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.
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, and 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.
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.
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.
Who is the target market for your dollar store?
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.
Skills, experience, and education useful in running 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 through business workshops within your community.
Costs to Start a Dollar Store
Dollar stores offer a large variety of products at low prices, and starting up a store requires a significant financial investment. The following expenses and more should be included in any dollar store’s budget.
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.
Steps to Starting a Dollar Store
Step 1: Write your 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.
Step 2: Form a Business Entity
A business entity refers to how a business is legally organized. There are four primary business entities 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.
Related: Comparison of Business Entities
Step 3: Select your Location
It’s generally beneficial for a dollar store to be located in higher-traffic locations, which typically equates to high rent or purchase price.
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 some general local, state, and federal business registrations that may be needed include a sales tax permit, Employer Identification Number, and Occupancy Permit, among others.
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.
Step 6: Open a Business Bank Account
Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the business’s income and expenses.
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. The marketing costs will vary from activity to activity.
Be sure to budget for the grand opening as you want to get as many people to know about your new store as possible.
Step 8: Obtain Business Insurance
Most dollar stores need a few different types of insurance to keep them fully covered against common risks:
- 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.
Insurance costs will vary according to many factors, including the cost of a business’ 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.
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 workman’s comp insurance, should be included in the budget.
Related: Hiring your first employee
Step 10: 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.
How much can you potentially make owning a dollar store?
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.
Things to consider before starting a dollar store
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.
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.
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.