In 2025, Potential Tariffs Implemented by President Trump on Chinese Imports Might Negatively Affect Dollar Tree More than Dollar General.
In 2025, Potential Tariffs Implemented by President Trump on Chinese Imports Might Negatively Affect Dollar Tree More than Dollar General.
On November 5th, Donald Trump emerged victorious in the U.S. presidential election. In line with traditional political practices, Trump made numerous pledges during his campaign, one of which was an intention to enhance import taxes on goods originating from China. Some are referring to this as the sequel to Trump Tariffs. Since his victory, the President-elect's resolve to implement these tariffs has only intensified.
The financial community is expressing concerns over the potential consequences of these tariffs on stocks that specialize in discount retail, such as Dollar Tree (-4.07%) and Dollar General (-1.27%). These two companies are frequently viewed as competitors, and experts presume that the new tariffs will exert pressure on their profit margins.
Upon closer inspection, it appears that Dollar Tree may be affected more significantly than Dollar General, for a straightforward reason.
How import tariffs could pose a threat to discount retail
Drive across the United States, and you'll soon realize that Dollar Tree and Dollar General outlets are ubiquitous. As of November 2nd, Dollar Tree boasted approximately 8,900 locations of its namesake brand and over 7,700 Family Dollar locations. Dollar General, in turn, had more than 20,500 establishments as of November 1st.
Both Dollar Tree and Dollar General sell a vast array of products that are also available in big-box retailers. However, their strategies are geared toward making their stores easily accessible to consumers, thus offering convenience. Consumers may still prefer online shopping or big-box stores for certain purchases, but when it comes to quick acquisitions, these two chains often have the upper hand due to their proximity to customers.
These stores may not always offer the lowest prices, but they firmly uphold the tenet of competitiveness regarding pricing. Many consumers perceive them as low-cost alternatives, which underscores the importance of affordability in their business models. Consequently, President Trump's proposed tariffs could constitute an issue for these businesses.
To simplify, Trump's tariffs entail an additional 10% tax on imports from China. For instance, if a product from China currently costs $100, the new tariff would bump up its price to $110.
Any company that sources products from China would be compelled to either elevate its prices or accept reduced profit margins. For discount retail establishments, it's likely that they'll face a mix of both. They cannot raise their prices too drastically because bargain-hunters expect cheap deals. In the event that they increase prices excessively, they may risk alienating consumers, which is why they may choose to tolerate a shrinkage in their profit margins.
That being said, the predicament is more pressing for Dollar Tree compared to Dollar General.
Dollar General investors may have grounds for optimism
Despite their resemblances, Dollar Tree and Dollar General share some fundamental differences.
According to its annual report for 2023, Dollar Tree sources around 41% to 43% of its products (in terms of value, not quantity) from China. Conversely, Dollar General only sourced 4% of its products in 2023, irrespective of their origin. As a result, the immediate impact of Trump's tariffs would be more pronounced on Dollar Tree compared to Dollar General.
Should the proposed tariffs on Chinese imports materialize, Dollar Tree would be under immense pressure to reassess its pricing strategy for nearly half of its inventory.
Dollar General, on the other hand, isn't likely to face the same immediate concerns. However, it isn't entirely insulated from second-order effects. The company stocks a plethora of branded products sourced from other businesses. If these companies are forced to hike their prices due to increased costs, Dollar General would inevitably be exposed to price increases. In summary, there's still a potential for ripple effects.
That being said, there's a contrast between the two, and this disparity is one of the reasons I lean towards favoring Dollar General stock over Dollar Tree stock today. If tariffs escalate the costs of name-brand products available in Dollar General's outlets, their prices will consequently rise, even as they do in other retail outlets. In essence, Dollar General may be better-equipped to conserve its bargain-price perception.
In the case of Dollar Tree
I'm not attempting to instill fear in relation to Dollar Tree's outlook. Instead, investors should make an effort to maintain historical context. Import tariffs experienced an upward trend during Trump's initial term, yet the gross margin and operating margin for both Dollar General and Dollar Tree remained unaffected.
Therefore, the pending import tariffs are among the factors that investors should take into account when evaluating Dollar Tree stock and Dollar General stock. However, there are numerous additional elements to consider before making a investment decision, and both companies possess the capacity to thrive despite evolutions in the cost of goods from China.
The financial analysts are closely monitoring the impact of President Trump's proposed tariffs on Chinese imports, as they could affect the profit margins of discount retailers like Dollar Tree and Dollar General. If the tariffs are implemented, Dollar Tree, which sources around 41-43% of its products from China, might need to adjust its pricing strategy, potentially impacting its profitability. On the other hand, Dollar General, sourcing only 4% of its products from China, might be less immediately affected, but could still be exposed to second-order effects such as increased prices of branded products from suppliers.