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Much has been made about the rise of Temu and its potential to disrupt Amazon in online shopping. But investors in the ecommerce giant need not fret. With lucrative side businesses that range from cloud computing to digital advertising, Amazon’s earnings growth is not at risk. Instead, it is dollar store operators that have the most to worry about.
America’s discount stores are struggling. The sector’s two biggest players — Dollar General and Dollar Tree — have taken the axe to their full-year guidance. Shares have cratered, with the companies losing 43 and 52 per cent of their respective values this year. The assumption that dollar stores would do well in good times and bad has been shattered.
The pullback in spending among low-income customers has hurt. Competition from Walmart is stiff. The companies did not mention China’s Temu. But its meteoric rise has arguably been more disruptive for the discounters.
Temu sells low-price household goods, apparel and toys, making it akin to a mega digital dollar store. Since launching in the US in September 2022, the online retailer — powered by big ad spending — has shot to the top of the app stores. While parent company PDD Holdings does not break out Temu’s financial performance, Temu’s global gross merchandise value — the total of all goods sold — reached $17bn last year and could grow to $40bn this year, according to Bernstein Research.
Within this, Temu has made the most inroads among low-income shoppers. In the space of two short years, its share of US discount spending has gone from zero to 17 per cent, according to consumer data analytics firm Earnest Analytics. Over the same period, Dollar General’s market share fell from 63 per cent to 52 per cent. Dollar Tree, which also owns Family Dollar, saw its share shrink 6 percentage points to 19.5 per cent.
Temu can undercut US rivals by delivering cheap goods straight from factories and warehouses in China. Its popularity has thrown a wrench into the dollar store business model. In previous times of financial stress, dollar store operators have been able to count on middle-class shoppers to trade down to their stores and low-income ones to switch to private-label offerings. Temu and its rock-bottom prices means inflation-wary shoppers can skip the trip to the dollar store altogether.
Relief may be coming. Regulators in Europe and the US are looking to crack down on the “de minimis” rule that has allowed Temu to send (in small scale) cheap goods overseas tariff-free. Between macroeconomic headwinds, shoplifting and company-specific mis-steps, dollar store operators could do with the break.
