Last week, 99 Cents Only Stores announced that it was going out of business and ceasing operations at its 371 stores. We've combined our data with visits to four locations in the SoCal market last weekend (including discussions with many associates there) to better understand why the stores are closing.
For perspective, 99 Cents Only largest footprint is the broader Los Angeles region, where 174 venues are located in addition to California, Arizona, and Texas. The store sizes for visited locations were 15,000-25,000 square feet on a gross basis, but the selling space per location averaged 16,000 in 2017 (according to 99 Cents Only 10-K filing for 2017, the last full-year before the company was taken private). In comparison, Dollar Tree averages 9,000 square feet and Grocery Outlet averages 14,000 (both on a net selling basis). 99 Cent Only's sales volume per location in 2017 was $5.7M compared to $1.7M for Dollar Tree, $1.4M for Family Dollar, and $7.4M for Grocery Outlet.
The chain's merchandise is a mash-up of Dollar Tree, Family Dollar, and Grocery Outlet. The chain offered fresh, frozen, and shelf-stable food and a large selection of personal and household care items, these were roughly half the store (associates said the sales mix for their location was roughly half-and-half between consumables and general merchandise). In terms of the fresh and frozen offering, we counted up to 18 cooler doors. For comparison, the consumables/general merchandise sales mix is 45%/55% for Dollar Tree and 80%/20% for Family Dollar (additionally, we’ve never seen non-dairy fresh food in those banners). As shown in the pictures below, 99 Cents Only positioned its grocery offering as a “grocery essentials” store. This explains the Grocery Outlet “part” of our mash-up example. However, the selection is far more limited than Grocery Outlet, and “understated” to Grocery Outlet in quality and national brands. In 2017, 99 Cents Only sales mix was 26% fresh, 32% grocery, 22% consumables, and 19% general merchandise. By contrast, Grocery Outlet positions itself as a full-basket grocery retailer.
Source: Thomas Paulson
From a trade area audience profile standpoint, the table below demonstrates that Family Dollar is really outside of the others. As such, we are going to put that retailer to the side for this analysis. While the merchandise mix makes 99 Cents Only slightly more like Grocery Outlet versus Dollar Tree, the 99 Cents customer is closer to the Dollar Tree customer from a demographic and psychographic perspective.
Using Experian Mosaic data, the sharpest distinction between the 99 Cents Only and Dollar Tree from Grocery Outlet is the Steadfast Conventionalists segment at over 20% of the customer mix. Steadfast Conventionalists is “conventional Gen X families living suburban and city lifestyles.” That distinction is counterintuitive to us as we had expected Grocery Outlet to be higher than the other two.
Like Dollar Tree, 99 Cents Only moved its standard price point from $0.99 to $1.29 at the end of 2021 to be able to broaden the assortment and upgrade the quality. (Dollar Tree moved from $1.00 to $1.25). As a reminder, the increase was necessary because costs had risen significantly with the liftoff in inflation, the pandemic’s resulting spike in freight costs, higher store wages, and lingering merchandise issues from the tariffs on Chinese imports (historically a very significant source of $1 price point dollar store merchandise). Over time, 99 Cents Only also began to offer more items at $3, $5, and $7 like Dollar Tree. Prior the move in price, these cost pressures margin pushed Dollar Tree’s gross and operating margin down by 265 basis points between 2018-2021, which fostered a period of acrimony between management and investors. And so, Dollar Tree’s $0.25 increase was a move to generate more margin, reestablish its unit economics, and get its stock moving and fend off any potential investor activist. (See our write-up here.)
Back to 99 Cents, its Los Angeles/SoCal locations perform just above the California average, as Texas and Arizona lag significantly. Moreover, visits for SoCal have outperformed the other markets over the past year. Texas and Arizona may have had idiosyncratic issues that were a greater drag on the company’s financials; however, if that were the case, why not restructure and just rid themselves of those two markets? As such, it seems logical, that if there was a central problem/ insufficiency with the business, that that would also be found in SoCal as well. As such, next we will unpack SoCal.
In the press release announcing the wind-down of the business, interim 99 Cents Only CEO Mike Simoncic is quoted, “This was an extremely difficult decision and is not the outcome we expected or hoped to achieve. Unfortunately, the last several years (i.e., this was not just a 2023 occurrence) have presented significant and lasting challenges in the retail environment, including the unprecedented impact of the COVID-19 pandemic, shifting consumer demand, rising levels of shrink, persistent inflationary pressures, and other macroeconomic headwinds, all of which have greatly hindered the company’s ability to operate.”
“Shifting consumer demand” implies that they had a difficult time with getting the right merchandise mix and basket margin, a challenge in 2022-2023 for Dollar General and Family Dollar (which we recently wrote about) as it was for Walmart and Target. For all of these retailers, consumables sales are up, but the richer margin general merchandise portion of their mix has been down, leading to a decline in gross margin rate due to the sales mix. As 99 Cents Only's traffic and sales were up slightly in 2023 year-over-year, its demise seems more related to the margin of the basket and expenses, including both the cost of sales and the spend to acquire those sales (i.e., marketing and other promotional expenses). As we noted a few weeks ago, that the everyday dollar retail sector appears to be reaching a saturation point, especially as grocery items have been extended across so many shelves, cooler doors, locations, and banners since before the pandemic (including brands such as Ollie’s and Big Lots). We also wrote that the large expansion of grocery was making the category more challenging for retail from a price and margin perspective. Given 99 Cent Only’s lower retail volume, they would be at a cost disadvantage from suppliers relative to Dollar Tree, Dollar General, and others. As such, the 99 Cent’s failure is another proof point of saturation.
“Rising shrink” (a bane across retail) is another factor that we suggested, as have other commentators, for Family Dollar’s decision to close 600 locations, as it was for Walmart and Target. Moreover, at the end of 2023, it was a worsening issue for General, Dollar Tree Inc, and Five Below. Did 99 Cents have the resources to remedy the challenge? Not to the extent that these larger retailers have.
Looking back at the COVID and recovery period, there is significant underperformance from 2019 to 2021 for 99 Cents Only versus its peers. In other words, the pandemic took a toll on 99 Cents as the pandemic (2020-2021) was traumatic to traffic, which did not recover in 2022 like its peers. The 2020-2021 period was notable for the trip consolidation by consumers into retail brands that offered a broad assortment (i.e., single stop), that were easy to get in and out of, and that offered superior pandemic store standards. Pricing and value were of less concern than personal safety.
For 99 Cents Only, many pre-pandemic shoppers didn’t find their way back (see below).
Potential causes of the customer defection include under-invested stores and high levels of out-of-stocks, both of which caused notable market share shifts during the pandemic. We don’t know if these were 99 Cents’ issues, but the non-recovery is provocative. We do know that the investment required by retailers was high to get stock onto shelves, set up pandemic best practices, and to establish curbside service was large, costing hundreds of millions, if not billions of dollars. For example, Target’s “one-time” COVID-related expense was $1.4B, nearly a third of its pre-pandemic profits, and that does not include its curbside investments. Obviously, 99 Cents is smaller than Target, both in the number of locations and its financial resources. Moreover, as pointed out above, SoCal is 99 Cents’ principal market. Restrictions in Los Angeles County and California in general during 2020-2021 were far more restrictive than most parts of the country. That too, would have been an outsized wallop on 99 Cents Only versus other retailers with big footprints in Florida and Texas.
From 2019-2023, 99 Cent Only’s revenue per location increased, driven by the standard price increase to $1.29 and overall inflation in consumables. However, the increase per location of 13% was less than Dollar Tree’s general merchandise, Dollar General's consumables business, and grocery inflation (+25% per CPI). This suggests that, while sales increased, all of that was due to price and that units per transaction, traffic, and customers all declined. Compared to 2019, 99 Cent Only’s visitors were down -20%. Again, this suggests that there was a disruption to 99 Cents Only's consumer proposition during 2020-2021 which resulted in fewer visits, less loyalty, and fewer units per transaction. This combined implies challenges with store standards, merchandise, and out-of-stocks.
We see little change in the Census 2019 and Experian Mosaic data when we compare the 99 Cent Only’s Captured Market between the 2019 and 2023 periods. As such, it looks like 99 Cents lost share and relevance across the board, which gives some insight into why they decided to close shop–i.e., it was difficult to identify which customer segments could they retain and grow? That is a marketing and competition challenge, and SoCal is a crazy market for really good, highly differentiated, niche, disruptive, and large grocers. Below, we show that brands as diverse as Albertsons, Trader Joe’s, and El Super all held steady with respect to share of visits in a market that was up +10%, while 99 Cents Only didn’t. Over the past four years, loyalty programs, digital engagement, and the mobile app have become an important part of a retailer’s ability to build loyalty. 99 Cents Only eroding loyalty may stem from a less compelling app and marketing message, as a consequence the chain may have relied more heavily on price to retain customers and visits at the expense of profitability.
At first glance, we thought it may have been Grocery Outlet growth and its pricing pressure that sunk 99 Cents Only. However, by using Placer to look more closely at Grocery Outlet, and others, we don’t think there was one “magic bullet” or competitor that sunk 99 Cents, we think it was the dynamic of a crazy SoCal market full of good, highly differentiated, niche, newly disruptive, and large grocers. Below we show cross-visitation for Grocery Outlet store opening in Long Beach that had a relatively nearby 99 Cents Only. In Q1 2022 versus Q1 2024, Grocery Outlet went from a non-top-10 to inside the top-10, but there are nine other bigger names there as well. This suggests that Grocery Outlet solely hasn’t been highly disruptive to 99 Cents.
Looking at Favorite Brands (Grocers) for 99 Cents’ customers for 2+ visits between 2019 and 2023, we see many brands with large gains, both in conventional grocers and in value/discount brands. That includes Trader Joe's (which went from 19.4% of 99 Cents’ customers to 27.2%), Albertsons (19.0% to 23.9%), Whole Foods and Smart & Final. Between periods, none of these added venues, they “organically” gained share of 99 Cents only visitors. Grocery Outlet gained by +64% which was largely due to new locations (but the penetration gains by non-expanders exceeded Grocery Outlet’s gains). From this we conclude that it wasn’t a single player that pressured 99 Cents, but the overall highly competitive SoCal grocery market, where scale and digital capabilities (especially around loyalty) are differentiators, as well as the many highly differentiated, ethnic, and niche operators.
Some analysts have speculated that 99 Cents Only's rent cost was too high and they point to Family Dollar as representative. However, 99 Cents Only's financials from 2017 show that while its rent on a per square foot basis were 38% higher than Dollar Tree/Family Dollar, they were also lower than Grocery Outlet. Moreover, as a percent of revenue, 99 Cents Only was lower than Dollar Tree/Family Dollar. 99 Cents Only's higher numbers reflect markets like SoCal and Phoenix where costs are higher, but also where there is more spend. And so, while higher rent could be a contributing factor, it doesn't strike us as a root factor. That said, there could be many of the 600 Family Dollar locations that will be closed that are burdened with (1) out-of-line lease costs; and (2) out-of-control theft/shrink, and that may also be a factor for some of the 99 Cent locations.
This takes us back to peer operating margin trends for 2023 compared to 2019, where Dollar Tree is up slightly (13.7% in 2023 versus 13.4% in 2019), Dollar General is down (6.3% in 2023 versus 8.3% in 2019) and Family Dollar is now at breakeven operating margins (-0.1% in 2023 versus 5.4% in 2019). The degradation in Family Dollar’s margin also reflects the costs to add store labor, increase compensation, modernize its supply chain and tech stack, and remodel its stores. Said differently, the “cost to compete” in the industry has risen. In those terms, Dollar Tree’s greater scale (17,000 stores between the two banners) would have been an advantage relative to 99 Cents Only. Dollar General’s trend reflects some of the labor costs, but most of the decline is from merchandise mix and shrink (i.e. it’s the result of the macro factors.)
If we go back 99 Cents’ 2017 financials, we see that the business didn’t generate cash that year or for the prior two. For the three-year combined period (2015-2017), the business burned through $137M in cash, leaving the balance sheet with $2.5M in cash against nearly $1B in debt and lease liabilities. The 2017 EBITDA margin was only 1.7%. Said differently, this was not a solid business at the precipice of two large/macro challenges: COVID and the inflationary spiral.
To conclude, 99 Cents Only shut down because of (1) unprecedented inflation in consumables (that had all sorts of bad consequences); (2) a brutal pandemic period with a particularly restrictive market in 99 Cents Only’s most important region, SoCal; (3) unrelenting competition by bigger players with scale advantages in supply chain, technology, and buying; (4) a hyper-competitive market for highly differentiated, ethnic, and niche operators; and (5) a business that before all of this struggled to generate cash. On top of these factors, California just raised the minimum wage for fast-food restaurant workers to $20 per hour, which will have spillover effects on retail, raising their costs as they increase wages to retain labor and store managers. Given the aforementioned, that may have been the “death nail” for 99 Cents Only.
