrative
incredibly hard, don't they? Oh, vehemently.
Yeah. Dollar Tree vehemently disputes the claim
that they are destroying local food access. Their
defense is that they are actively creating food
options in underserved communities that were
already abandoned by traditional supermarkets
long before they ever arrived. Right. They see
themselves as the solution, not the problem.
Exactly. It's a massive chicken or the egg scenario.
Are the dollar stores the active cause of the
local grocery stores closing or are they just
opportunistic scavengers moving into the vacuum
left behind by a failing local economy that simply
didn't have the median income to support a full
scale supermarket anymore? It is the ultimate
friction point between free market corporate
expansion and community driven zoning. You basically
have two distinctly different views of the exact
same economic data. One side sees a predatory
expansion model methodically destroying fragile
local retail ecosystems. The other side sees
a highly efficient affordable lifeline being
extended to rural and urban areas that traditional
grocers have completely ignored. It's just so
complicated. It really is an incredibly complex
debate that is currently redefining local retail
zoning laws across the country. We aren't here
to say who is right, but it's vital to understand
both arguments. And the irony of this massive
dominance, the fact that they are powerful enough
to trigger state zoning legislation, is that
their grocery model is actually shockingly fragile.
Very fragile. Because they are shackled to that
rigid pricing structure, they have almost zero
wiggle room when those global supply chains get
messy. That is a critical vulnerability. Their
margins are razor thin by design. A perfect example
of this fragility occurred recently in 2023.
Dollar Tree reportedly had to stop selling eggs
entirely across its stores. Just stop selling
them. Yeah. The wholesale price of eggs had simply
increased too much due to avian flu and inflation.
A traditional grocery store just absorbs that
hit by raising the price of a carton of eggs
for the consumer from, say, $3 to $5. Right.
You just pay more at checkout. But a dollar store
cannot easily pass that fluctuating cost on mat.
without breaking its fundamental psychological
promise of the fixed price point. So, unable
to bend, they simply stop carrying them. Which
really brings this whole deep dive full circle.
We've traced this entire phenomenon from Frank
Woolworth's first little nickel store in Utica,
New York, defying all the established business
logic of 1879, all the way to high -income shoppers
browsing the aisles in Atherton, California,
and intense community zoning battles over local
food access. quite a journey. It has. It is an
absolute master class in how psychological tricks
like shrinking package sizes and giving you the
illusion of a steel... Well, I think it means
this industry is a brilliant, highly adaptive,
but potentially unstable balancing act. Which
leaves you with a significant thought to ponder
regarding the future of retail. Okay, let's hear
it. These stores are built entirely on the rigid
psychological foundation of a fixed price point.
A dollar. A hundred yen. a pound. But we are
currently entering an era of unpredictable global
inflation, rising manufacturing costs, and volatile
supply chains. Which changes the math. Entirely.
If the dollar store is fundamentally unable to
sell things for a dollar anymore without taking
a loss, what exactly does it become? If they
have to continually raise prices and break the
illusion to survive, do they lose their magic
or do they just become another regular slightly
disappointing convenience store? It's the ultimate
magic trick. If the magician's hat catches fire,
how on earth do you pull the rabbit out? Next
time you step into a variety store to grab a
cheap pair of sunglasses or a quick snack, keep
your eyes open. Notice the package sizes. Notice
what's placed next to what. Look for the misdirection.
Thanks for joining us on this deep dive.