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BRIAN KENNY: Welcome to Cold Call, the podcast where we dive deep into the stories behind groundbreaking Harvard Business School case studies. On June 1st, 1879, Frank Winfield Woolworth made retail history by opening the very first 5 and 10 cents store in Lancaster, Pennsylvania. Tapping into the one certainty in the retail space, everyone loves a bargain, which brings us to today\u2019s case subject, Dollar Tree. For 35 years, Dollar Tree built its entire identity around one simple, powerful promise. Everything in the store costs just one dollar. That fixed price point, not only defined the brand, but also created a unique shopping experience and a strong sense of value for customers. But in 2021, amid rising inflation, global supply chain pressures, and activist investor demands, Dollar Tree made a seismic shift. It raised prices to $1.25. Analysts were divided. Some said it was necessary for survival. Others called it one of the worst decisions in retail history. Today on Cold Call, we welcome Professor Jill Avery to discuss the case, \u201cDollar Tree: Breaking the Buck.\u201d I\u2019m your host, Brian Kenny, and you\u2019re listening to Cold Call on the HBR Podcast Network.<\/p>\n
Jill Avery is an authority on branding and brand management, customer relationship management, and digital marketing. She has managed several world-class brands including Gillette, Braun, Sam Adams, and AT&T. She is a repeat guest here on Cold Call. Welcome back, Jill.<\/p>\n
JILL AVERY: Thank you. Thank you for having me.<\/p>\n
BRIAN KENNY: It\u2019s great to have you here. And I have shopped at Dollar Tree, I must admit I\u2019ve been there, and I\u2019ve sampled it, and I\u2019ve enjoyed shopping at Dollar Tree.<\/p>\n
JILL AVERY: I have as well. It\u2019s always a treasure hunt. You never know what you\u2019re going to find, and you\u2019ll always find a bargain.<\/p>\n
BRIAN KENNY: Yeah, my wife is a teacher, elementary school teacher, and she buys school supplies there. So we have a lot of experience at Dollar Tree. I was really interested hearing about this seismic shift that I mentioned in the introduction, and that\u2019s what we\u2019re going to talk about today. Why don\u2019t we just dive right in. Let me ask you what inspired you to write the case about Dollar Tree, and what\u2019s your cold call to start the discussion?<\/p>\n
JILL AVERY: This is a special case for me because I co-authored it with a very dear friend of mine, Professor Marco Bertini, who is one of the world\u2019s leading pricing experts. And he was a visiting professor here at HBS and we actually go way back. We were doctoral students together.<\/p>\n
BRIAN KENNY: Wow.<\/p>\n
JILL AVERY: So we found this case and we thought this is the perfect marriage of his expertise in pricing and my expertise in branding and came together to write the case. It\u2019s the marriage of our collaboration.<\/p>\n
BRIAN KENNY: That\u2019s awesome. So how do you start the conversation?<\/p>\n
JILL AVERY: Well, our opening cold call is an action planning pasture and we ask students, do you support Dollar Tree\u2019s decision to raise their prices from $1 to $1.25? Why or why not? And what excites you and what worries you about this pricing change?<\/p>\n
BRIAN KENNY: Yeah. I had to laugh a little bit when I said a dollar to a\u2026 Because $1.25 sounds like nothing, but it was a big deal.<\/p>\n
JILL AVERY: It\u2019s a 25% increase and this is a classic decision analysis moment for a case discussion. It opens up many different types of analysis for students, both financial, strategic. And answering it well really requires understanding a lot about Dollar Tree\u2019s consumers, its brand, its competitors, and the overall economic conditions in its market.<\/p>\n
BRIAN KENNY: So let\u2019s talk about that a little bit. Why was the one dollar price point so central to a dollar store\u2019s identity?<\/p>\n
JILL AVERY: Since the beginning, the one dollar price point is the foundation of this company\u2019s customer value proposition. It is the fundamental promise that it makes to its consumers right from the beginning, from 1986, everything in the store is a dollar. And customers would consistently be surprised and delighted at what they could buy for a dollar. It was not cheap merchandise for a dollar. It was excellent, exciting merchandise that you were shocked you could get for a dollar.<\/p>\n
BRIAN KENNY: Yeah, the case uses the word magical to describe the price, which I thought was interesting. But it does simplify decision making for shoppers and it even helped them to streamline their operations. Can you talk a little bit about that phenomenon?<\/p>\n
JILL AVERY: Sure. It is a magical price point. It\u2019s magical from a consumer perspective because it seems too cheap to be real. So there\u2019s a, \u201cWait a minute, how could they possibly do this?\u201d It also helps streamline the shopping experience. Dollar Tree caters to a lot of people who are trying to stretch their money when they\u2019re shopping. And when you have a limited budget and you know that you can only spend, for instance, $10 or $20 on a shopping trip, it\u2019s much easier to know that everything you put in your cart is just a dollar. I don\u2019t have to do complicated math. I don\u2019t have to track things really closely. I just say, \u201cMy budget\u2019s $10, I can buy 10 things today.\u201d It takes a lot of the stress around the shopping experience away.<\/p>\n
On the employee side, creates lots of efficiencies for the business model. I don\u2019t have to price, I don\u2019t have to walk around with a price sticker and sticker every item for sale. I don\u2019t ever have to price check at the register because my cashiers know that everything is a dollar. It creates a lot of just streamlining of a retailing operation. And it helps with buying. If we think about all of the buyers that buy the merchandise that wind up in a Dollar Tree, they have a different type of negotiating leverage. They have a harder but also easier task in deciding what should I buy? What should I be looking at? Because they know they have that hard constraint that everything has to be a dollar.<\/p>\n
BRIAN KENNY: So they have to get a certain margin, I assume. When they go out to look for things to bring into the store, they want to make sure they\u2019re making a certain margin. How do they think about that?<\/p>\n
JILL AVERY: Yeah, so the dollar price point really limits them in terms of what types of merchandise they can look at and what types of merchandise they can bring in. They have to find low-cost goods, but that\u2019s not the only criteria that the buyers have. From the beginning, they had three different criteria. One was: has to be sold for a dollar, so it has to have a cost below that. But the second was: has to have a perceived value above a dollar. And so this has to be a good that\u2019s going to surprise the customer and make them think that they\u2019re getting more for their money. And third, and this was very important to the founders of Dollar Tree, it had to be an item of value, of quality. This shouldn\u2019t be cheap junk for sale. It had to be something that consumers really wanted and would see the value in.<\/p>\n
BRIAN KENNY: I mentioned the five and dime in the opening, that was Frank Woolworth, who eventually went on to found Woolworths. But his premise was the same. Everything should cost either 5 or 10 cents. But by the time I was shopping in Five and Dimes in the 1970s or \u201980s, things were no longer 5 or 10 cents. And eventually like everything, the costs go up. And many of Dollar Tree\u2019s competitors found that they had to eventually move off of that brand promise. What allowed Dollar Tree to sort of hold true to that even after everybody else had figured we just got to move on?<\/p>\n
JILL AVERY: It\u2019s a great question, and this just shows the enduring quality of this company\u2019s business model and how it was built to support that core customer value proposition. Everything this company does is focused on maintaining that dollar price point from the efficient design of the stores, to the type of retail locations that it signs up to host its stores, to the way it runs its retail operations. Everything is about efficiency and driving costs down. As inflation happened over the years, rather than moving off that core value proposition, the buyers decided that they would go out and find different types of merchandise. One of the beauties of the dollar store business model is that they don\u2019t promise consumers that you will find a particular item or even a particular category of items when you come and shop. So as prices of one category went up, they just stopped buying it and they stopped supplying that to the stores. So they were opportunistic in their buying. They held firm to the price and then changed the merchandise to support that price over time.<\/p>\n
BRIAN KENNY: And they also went pretty far afield, right? They went looking for things in parts of the world that a lot of other retailers wouldn\u2019t go to that length.<\/p>\n
JILL AVERY: Absolutely. Their search for low-price goods sent them very quickly to Asia where they not only visited the typical factories, the larger factories, but they went very far afield. They looked for factories that were producing at very low costs for quality goods. And factories that could support the high volumes that allowed them to buy at those low costs.<\/p>\n
BRIAN KENNY: Yeah. And they were pretty surprised at what they found in some parts of China too. I think American consumers for many years, and maybe still to some extent, have this impression that things that were coming out of China were poorly made or were poor quality. But that wasn\u2019t the experience that these buyers had.<\/p>\n
JILL AVERY: Absolutely not. As they went further and further afield, they found real artisans. They found the makers and handy craft people of different regions, and that became a signature look for the Dollar Tree merchandise.<\/p>\n
BRIAN KENNY: It reminded me a little bit of Etsy. They were finding artisans where they were and allowing them to bring their arts back into the store itself. So I thought that was interesting.<\/p>\n
JILL AVERY: Absolutely.<\/p>\n
BRIAN KENNY: At some point in the case, it talks about them acquiring Family Dollar, which was really a way for them to expand their reach. But that turned out having pretty significant impact on their business model. How did that deal shape the context for Dollar Tree\u2019s eventual decision to move beyond the dollar mark?<\/p>\n
JILL AVERY: Yeah, the Family Dollar acquisition put a lot of stress on the company and its executives. I think it was a large acquisition for the company, and they thought there would be a lot of synergies, particularly in the backend operations. But when they tried to merge back-of-the-house operations, they found that it was more complicated than they had anticipated. And that Dollar Tree had been a highly efficient operation and that Family Dollar was less efficient and it was harder to bring it into line with that. Family Dollar had more varied price points. They had a greater reliance on perishable products, which brought new costs into the system. And so, as they converted Family Dollar stores into Dollar Trees, things didn\u2019t go perhaps as smoothly as the executives had hoped. And that attracted some concern from shareholders. It attracted activist investors who started to put pressure on the executives to improve business results.<\/p>\n
BRIAN KENNY: Talk a little bit more about the activist investors because the case focused quite a bit on that. We\u2019ve talked about activist investors in other industries. I found it interesting that they were focused so intensely on this and trying to move them off basically their core brand promise.<\/p>\n
JILL AVERY: Yes. There are a few levers to improve the performance of a company. And if you want to improve revenue, you can either drive volume or you can drive price. And price here is a somewhat easy lever to imagine pulling, right? We can move off the dollar, we can raise the price a little bit. We haven\u2019t raised the price in 35 years. That\u2019s crazy from a business person\u2019s perspective. So if you are financially minded, you\u2019re probably going to immediately go to raising the price. But if you understand anything about this company\u2019s brand, and its heritage, and its relationship with customers, you\u2019re going to realize that that\u2019s the one thing you can\u2019t touch easily or you\u2019re going to have to move off that in a evolutionary way rather than in a revolutionary break with the past.<\/p>\n
BRIAN KENNY: Yeah. So what happens? They decide to make that change, they go from $1 to $1.25. What is the reaction that they face from their customers?<\/p>\n
JILL AVERY: Luckily, this is a brand that has very strong loyalty among its customer base and longstanding relationships. So the initial change was well communicated to consumers, and because they didn\u2019t raise prices haphazardly across the merchandise, everything went from $1 to $1.25. It was a pretty clear change and pretty easy for customers to understand. But some customers didn\u2019t want to pay $1.25, and this was shocking. This is a 25% price increase. So some of the early customer research showed that Dollar Tree\u2019s customers reported that 32% would shop there less often if prices were raised above a dollar. And 5% would stop purchasing there altogether, there\u2019s a great risk when this price change happens that Dollar Tree begins to lose some customers, or at least begins to lose some shopping frequency among its customers.<\/p>\n
BRIAN KENNY: So could they have considered some alternative ways of doing this? Like rather than raising everything, which I understand the simplicity of doing that because it maintains some of the things that you were saying earlier about streamlining the operation. But could they have had everything here is $1, everything over here is $2, everything here is $3. Would that have been an option?<\/p>\n
JILL AVERY: Absolutely. So why does the whole store have to move off the dollar price point? Could we have a $1 section? Could we have a $2 section, a $3 section, and so on? The executives decide that that magic of one price point is an important part of the value proposition to hold onto. So rather than segment the merchandise by price, they changed the type of merchandise that they buy. As they make the price change, they don\u2019t just take the items that used to sell for $1 and price them at $1.25. They start buying merchandise differently. They start buying merchandise that seems like it\u2019s a good bargain, not at $1 but at $1.25. So this price change drives a whole merchandising shift as well.<\/p>\n
BRIAN KENNY: Yeah. I wonder what the implications are there for their core buyer, their core audience, their core customers rather. Does that make them feel like the store is getting a little upscale now and maybe the things that I liked are no longer there, so maybe I don\u2019t want to invest my time and money there?<\/p>\n
JILL AVERY: It could be. I think it goes back to understanding how consumers respond to this customer value proposition. Is the value that they\u2019re deriving from their relationship with Dollar Tree tied to the fact that everything\u2019s a dollar, or is it derived from the fact that whatever I buy, I feel like I\u2019m getting a great bargain. And I think it\u2019s hopefully for Dollar Tree, the latter, because that gives you a bit more pricing power, a bit more flexibility as long as you continue to delight and surprise consumers. So that they feel like no matter what they\u2019re buying, this is a great price and a great quality item for that price. You\u2019ll be able to hold on to those customers.<\/p>\n
BRIAN KENNY: Yeah, that\u2019s a really important insight. What effect, if any, did this have on other discount retail establishments?<\/p>\n
JILL AVERY: I think everybody was struggling with the similar issue that Dollar Tree was facing here because of the inflationary environment, and particularly the hyper-inflationary environment that the COVID-19 pandemic brought across supply chains. Everybody is struggling with rising costs and everybody\u2019s experimenting with how to take price increases, whether to take price increases, and how much. If you look across grocery, mass merchandisers, everybody\u2019s struggling with these same questions. So that makes it a little safer for a Dollar Tree to increase its prices if everybody is increasing their prices. It would\u2019ve been much more dangerous, I think, for the company to raise its prices if competitors were holding firm on price.<\/p>\n
BRIAN KENNY: Yeah. One of the criticisms that the case points out is that these discount stores, generally speaking, are located in areas where people are economically challenged and perhaps they\u2019re not doing enough to lift up those communities. In fact, maybe they\u2019re miring people in poverty in some ways and reinforcing those notions. What are some of the things that Dollar Tree tried to do to push back on that?<\/p>\n
JILL AVERY: So I think what\u2019s important to understand here is where are Dollar Tree and other dollar stores located? Often they\u2019re located in what people have termed food deserts where there are no other grocery stores that sell perishable food in the area. And so these stores become the only go-to place for people who live in those neighborhoods. If you ask people who are shoppers of Dollar Tree, they have very high satisfaction and happiness with their experience shopping in these types of outlets. I think the criticism comes from retailers who are located near dollar stores who feel that dollar stores undercut their prices or destroy their pricing power in a market. But I think from the consumer perspective, consumers who shop there love dollar stores. It\u2019s an important part of how they manage their finances for their families.<\/p>\n
BRIAN KENNY: Yeah. And I also wonder, the case mentions Whole Foods, I think is one of the retailers that was particularly pushing back on this. Does it in some way, do they feel like it\u2019s degrading their brand to be located near a Dollar store?<\/p>\n
JILL AVERY: I don\u2019t think it should. I think Whole Foods and a dollar store, if we think about market segmentation and customer heterogeneity in a market, those are two brands targeting two very, very different shoppers and offering a very different shopping experience. If Dollar Tree is all about treasure hunting and finding bargains, Whole Foods is about exposing consumers to new brands, and healthy and natural types of merchandising. So these are two competitors that play in very different arenas. And really, even though you could say they\u2019re in the same business, they don\u2019t really compete head-to-head.<\/p>\n
BRIAN KENNY: Right, right. So you\u2019ve been at the helm of managing some really great global brands in your time before you came back to HBS to teach here. I\u2019m wondering if you see what Dollar Tree did here, which was essentially an economic compromise. Do you think that that is in some way compromising their brand in a way that\u2019s difficult to recover from?<\/p>\n
JILL AVERY: I think this is the challenge when you name your brand after a price point, because economics change over time. And so the name Dollar Tree could become problematic as we move away from the dollar price point.<\/p>\n
BRIAN KENNY: And $1.25 Tree just doesn\u2019t sound good.<\/p>\n
JILL AVERY: It just doesn\u2019t have the same ring to it. But I think brands are much more than words to consumers. Some brands don\u2019t even mean anything. They\u2019re made up words. And what matters with a brand is the story and the meaning structure that both the company and its consumers bring to the brand over time. Dollar Tree means much more than a dollar price point to its consumers. So I think the brand will endure despite the price increase.<\/p>\n
BRIAN KENNY: And again, just thinking about my own wife\u2019s reaction when she comes home from the dollar store with a bag full of stuff, she\u2019s really pleased and proud that she was able to get those great bargains at dollar store for her students. So I\u2019m sure that\u2019s a common feeling for people.<\/p>\n
JILL AVERY: Absolutely. It\u2019s exhilarating.<\/p>\n
BRIAN KENNY: It is. We love a bargain.<\/p>\n
JILL AVERY: We do.<\/p>\n
BRIAN KENNY: Jill, this has been a great conversation. I knew it would be. I\u2019ve got one last question for you before we finish, which is, if there\u2019s one thing you want our listeners to take away from the Dollar Tree case, what would it be?<\/p>\n
JILL AVERY: I think the most important lesson in the Dollar Tree case is that price is an indication or an input into value. What companies need to do for their customers is create real value, lasting value. Delighting the customer is about creating value in their lives. Part of that is how much you\u2019re going to charge them to access that value. So that\u2019s why pricing is so important, but price points are just one input into that value proposition.<\/p>\n
BRIAN KENNY: Yeah. Jill, thanks so much for joining me on Cold Call.<\/p>\n
JILL AVERY: Thank you. It was a pleasure.<\/p>\n