If you want to start a retail store that offers value to your community but features lower inventory costs than the large box chains offer, 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 at around $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
According to IBISWorld, dollar and variety stores have experienced growth over the past five years, as stores adopt new strategies to sustain growth. The most substantial platform for change within the industry has been its customer base. While dollar stores have historically targeted low-income earners, this consumer pool has expanded in recent years to include middle-class and even some high-income earners. Dollar General expanded their market through pOpshelf stores, aiming at the middle and higher earners. Also, expansion in industry product portfolios to include different categories, such as healthcare products, has enabled larger operators to compete with other discount retailers. Overall, the combination of these trends has driven growth. As a result, total industry revenue is expected to increase at an annual rate of 3.9% to $114.2 billion in sales.
Related Industries
Industry Trends
While many retail stores face steep competition from online and big-box retailers, dollar stores are uniquely positioned. 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 2022, Dollar General’s net sales totaled $37.4 billion, while Dollar Tree’s net sales were $28.753 billion. These chain stores demonstrate the earning potential that is possible by offering low-cost in-demand items to local consumers.
Target Market
The target market for a dollar store typically includes a wide range of consumers who are looking for discounted, affordable, and budget-friendly options. While it may vary depending on the region and the store inventory, the primary target market for a dollar store often includes:
- Price-conscious consumers: Dollar stores attract customers who are focused on getting the best value for their money. This includes individuals or families with limited disposable income or those who prefer to save money on everyday items.
- Bargain shoppers: People who enjoy the thrill of finding a great deal and love browsing through a wide range of discounted products are often drawn to dollar stores. These shoppers appreciate the affordability and potential savings that come with shopping at a dollar store.
- Students: Dollar stores are popular among students who are on a tight budget. They often seek inexpensive school supplies, snacks, and household items. Dollar stores can be convenient locations for students to find affordable items for dorm rooms or to stock up on essentials.
- Small business owners: Entrepreneurs, especially those who operate small businesses, often shop at dollar stores to find cost-effective supplies and materials to reduce ongoing expenses. Dollar stores offer a wide range of items, including office supplies, party decorations, and basic tools, making them attractive to small business owners.
- Frugal shoppers: Some individuals actively choose to live a frugal lifestyle and prioritize saving money by looking for those rock-bottom prices. Dollar stores provide an opportunity for these shoppers to stretch their budgets and find everyday items at low prices.
- Seasonal and holiday shoppers: Dollar stores are popular destinations during holidays and special occasions. Shoppers often visit dollar stores to find inexpensive decorations, party supplies, and seasonal items for events such as Halloween, Christmas, Easter, and birthdays.
- Underserved markets: There are many communities throughout the United States that are considered food deserts. These types of convenience/limited grocery stores help alleviate food deserts by providing a resource for small, rural populations. And while many of these stores offer their own, cheaper brands, they also offer name brands like General Mills, Coca-Cola, Kellogg, Procter & Gamble, Hanes, and more.
Checklist To Start 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: Research the market
Before setting up a new dollar store, it’s important to conduct extensive market research to understand the potential demand and competition in the area. Here are a few methods you can use:
Demographic Analysis: Understand the socioeconomic and demographic makeup of the area where you plan to set up your store. Consider factors such as income level, family size, age distribution, and more. Generally, dollar stores thrive in areas where there is a higher concentration of lower-income households. Tools such as the US Census Bureau’s website can help with this.
Survey and Interviews: Conduct surveys or interviews with locals to understand their shopping habits, needs, and preferences. This could give you insights into whether there’s a demand for a dollar store.
Location Analysis: Evaluate the physical location where you plan to set up your store. Consider factors such as foot traffic, visibility, accessibility, and proximity to other businesses. Sites like Google Maps and local city planning websites can be useful for this purpose.
Competition Analysis: Understand the competition in your proposed area. If there are already numerous dollar stores or similar businesses, it may be more challenging to break into the market. However, if there are few such stores, it could indicate either a great opportunity or a lack of demand. Online resources like Google Maps, Yelp, and other business directories can help you identify competitors in the area.
Market Trends: It’s important to understand the broader market trends in the retail sector and particularly within the discount stores segment. Online resources, industry reports, and financial news platforms can be useful for this.
Local Economic Conditions: Understanding the local economy is crucial. Factors such as unemployment rates, job growth, and general economic trends can give you an idea of the potential market size for a dollar store.
Customer Shopping Behavior: Online tools like Google Trends or social media sentiment analysis can help gauge interest in dollar stores and similar shopping concepts.
Pilot Project or Pop-up Store: Finally, if possible, consider running a temporary pop-up store or small pilot project. This can be an effective way to test demand without committing to a full-scale operation.
Local Chamber of Commerce or Economic Development Agency: These organizations may have resources or data available to help you understand the potential market.
Remember, market research is about gathering as much information as possible to minimize risk and make informed decisions. It may also be beneficial to consult with a business advisor or mentor, particularly one with experience in the dollar store or retail industry, as they may have valuable insights and advice.
Step 2: 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. In a business plan, you should consider your total investment in the business, a cash flow analysis, a complete cost of merchandise, anticipated revenue, projected monthly expenses, and more. If you are asking for a loan, the bank or funding agent must know how you will spend the loan, down to the store fixtures.
Related: How to write a business plan
Step 3: Select for a 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, 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 place for a store, as well as to better understand the types of products that the local community may seek out.
Dollar stores, such as Dollar General, are often located on the outskirts of small towns because they serve a part of the country that larger retailers like Walmart don’t serve directly. Dollar General’s district manager, Larry West, explains that there are many people who do not want to travel 30 minutes to go to the grocery store. Dollar stores can provide a convenient and affordable shopping option for residents of small towns who may have limited access to other retail options.
Related: Choosing a business location
Step 4: Secure funding
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.
As a dollar store typically operates on thin margins, the financial projections are going to be of particular importance. These should include detailed sales forecasts, expenses, and profitability projections. Also, be sure to account for seasonality and other factors that can impact sales.
Because of the high cost of starting a dollar store, obtaining funding 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 with a certain percentage being liquid capital. Small Business Administration (SBA) loan guarantees are often helpful as they will reduce the risk for the bank.
Step 5: Register the business
The next step in starting your dollar store is to make sure it’s properly registered and legal to operate. It’s important to note, however, that the exact process can vary from state to state, so you’ll need to check the specific requirements for your location. Here’s a general guide to the key registrations:
Form a Business Structure: The first thing you’ll need to decide is what business structure is best for your business. This could be a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. Each structure has its own advantages and disadvantages in terms of liability, taxation, and operational complexity. Many small business owners choose the LLC structure because it provides limited liability protection and has fewer administrative requirements than a corporation.
Related: Comparison of business structures
Register Your Business Name: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
Obtain Business Licenses and Permits: 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, sign permits, Employer Identification Number, and Occupancy Permit, among others.
Related: State guides for general business licensing
Zoning and Building Codes: Make sure your chosen location is properly zoned for a retail business and that your store complies with all applicable building codes. This could involve inspections from local code enforcement or fire department officials.
Step 6: Acquire the store and begin setting up
After securing funding and a suitable location for your dollar store, the real work begins. Here are several key steps and pieces of advice to prepare your location for opening:
Buildout and Renovations: Depending on the state of your location, you may need to perform renovations or buildouts. This could include installing fixtures and shelving, painting, or even major construction. Always ensure you’re complying with all local codes and regulations during this process.
Store Layout: Plan a thoughtful store layout that maximizes space, encourages purchases, and provides a positive shopping experience. Group similar items together and consider placing high-margin or impulse-buy items near the checkout. There are software options available, like SmartDraw or SketchUp can assist in creating a layout. These programs allow you to build a virtual representation of your store and experiment with different configurations.
Point of Sale (POS) System: A POS system is essential for sales transactions, inventory management, and sometimes even for customer management. Software such as Square, Clover, or Lightspeed can serve as comprehensive POS systems for a retail store.
Step 7: Hire & train staff
Most dollar stores can operate with just eight or nine employees. According to PayScale, the average hourly pay for sales clerks is $11.31 per hour, though the actual cost can be much higher in some areas. 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.
Here are some dollar store-specific tips for hiring and training staff:
Look for Detail-Oriented Applicants: Dollar stores often carry a wide variety of products, and inventory management can be a challenge. Look for employees who are detail-oriented and can maintain accurate inventory counts and neat, organized shelves.
Focus on Customer Service: Customer service is critical in a dollar store setting where the shopping experience can greatly influence repeat business. During the interview process, look for applicants who are friendly, patient, and customer-focused.
Train Employees on Store Layout: Given the variety of products in a dollar store, customers often need help finding items. Ensure all staff members are familiar with the store layout and product locations to assist customers efficiently.
Safety Training: Dollar stores can be quite busy, and shelves are often fully stocked. It’s important to train employees on proper lifting techniques and other safety protocols to prevent accidents.
Cash Handling and Loss Prevention: Train all employees on proper cash handling procedures and strategies for preventing theft, which can be a significant issue for dollar stores.
Product Knowledge: While it might be challenging due to the diversity of products, train your employees to have a basic understanding of the products you sell. This will make them more effective at helping customers and making suggestions for additional purchases.
Adaptability: In a dollar store, employees may have to wear many hats – cashier, stocker, customer service, etc. Look for individuals who are flexible and willing to perform various duties as required.
Hiring the right team is essential for any retail store, but especially for a dollar store where efficiency, customer service, and versatility are key. Taking the time to carefully hire and thoroughly train your staff can pay significant dividends in the success of your store.
Related: Hiring your first employee
Step 8: Purchase inventory
As you are getting close to opening the store, it’s time to start ordering inventory. Having a reliable and cost-effective supply chain is one of the most critical aspects of this business. Here are some tips to help you find suppliers and purchase inventory for your dollar store:
Wholesale Suppliers: Start by looking at wholesale suppliers that specialize in supplying dollar stores. Companies like DollarDays, Dollar Item Direct, or Kole Imports have a wide range of products that can be sold in dollar stores. Be sure to compare prices across different suppliers to get the best deal and remember to factor in shipping costs.
Liquidation Sales: Liquidation and closeout sales can provide a great source of inventory at heavily discounted prices. You can purchase these items in bulk and sell them at a significant profit. Companies like QuickLotz or Liquidation.com can be a good starting point.
Local Suppliers: Depending on what you plan to sell, local suppliers might also be an option. For example, if you’re selling locally made crafts or food items, you could partner with local artisans or farmers.
Retail Trade Shows: Trade shows and exhibitions can be excellent places to connect with suppliers and discover new products. These events provide opportunities to negotiate deals, ask questions, and see products first-hand.
Direct from Manufacturers: In some cases, you might be able to purchase products directly from manufacturers. This allows you to cut out the middleman and get the best possible prices. However, this often requires a significant upfront order.
Overseas Suppliers: Many dollar stores source inexpensive products from overseas, often from countries like China. Websites like Alibaba or Global Sources connect you with overseas manufacturers and wholesalers. However, keep in mind that while prices can be very low, ordering from overseas can be more complex, often involves larger order quantities, and comes with longer shipping times.
Inventory Management: Establish strong relationships with suppliers and place your initial inventory orders. It’s crucial to have a system for managing inventory — understanding what you have, what’s selling, and what needs to be restocked. Software like Vend, Square for Retail, or Shopventory can help manage inventory, especially as your business grows.
Product Selection: Aim for a diverse product selection that appeals to a wide range of customers. However, be mindful of your target market’s preferences and tailor your inventory to meet their needs. Keep track of what items sell well and focus on stocking those types of products.
Building relationships with suppliers is a crucial part of running a dollar store. Remember that negotiation is key — don’t be afraid to negotiate for better prices, particularly when you’re buying in large quantities. Also, keep in mind that it’s always a good idea to have backup suppliers in case of any issues with your primary suppliers.
Step 9: Begin marketing
Marketing a dollar store requires strategic planning and a strong understanding of the community you serve.
In order to keep costs low, grassroots marketing efforts can be highly effective for dollar stores. This could include distributing flyers or coupons, participating in local events or festivals, or sponsoring a local sports team. Leveraging relationships with local newspapers or radio stations for advertising can also be beneficial. Since dollar stores often serve a local or regional market, it’s crucial to emphasize your role as a community store and promote the convenience and value you offer.
Then there are several low-cost digital marketing tools such as social media platforms like Facebook, Instagram, or Twitter that can be used to reach your audience. Regularly posting about new products, special deals, or store events can keep your customers engaged and informed. Additionally, Google My Business is an essential tool for local businesses — it helps you manage your online presence across Google, including Search and Maps, making it easier for customers to find your store and learn about what you offer.
Last, in-store promotions can draw in customers and encourage them to buy more during their visit. This could include discounts on bulk purchases, special sales, or a bargain bin with deeply discounted items. Combining these marketing methods effectively can help a dollar store attract and retain customers, increasing its visibility and reputation in the community.
Step 10: Prepare to open for business
We’ve gone through the common steps that a dollar store owner will take when opening their business, and as you prepare to open the doors, there are likely a few loose ends to tie up. Here are some common remaining things to not overlook:
Business Insurance: It’s necessary to have appropriate business insurance coverage, such as general liability insurance, property insurance, and workers’ compensation if you have employees. This protects your business from potential losses and legal issues.
Bookkeeping: Implementing a robust bookkeeping system from the start is vital for tracking income, expenses, and overall business performance. Software like Wave Accounting (FREE) or Quickbooks can assist in this process.
Bank Account: Open a separate business bank account. This helps keep your personal and business finances separate, making it easier to manage finances and taxes.
Setting Pricing: All items in a dollar store are typically priced at a single price point, but it’s crucial to make sure you’re still making a profit. Factor in all your costs, not just the cost of the item from the supplier, but also overhead costs like rent, utilities, and salaries.
Payment Methods: In today’s digital age, accepting credit cards and mobile payments is almost a must. Find a reliable payment processor that offers low fees. Many modern POS systems include payment processing, making it easy to accept a variety of payment methods.
Legal and Regulatory Requirements: Ensure you’re in compliance with all legal and regulatory requirements. This includes everything from obtaining the necessary business licenses and permits to following labor laws if you have employees.
Policies and Procedures: Have clear policies and procedures in place for returns, customer complaints, and other common retail scenarios. Train your staff on these procedures.
Remember, the needs and exact steps can vary significantly based on your location, the size of your store, and your specific business model. It’s always a good idea to consult with legal and financial professionals to ensure you’re setting up your business correctly. The road to opening a dollar store is filled with tasks, but careful planning and diligent execution can set the stage for a successful retail operation.
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Therefore, it’s crucial to implement a robust inventory management system. Regularly track what you have, what sells well, and what needs to be restocked. You may start with a simple spreadsheet, but as your store grows, consider investing in inventory management software that can automate much of the process.
Regularly review sales data to understand which items are your best sellers and which ones aren’t moving. This can guide your purchasing decisions and help you maintain an optimal inventory level. Additionally, keep a close eye on seasonal trends and plan your inventory accordingly.
Common Questions When Starting A Dollar Store
How much does it cost to start a dollar store?
The total cost of starting a dollar discount store can vary significantly depending on various factors such as location, size of the store, and the amount of inventory you start with. On average, you could expect the total startup costs to range between $50,000 to $235,000. This estimate includes everything from leasing and renovating your store location to purchasing initial inventory and advertising your grand opening.
Here’s a rough breakdown of the costs:
Franchise Cost: While you can open an independent dollar store, if you want to operate under a name brand like Dollar Tree, Family Dollar, etc., there will be a franchise fee that can range from $10k – $30k, plus royalties (a percentage paid based on sales) depending on the brand you work with. Unfortunately, you can’t get a Dollar General franchise, as Dollar General stores are all corporate owned.
Lease/Rent: Depending on your location, leasing a retail space could cost anywhere from $10 to $50 per square foot per year.
Store Build-Out/Renovations: These costs can range widely, depending on the current condition of the leased space and the extent of the renovations needed. An estimate would be between $10,000 and $50,000.
Initial Inventory: You will likely need to invest between $20,000 and $50,000 in inventory to adequately stock your store at the beginning.
Equipment: This includes shelving, cash registers or a POS system, shopping carts or baskets, signage, and more. Expect to spend about $10,000 to $20,000 on equipment.
Permits and Licenses: The cost for these can vary widely depending on your location, but you might expect to spend a few hundred to a few thousand dollars on necessary permits and licenses.
Advertising and Marketing: Budget for marketing costs, especially for your grand opening. A ballpark figure might be between $1,000 and $5,000.
Operating Expenses: As you mentioned, it’s essential to have a buffer of at least three to six months’ worth of operating expenses. This includes rent, utilities, employee wages, insurance, and more. Depending on your costs, this could range from $10,000 to $30,000.
Keep in mind these are rough estimates and the actual costs can vary. It’s crucial to conduct your own research and create a detailed budget before starting your dollar store. Also, it’s always good to overestimate costs a bit to account for unexpected expenses.
How profitable are dollar stores?
The income a dollar store owner can make depends on a variety of factors such as store location, size, operating costs, and the amount of business the store does. A commonly used metric in the retail industry is the profit margin, which is typically expressed as a percentage of the selling price. Dollar stores operate on thin margins, typically ranging from 30% to 35%.
According to Statista, the average net sales per Dollar Tree store in the United States totaled about $1.6 million U.S. dollars. So to illustrate the potential in this example, let’s assume our brand-new store will generate $500,000 in sales in its first year (which may vary significantly depending on the factors mentioned). If we apply a 35% profit margin to this, we’d have a gross profit of $175,000 ($500,000 x 0.35).
From this, we can calculate gross profit, where we need to subtract all operating expenses such as rent, utilities, salaries, insurance, and more. For example, if the total operating expenses add up to $125,000 annually, the net income (or profit) for the store owner would be $50,000 ($175,000 – $125,000).
Remember, these are rough estimates and actual numbers can vary significantly based on a multitude of factors. Also, these calculations assume all items are sold at a profit, which may not always be the case. It’s crucial for anyone considering opening a dollar store to conduct a detailed financial analysis to get a more accurate estimate of potential earnings.
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.
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
