Why discount stores can survive when the supply chain falls apart

Why discount stores can survive when the supply chain falls apart
Discount retailer Dollar General could be less vulnerable to supply chain pressures because of its business model. Erin Scott/Reuters
  • Discount chains such as Lidl or Dollar General have more flexibility to manage supply chain issues.
  • These stores stock fewer items and carry more own-brand goods.
  • This means fewer products to keep in stock and more flexibility to switch manufacturers.

The global supply chain network is on its knees and retailers across the world are scrambling to keep shelves stocked as the busy holiday shopping season approaches.

Experts say that empty shelves and long delays are expected to be a guaranteed part of our winter shopping this year. However, some stores, namely the discount chains, could be less vulnerable to pressures because of their unique business models.

The Aldis, Lidls, Dollar Generals, Dollar Trees, and to some extent, the Costcos of the world, stock a large amount of own-brand goods and have a limited number of product stock keeping units, or SKUs, in their stores. This approach reduces costs and streamlines supply chains.

At the core of the dollar store or discount grocery chain business model is keeping business costs as low as possible in order to keep prices down for the shopper. This means these stores have far fewer types of products on offer than you would find in your typical Walmart supercenter, for example.

In normal times, buying fewer products in bulk gives these stores greater bargaining power with suppliers but this setup also has its benefits during the ongoing supply chain crunch: these stores have a smaller assortment of items to worry about being in stock and most likely fewer suppliers to deal with, something Lidl's UK and Ireland CEO flagged in a recent interview.


By not being a store of everything, the discount chains have more flexibility to swap items in and out. Dollar General has been vocal about this advantage in recent earnings calls. As prices have risen over the past two quarters, the retailer said it has had the flexibility to drop items that have been most impacted by inflation.

And just as shoppers don't mind if the assortment changes, they also wouldn't be shocked to see bare shelves, Dave Marcotte, longtime retail and supply chain expert from Kantar Consulting, said in a recent conversation with Insider.

"Shoppers don't go to dollar stores for an experience ... They are not expecting to see full shelves, and when they come in and see two to three meters of holes in the shelves, it doesn't affect them," he said, adding: "If they are out of what they're looking for, that's ok too."

Marcotte said that shoppers generally make dollar or discount stores their first port of call, if the item they want is there and they can get it at a cheap price, great. Shoppers depend on these stores for discounts rather than a large assortment.

Then there's the own-brand aspect. Discount chains stock large amounts of private-label goods, as does Costco through its Kirkland range, which gives them greater flexibility to switch manufacturers without the consumer noticing.


"Shoppers are not aware of who the real manufacturer is," Marcotte said. "The actual manufacturing behind it can be anything as long as the quality is there ... they don't have the perception that they are being traded down."

While private-label manufacturers are still subject to the same supply chain challenges, the discount retailers have more flexibility to shop around by selling fewer national brands.

Still, it's not all plain sailing. Dollar stores in particular are some of the largest importers of products from Asia, as is Costco, making these stores particularly vulnerable to the current freight supply chain issues.

Additionally, discount stores have less room to raise prices without the consumer noticing, something Dollar Tree was forced to do last month.