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Why $15 minimum wage might hammer these big retailers

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The dollar store models of Dollar General and Dollar Tree — essentially to pay workers federal minimum wages and move cheaply sourced merchandise at high volume — may be put to the test should a new Democrat proposal to lift the minimum wage to $15 an hour gain steam. Yahoo Finance’s Brian Sozzi weighs in.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Tuesday morning. Let's talk a bit about the minimum wage and the impact that an increase in the minimum wage to $15-- now, the proposal will bring it up to 15 bucks over the next couple of years. But Brian Sozzi, I know you're looking at one sector of the economy, but there could be a big impact on the business.

BRIAN SOZZI: Yeah, Myles and Julie. I'm looking at dollar stores. So I wrote a full piece right now on Yahoo Finance about this, really pegged to very exhaustive research out of random from Randal Konik over at Jefferies.

He noted that Dollar General could see as much as $700 million in extra costs if the minimum wage goes to $15 by 2025, as has been proposed recently by Democrats. Dollar Tree, that impact could be $500 million. And why you're seeing big potential increases along these lines, just look at where most of these stores are.

Most Dollar General stores, they pay $7.79 at these stores, the bulk of these stores. At Family Dollar, which is owned by Dollar Tree, a bulk of their stores pay their workers $8.43 an hour. And then Dollar Tree is the big spender here. At those Dollar Tree stores, they are paying workers $9.36.

So the whole business model of dollar stores has been they feast on selling high volumes of cheap stuff sourced from China, but they also pay, for the most part, minimum wage to their workers. And this could be a real hit to their business model moving forward, if wages do ultimately go up to $15 an hour.

Now, you could see them try to offset any type of increase. They can cut inventory. You know, they could just hold less in store so there's less cost there. They could slow the pace of store openings. These have been some of the most aggressive retailers opening stores over the past decade. They can slow that pace down. They can introduce more national brands.

You know, those employees, while a cost, they will also have more money in their pockets. So they will probably-- they could very well buy more from a Dollar Tree or a Family Dollar or a Dollar General. And they could introduce more fresh food. You know, that's also been an initiative in the dollar store channel in the past five years. Sell more fresh food, get more of that consumer shopping basket.

But even if we don't reach $15 an hour over the next five years, the outlook for wages is clearly up, and these dollar stores could be absolutely hammered.

MYLES UDLAND: Yeah. You know, Sozz, I just want to pick up on that point about higher minimum wage increasing spending power for the employees. Because you're outlining here that a number of these shops are basically paying half of what this national minimum wage would be at.

So, OK, on the labor line of the income statement, you are now seeing your costs double as a business, but your employees are also seeing their income double as a result of higher wages.

And I do wonder, as things go along here and this process gets rolled out, if the very myopically-focused on the cost side conversation, which is where we're at right now-- this makes cost higher for businesses-- perhaps will start to be peppered in with more discussion of what it means when consumers have additional spending power.

Because we've seen the power of that, certainly, in 2020 with stimulus checks going out and how that money came back into the economy.

BRIAN SOZZI: That is very hard to estimate as an analyst. As an analyst, you could estimate costs fairly reasonably. You have the total number of employees. You put it into your model. You do that. You think wages could reach to $15 an hour. You put that in the model. But it's unclear, because let's say they do get higher wages, how much do they spend in the stores?

And also let's keep in mind, too, let's say these workers are making $15 an hour by 2025. Maybe after all these years of spending and buying goods at Dollar General, Dollar Tree, and a Family Dollar, maybe they go across the street and splurge a little bit more to Walmart. Maybe they trade up even more and go to Target.

Those are the considerations for consumers, and those are the considerations that are hard to put into a financial model.

MYLES UDLAND: Yeah. Certainly interesting times ahead.