By Richa Naidu and Aishwarya Venugopal
CHICAGO (Reuters) - U.S. dollar stores including Dollar General (NYSE:DG) and Family Dollar are likely to see a sales and earnings boost from the Biden administration's plan to hike food stamp benefits, an added payoff for the chains' strategy to tap the $274 billion fresh food market.
The U.S. Department of Agriculture (USDA) said last week that as part of a plan to promote a more nutritious diet among Americans, it is raising average Supplemental Nutrition Assistance Program (SNAP) benefits by more than 25% versus pre-pandemic levels.
In a $1 trillion food-at-home industry, the additional payout is expected to potentially add about $6 billion of increased funding to shoppers' wallets starting in October, analysts at Evercore said.
Under the new rules, average monthly benefits, $121 per person before the pandemic, will rise by $36. All 42 million people in the program will receive additional aid.
With the additional $36, "you would expect they would buy more things like meat, fish, fruits and vegetables because those are high-priced items that tend to be responsive to income changes," said Joe Glauber, former USDA chief economist and a senior research fellow at the International Food Policy Research Institute.
Dollar stores count on low-income shoppers, and welfare checks tend to drive sales. In the pandemic, sales have skyrocketed with the help of shoppers benefiting from stimulus money, food stamps, child tax credits and higher wages in a tight labor market.
A Dollar General store in Norridge, Chicago sells 30-cent bunches of bananas and charges 75 cents for a lemon. This compares to a single banana that costs 27 cents at a Kroger-owned Mariano's store in a similar neighborhood in Chicago, where lemons cost 89 cents each.
A GREAT POSITION
"They (dollar stores) are going to have a tremendous benefit from this step-up in government support," said Mark Cohen, the director of retail studies at Columbia Business School and former chief executive of Sears Canada. "It plays perfectly into the hands of their existing customer base, who now will have more money to spend."
Dollar stores run thousands of outlets that are walking distance from shoppers who use government assistance to buy food.
"We do well when she (the customer) has a little extra money to spend ... Now if things start to more normalize and/or go the other way, then we're in a great position as well because she needs us even more," Dollar General Chief Executive Officer Todd Vasos said at an industry conference in June.
In securities filings, the company flags the importance of SNAP to its earnings. Both Dollar General and Dollar Tree (NASDAQ:DLTR), which declined to comment, will report earnings on Thursday.
If SNAP recipients have more to spend, they're more likely to buy more expensive food at dollar stores like fresh items that require refrigeration, Scott Vinson, the National Retail Federation's vice president for government relations, food and energy policy, said.
Still, not everyone trusts dollar stores for fresh produce, especially with big retailers such as Walmart (NYSE:WMT) and Target (NYSE:TGT) bolstering their offerings.
"I just don't like the quality of it...I feel produce would be better at other places so I never really looked here, to be honest with you," said Laura, 56, an accountant from Harwood Heights, Chicago who was loading up her cart with packaged food at the Norridge store.