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Unpacking the Dollar Tree price hike

DAVID FOLKENFLIK, HOST:

Since its founding decades ago, Dollar Tree has kept its prices constant - $1 for just about every item for sale in the store. That will change starting next month. Dollar Tree now says it will raise prices by 25% from a dollar to a buck 25. The company's CEO said the price hike is permanent, not the result of short-term dynamics like inflation. Yet many Americans are concerned about inflation. So what can a price increase like this tell us about the economy more broadly? For that, we rang up Willy Shih, a longtime corporate executive-turned-professor at the Harvard Business School.

Willy Shih, welcome.

WILLY SHIH: Oh, thank you, David.

FOLKENFLIK: As a scholar, as a former corporate executive, what stands out to you about Dollar Tree's announcement?

SHIH: Well, I think, first of all, Dollar Tree is a really interesting retail chain because, you know, they have a unique challenge in meeting their customer promise of offering everything at $1. And now suddenly moving that up to 1.25 - or maybe it wasn't so sudden - that's really quite a change. I think, you know, the challenge for them in meeting their customer promise is - you know, what can you sell for a dollar? If you go into a store these days, you find things like party supplies, greeting cards, inexpensive toys, and you find consumables. But what that price increase tells you is they're having a hard time selling you things just for a dollar.

FOLKENFLIK: Well, I got to say, professor, at first blush, it seems hard to blame. I did the math. A dollar in 1986, which is the year of Dollar Tree's founding, works out to a scooch over 2.50 in today's money. That's inflation over time. More recent inflation spikes have to do with increases of cost of labor and shipping. Why isn't this announcement about inflation ultimately?

SHIH: Well, it really is in some regards because the challenge a store like Dollar Tree has is - how do I get things to you in a dollar? And in many ways, it's the relatively high cost of handling goods, putting them on the shelf. It's kind of like shipping and handling, you know? If you go into Dollar Tree, you find these packages. I was in there the other day, and they had a package of Advil that was two tablets for a dollar. OK? So what you see there is most of the cost of putting that good on the shelf was, in fact, the packaging and the shipping and the handling - right? - less of the good.

And so when you have this escalation in shipping costs and you also have these bottlenecks in their supply chain because a lot of their inexpensive goods come from China, it makes it a real challenge for them to be able to offer a variety of goods. By going up to a dollar 25, they can really increase the range of what they can squeeze in under that price umbrella.

FOLKENFLIK: I got to say the announcement sparked some criticism, even some derision on social media. Dollar Tree made over a billion dollars in profits just in the first nine months of this year. As a top aide to Senator Bernie Sanders noted, the company CEO's compensation exceeded $10 million last year, while many of his employees make little more than $8 an hour and reliant on food stamps. So how needed is this extra revenue?

SHIH: Well, I think it's as much about what can they offer in the store. If you listen to what management said in their recent earnings calls, it's - you know, if we keep the price point of the dollar, we are precluded from selling more and more items. By raising that kind of price floor, if you will, then there are more things that they can get into a package that sells for a dollar 25 that they can get onto the shelf. Now, I think they've been hit pretty hard by increased freight and labor costs as well, so I can see both sides of this debate.

FOLKENFLIK: Are you among those who believe that inflation is likely to stick around in a significant way, past the first - the last quarter, say, of the year, first quarter of next?

SHIH: Well, I think inflation - some of the cost increases that we are seeing are going to be a little more than transitory. We see - especially in some of the major international trade lanes, we see shippers locking in longer-term contract rates as a way of guaranteeing that they're going to get space. So those costs are going to be sticky on the way going down. And we see labor rates as they increase. Those are probably going to be very sticky. They're not going to easily go down as well. So I think we're going to see more than this transitory inflation. We will see ups and downs in oil prices and a lot of commodities. But labor costs, shipping costs - those are likely to stay elevated for some time.

FOLKENFLIK: We've been hearing from the economist and Harvard Business professor Willy Shih. Willy Shih, thanks for being with us.

SHIH: Thanks for having me.

(SOUNDBITE OF MUM SONG, "GREEN GRASS OF TUNNEL") Transcript provided by NPR, Copyright NPR.