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Dollar Tree, and its customers, feel pain of tariffs on Chinese imports

USA TODAY logo USA TODAY 10/10/2018 Paul Davidson
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Few stores, and shoppers, are as affected by the Trump administration’s escalating trade fight with China as Dollar Tree and its massive base of low- and middle-income customers.

Late last month, President Donald Trump slapped a 10 percent tariff on $200 billion worth of Chinese imports. Unlike previous rounds of tariffs on Chinese products, which largely taxed industrial goods, the new duty touches everyday consumer items. That's the sweet spot for the Chesapeake, Virginia-based Dollar Tree, which owns 15,000 Dollar Tree and Family Dollar discount variety stores across the U.S., and may soon need to pull items off shelves, or take other steps to offset the higher costs. The tariff may also hit communities if the company pulls back on store openings and hiring. 

Many of its inexpensive products can be made only in China, company executives said. Dollar Tree imports about 42 percent of its products, while Family Dollar imports about 23 percent, according to estimates from the Telsey Advisory Group, a research and consulting firm. Most of the shipments are from China, the firm said.

The tariff will hit about 10 percent of Dollar Tree's merchandise, or several thousand items, including household, health and beauty products, food, hardware and electronics, the company's chief executive, Gary Philbin, said at a hearing before the U.S. trade representative in late August.

The higher tariff is forcing Dollar Tree to pay more to import the goods. It can eat the higher costs, pass them on to customers or find a way to offset them. 

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While most discount store shoppers could feel the pinch, customers of the so-called dollar stores are especially budget-constrained and would be hurt by what is essentially a new tax on their purchases. And higher costs lay ahead: The new tariff is set to rise to 25 percent on Jan. 1.

Philbin said in a letter to the U.S. trade representative last month that his company simply can’t raise prices at Dollar Tree, which sells everything for $1. At Family Dollar, the company has a little more wiggle room, with about 40 percent of items priced at $1 and the vast majority costing $3 or less.

As a result, if the U.S.-China standoff isn’t resolved soon, customers are likely to see slightly less merchandise in stores, smaller packages at the same price for certain items and perhaps some higher prices at Family Dollar, Philbin said. Dollar Tree also may pull back investment and hiring in communities if its profits fall, he said.

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More than 60 percent of Dollar Tree’s shoppers – at both the Dollar Tree and Family Dollar chains – have less than $40,000 in annual household income, Philbin wrote in his letter to U.S. Trade Representative Robert Lighthizer. Half of that group earns less than $20,000 a year.

“They truly are among the most vulnerable U.S. consumers,” Philbin said in the letter. At the hearing, he said they depended on the stores’ offerings “to make ends meet.”

Among the products affected by the tariffs are: vegetables, perfume, shampoo, makeup, dog leashes, handbags, paper, bed sheets, dishes, cups, carpet, batteries, clothing, hats, tweezers, screwdrivers and lamps.

“The U.S. consumer will suffer,” Philbin said at the hearing.

Company officials would not comment for this article.

Outside a Dollar Tree in Annandale, Virginia, last week, Edgar Escobar, 48, said he shops at one of the chain’s area stores about twice a week, buying staples such as bread, soda and candy, as well as plastic containers and mirrors.

“I like it because everything is cheap,” said Escobar, a house painter. If the store carries fewer items because of the tariffs, he said he would clip supermarket coupons but still couldn’t match the deals he gets at Dollar Tree.

Joseph Feldman, analyst at Telsey Advisory Group, believes Dollar Tree will likely rely mostly on reducing package sizes, a tactic shoppers will notice. “The consumer is really smart,” he said.

The current 10 percent tariff likely will have some effect on the stores in coming weeks, Feldman said. But he added, “You can probably figure out a way to deal with it,” in part by absorbing some of the added cost and coping with narrower profit margins.

Philbin told analysts in August that the company “can also attempt to negotiate price concessions” with suppliers.

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But the 25 percent duty in January will take a bigger toll, Feldman said.

Philbin said the tax will make Dollar Tree’s stores less competitive with higher-priced discount retailers.

“This could result in slower growth,” he said at the hearing. The tariffs, if sustained, would shave company revenue by tens of millions of dollars a year, he estimated.

That, he said, could slow new store openings, limit the need for new distribution centers and curtail hiring.

The company opened 603 stores last year and has been adding more than 6,000 retail associates a year. The tariffs “put these new jobs and possibly existing jobs at risk,” Philbin said. Dollar Tree employs about 175,000 workers.

The duties also threaten Dollar Tree’s plans to open a new distribution center every 12 to 18 months, he said. Each generates about $100 million in investment and about 400 new jobs.

Philbin said many of its products can be sourced only from China because they’re crafted or packaged by hand, incurring labor costs that would be exorbitant in the U.S. Also, he said, the U.S. lacks some injection plastic molding techniques and sufficient production and distribution capacity for many products.

One factory in China has expanded to more than 400 injection molding machines to meet Dollar Tree’s demand, Philbin said.

“That type of production capacity simply does not exist anywhere outside of China,” he wrote in the letter.

The company, he said, is exploring production in foreign countries outside China. But, he said at the hearing, “We believe it will take two to four years to improve their supply chains.”

In Annandale, Kay Durra, 41, was at the second of three Dollar Tree outlets she was hitting that night as she tried to cobble together enough feather boas for a Halloween flamingo costume.

She typically buys party decorations and craft items at the shop that cost a third as much as they do at traditional stores, as well as snacks. “They have pretty interesting stuff you can’t get anywhere else,” said Durra, a retirement administrator.

“It would be pretty disappointing if they didn’t have the variety of things or the quantity (in a package) that you’d expect," she said. You'd have to go to (big-box stores) and pay more.”

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