How to Open a Dollar Store

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Overview

How to Open a Dollar Store

If you want to start a retail store that offers value to your community but features lower inventory costs than some larger retail stores require, a dollar store may be the right solution. Skilled inventory sourcing and a pulse on what’s in demand locally are just a few skills you’ll need, but a well-thought-out store can be a valuable addition to a local community. The following overview of what it takes to get a dollar store business up and running can help you create a detailed business plan and start-up your store.

Business Overview

Dollar stores offer low-cost goods to consumers and sometimes price all items in the store for $1. Typically, dollar stores’ stock goods include groceries, kitchenware, home furnishings, books, health goods, cleaning supplies, decor, and more. Because the stores purchase the items in bulk or take advantage of closeouts or other specials, they offer competitive pricing that consumers can’t find elsewhere. Dollar stores naturally appeal to bargain hunters. While low-income consumers make up a significant portion of the store’s customer base, mid-class and upper-class customers also shop at dollar stores.

Industry Summary

From 2014 through 2019, dollar stores have undergone significant growth in the United States. IBISWorld reports that the dollar store industry’s annual growth of 3.9% during those five years results in a projected revenue totaling $87 billion in 2019. At the same time, the number of dollar stores in business grew by 3% to 77,740. The number of employees also increased by 6.3% over that five-year time frame, with the industry’s employment totaling 538,907 by 2019.

Related Industries

Convenience Store
Thrift Store

 

Industry Trends

While many retail stores face steep competition from online retailers and big-box retailers, dollar stores are in a unique position. According to eMarketer, even though the economy is improving, consumers still demonstrate shopping habits influenced by the recession. Consumers continue to bargain hunt, and dollar stores offer a convenient local source of bargain deals on particular goods. Bargain hunting has even become a point of pride for many consumers with higher incomes, which has increased the customer base for dollar stores.

Dollar General and Dollar Tree are major competitors to dollar stores. According to Statista, in 2017, Dollar General’s net sales totaled $23.5 billion, while Dollar Tree’s net sales were $22.2 billion. These chain stores demonstrate the earning potential that is possible by offering low-cost in-demand items to local consumers.

Target Market

A study by Inmar in July of 2018 revealed that 21% of dollar store consumers are households with incomes between $20,000 and $39,000 and households with incomes exceeding $100,000. Low-income households are a significant part of a dollar store’s customer base. In November of 2018, Inmar’s Dollars and Cents survey revealed that 43% of millennials also visit dollar stores weekly for groceries. A store’s location will also affect its target audience.

Checklist for Starting a Dollar Store

If you’re thinking about starting a dollar store, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Write a Business Plan

After coming up with a business idea, the next step in starting any business should be to write a business plan. Not only will a bank require you to have one in order to get funding, but multiple studies have shown that a business plan helps increase the odds of starting a successful business. A well thought out dollar store business plan will serve the entrepreneur as the road map for their business, helping them achieve their business goals.

Related: How to write a business plan

Step 2: Form a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a dollar store, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 3: Name the Business

Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming an auto repair business

Step 4: Select your Location

A dollar store’s success depends on many factors, including its location, the local area’s need for the store, and your ability to secure great deals on inventory. Owning and managing the store is an ongoing job and finding the right wholesale or liquidation supplier is a task that’s essential to a store’s success. Regularly bringing in new, seasonal merchandise is also key to keeping customers returning to the store again and again.

Ultimately, dollar stores fulfill a local need for convenience, for quality products, and for money-saving deals. Assessing the location – both in terms of the actual storefront and the geographic location – can help to determine the best location for a store, as well as to better understand the types of products that the local community may seek out.

Lease expenses will vary according to the location and size of the store. Store space in primary retail areas will be more expensive but can bring in more customers as a result. Dollar stores in malls or shopping plazas have the advantage of offering items at a much lower price point than the surrounding businesses can offer.

Related: Choosing a business location

Step 4: Register for Business Licenses and Permits

The types of business licenses, permits, and registrations that will be required to start a business vary on the activities of the business in addition to where it is located.

No special licensing is required to open a dollar store business, but there are some general business registrations that may be needed which include a business license, sales tax permit, Employer Identification Number, and Occupancy Permit, among others.

Related: Common business licenses, permits, and registrations by state

Step 5: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a dollar store is another. The cost to start a dollar store can be high, with most of the costs going towards remodeling, shelving, signage, and inventory. Funding for a new start-up can be difficult as banks are typically going to want the borrower to have good credit and be able to personally invest 15-25% towards the total startup costs.

Related: Finding the money to start a business

Step 6: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 7: Get your Marketing Ready

Marketing is also a necessary expense, especially when first opening a dollar store. Because inventory may fluctuate, it can be difficult to send out regular flyers or emails to a customer base, but dollar stores can use coupons, direct mailers, and even in-store events to encourage customers to shop. Other marketing options include sponsoring local events within the community and even getting active on social media to build awareness and support for the store.

Be sure to budget for the grand opening as you want to get as many people to know about your new store as possible.

Related: Low-cost ideas to market a new business

Every business is going to need a logo. Make a professional logo in no time with the free Canvaa logo maker!

Step 8: Obtain Business Insurance

There are several types of insurance to consider when starting a dollar store. A few of these include:
– General liability insurance covers expenses like medical bills if a customer is injured in the store, such as by a slip or fall.
– Commercial property insurance pays for losses in inventory, equipment, and the store’s building in case of an event like a fire or a storm.
– Worker’s compensation insurance is required if a business has employees. This insurance helps to cover expenses like an employee’s lost wages or medical bills if they are ever injured on the job.

The cost to insure a dollar store will vary according to many factors, including the cost of inventory, the number of employees a business has, desired coverage limits, and more. It is best to request insurance quotes from multiple providers and then carefully compare them to determine the best insurance plan for a business.

Related: Types of insurance your business may need

Step 9: Hire Employees

Most dollar stores can operate with just eight or nine employees. According to PayScale, the average hourly pay for sales clerks is $10.31 per hour or about $26,666 per year. Depending on whether a store owner employs full-time or part-time employees, additional expenses, such as health insurance contributions, paid time off, and workers’ comp insurance should be included in the budget.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a dollar store?

Because a storefront and so much inventory is required, dollar stores can have significant startup costs. It’s important to create a detailed business plan to understand the expenses that you will face, as well as to take steps to maximize the store’s success. A well-thought-out business plan can help you to secure funding, too, if it is needed.

The following expenses are some common costs to start a dollar store.

Franchise Cost – While you can open an independent dollar store, if you want to operate under a name brand like Dollar General, Dollar Tree, Family Dollar, etc., there will be a franchise fee that can range from $10k – $50k, plus royalties (a percentage paid based on sales) depending on the brand you work with.

Equipment – Cash registers, carts, furniture, fixtures, refrigerators, freezers, etc.

Supplies – shopping bags, cleaning supplies, etc.

Inventory – Varies based on the size of the store, but figure between a minimum of $25,000 and $50,000 to get started.

How much can a dollar store owner make?

In 2019, dollar and variety stores should make $87 billion in revenue, according to IBISWorld. The industry has grown steadily since 2014, and the number of businesses in the country has increased to over 77,000. According to Glassdoor, annual salaries for Dollar Tree owner-operators average between $53,000 and $57,000.

While things look promising for dollar stores, each store’s profits will vary from store to store. Factors such as a store’s size and location, as well as the deals that you can secure on merchandise, will all affect your potential income.

What skills are needed to run a dollar store?

While a business degree isn’t required to start a dollar store, particular skills and experiences are important and useful.
Retail experience. Experience as a retail manager is useful in opening a dollar store business. As the store owner, you’ll need to be familiar with tasks such as inventory management, how to determine appropriate pricing, using a cash register, and more. Firsthand experience in some sort of retail store – even if it wasn’t a dollar store – can leave you better prepared to handle the demands of owning a retail store.

Customer service skills. From helping customers find the right products to upselling items and providing a great shopping experience, customer service skills are key for any dollar store owner. By developing strong relationships with customers and being out on the floor, store owners can learn what items customers are looking for that the store doesn’t stock and potentially add those to the inventory for increased sales and better overall customer service.

Management skills. Multiple employees are a must when running a dollar store, and managing those employees takes talent. Previous management skills, such as experience hiring staff, training employees, managing an employee schedule, teaching employees about customer service, and even designing an employee manual, are valuable as you hire and train employees.

Business skills. Running a dollar store takes some business skills. Developing relationships with wholesalers, managing inventory, tracking expenses, income, and marketing the business are just a few of the responsibilities that store owners will face daily. Even if you don’t have a business degree, you can learn many of these skills through courses at community colleges, online classes, or business workshops within your community.

Are there grants to start a dollar store?

It’s extremely rare to find a grant to start a dollar store. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

What is the NAICS code for a dollar store?

The NAICS code for a dollar store is 452990.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

Resources:
National Retail Federation
Retail Merchants Association

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