MONEY cellphones

Hey AT&T Customers: It May Be Time to Give Up Your Unlimited Data Plan

woman walking past AT&T store
Bloomberg—Bloomberg via Getty Images

AT&T and other wireless carriers may continue to offer unlimited data plans, but they're not the great deal they once were.

Almost half of all AT&T mobile customers are still clinging desperately to a grandfathered cellphone plan with unlimited data, according to a survey from Consumer Intelligence Research Partners (CIRP). But that choice is looking particularly unfortunate in light of the Federal Trade Commission’s latest lawsuit.

In a complaint filed Tuesday, the federal agency alleges that AT&T has been slowing data speeds for consumers on “unlimited” plans, in some cases by up to 95%. The practice of reducing data speeds for heavy users, called “throttling,” can make it very difficult to complete routine tasks like browsing the web or using GPS navigation. In some dense metro areas like New York and San Francisco, AT&T allegedly throttled users who consumed as little as 2 GB a month. Altogether, the New York Times estimates, about 25% of AT&T’s unlimited data plan customers were affected.

“AT&T promised its customers ‘unlimited’ data, and in many instances, it has failed to deliver on that promise,” FTC chairwoman Edith Ramirez says in a statement. “The issue here is simple: ‘unlimited’ means unlimited.”

AT&T calls the charges “baseless” and says it warned customers that heavy users could be throttled. But while AT&T’s alleged behavior is particularly egregious, the carrier wouldn’t be the only one to limit data use on so-called “unlimited” plans, as Ars Technica has reported.

For example, Sprint’s My Way plan promises unlimited data for the life of the line of service, but read the fine print: The carrier also throttles the top 5% of its users, as part of its “network management” strategy. Sprint says that users who consume more than 5 GB are generally at risk for throttling, though it varies by month.

Likewise, while T-Mobile has repeatedly said it does not throttle its unlimited customers, its fine print notes that the top 3% of users might see their data slowed “during times and in places of network congestion.”

Similarly, Verizon throttles the top 5% of customers still on 3G. Verizon had planned to slow speeds for the heaviest users on 4G, but it shelved that idea after receiving its own stern warning from the FTC. Maybe Verizon has less to worry about—according to CIRP, it has already moved the vast majority of its customers off unlimited plans.

In fact, Verizon hasn’t sold a single new unlimited cellphone plan in two years. AT&T hasn’t offered an unlimited plan in four years. The two biggest American carriers have been trying to wean customers off of unlimited data plans for a while now, or else the wireless companies risk becoming victims of their own success.

First Unlimited Calls, Then Unlimited Data

The unlimited model was born in the late 1990s, when AT&T launched its first One Rate phone plan, explains Kirk Parsons, senior director of telecom services at J.D. Power. Customers loved the certainty: the same bill, every month, with no separate charges for roaming or long distance calls.

That model still made sense when the phone carrier introduced data plans for smartphone users—so much sense that by 2008, AT&T actually forced all iPhone 3G customers to buy an unlimited data plan. Back then, it was a moneymaker: You could offer unlimited data because people wouldn’t use a lot of it, and it didn’t cost a lot anyways. That’s all changed.

“When smartphones started coming out, the networks weren’t up to snuff,” Parsons says. “You couldn’t actually enjoy the experience of videos and downloads. Once 3G coverage widened, then we transitioned from 3G to 4G, that’s when you really saw people using data on their phones, streaming music, watching shows.”

Now, the carriers have created a nation of data addicts. As of December 2013, Americans consumed 269.1 billion MB of cellphone data a month—far more than double what they consumed a year before. It’s just too expensive to keep up with our insatiable demand. The carriers have to buy or lease radio frequencies all around the country to provide good service, says Logan Abbott, president of Wirefly.com. There’s only so much bandwidth.

“Consider it like a nationwide wifi network,” Abbott says. “If you have everyone in your house on one wifi connection—downloading, streaming Netflix, doing data-intensive stuff—your bandwidth is going to get used up … It’s going to put drag on your network.”

Of course, if AT&T acted as the FTC claims, consumers got a really raw deal. While the other carriers say they throttle just a small fraction of the heaviest users for network management reasons, AT&T is accused of slowing service for 3.5 million of its 14 million subscribers.

Still, limited data is the way of the future. Not that AT&T customers want to hear it—there’s a reason 44% of them haven’t changed cellphone plans in over four years. “It doesn’t necessarily make sense, but they like the security blanket of never being overcharged,” Abbott says. “They have a vintage product, and they don’t want to let go.”

Paying for More Data Than You Actually Use

The truth is, if you’re an AT&T user, it might be time to give up your unlimited plan. The first thing to do is check your account to see how much data you really use—it may not be as much as you think.

Slate has prepared some handy interactive charts that show how much data you’d have to use before an unlimited plan pays off, but this is the main takeaway: If you’re only using 1 or 2 GB of data—like most typical users—you’re likely overpaying for the unlimited option. You simply don’t need that much.

If, on the other hand, you’re using a lot more, the FTC says you’re being throttled—in which case, you might as well shell out a little more money for a data plan that actually delivers the speeds advertised.

Related:

MONEY

Big-Time Authors Auction Off Naming Rights for Charity

Book with cover with woman with mask and question mark over face
MONEY (photo illustration)—iStock (book); Joseph Desire Court/DEA/A. DAGLI ORTI/Getty Images (cover)

You can be the next ‘Girl With a Pearl Earring’ for $10,000, thanks to writers selling character names—but no, it's not for personal gain.

Tracy Chevalier, author of the 1999 novel-cum-Scarlett-Johansson-flick Girl With a Pearl Earring, is one of seventeen authors auctioning off character names for upcoming novels—not to pay for giant-mansion-hiding hedges—but to fund therapy for survivors of torture living in the U.K.

Other authors participating include Margaret Atwood, Ken Follett, Julian Barnes, Pat Barker, Ian McEwan, Robert Harris, Will Self, and Zadie Smith.

The November 20 auction is for books in the works (so no, you can’t actually be Johan Vermeer’s fictional servant this time) and you can start bidding today.

Chevalier says she auctioned off the name of a minor character in a book for £800 (about $1,300) last year but would require a bigger donation—to the tune of $10,000— for a main character.

No matter how generous the donation, however, it’s important your name isn’t already famous for other reasons. “It’s not going to work if you’re Bill Gates,” Chevalier says.

This isn’t the first time authors have used a similar stunt for charity: Stephen King, John Grisham, Dave Eggers, and Game of Thrones author George RR Martin have all done the same for causes including a wolf sanctuary and food charity.

The Kardashians did not respond to requests for comment on how much it would cost to star in the next edition of gaming app Kim Kardashian: Hollywood.

MONEY Fast Food

Taco Bell Launches App to Make Fast Food Faster

Like McDonald's, Taco Bell is trying to win over millennials by feeding their need for speed.

MONEY The Economy

The Stock Market Loses a Big Crutch as the Fed Ends ‘Quantitative Easing’

The Fed has concluded its asset-purchasing program thanks to an improving labor market. Here's what QE3 has meant to investors and the economy.

After spending trillions of dollars on bond purchases since the end of the Great Recession — to keep interest rates low to boost spending, lending, and investments — the Federal Reserve ended its stimulus program known as quantitative easing.

The central bank’s decision to stop buying billions of dollars of Treasury and mortgage-related bonds each month comes as the U.S. economy has shown signs of recent improvement.

U.S. gross domestic product grew an impressive 4.6% last quarter. And while growth dropped at the start of this year, thanks to an unusually bad winter, the economy expanded at annual pace of 4.5% and 3.5% in the second half of 2013.

Meanwhile, employers have added an average of 227,000 jobs this year and the unemployment rate rests at a post-recession low of 5.9%. It was at 7.8% in September 2012, when this round of quantitative easing, known as QE3, began.

What this means for interest rates
Even with QE over, the Fed is unlikely to start raising short-term interest rates until next year, at the earliest.

In part due to the strengthening dollar and weakening foreign economies, inflation has failed to pick up despite the Fed’s unprecedented easy monetary policy.

And there remains a decent bit of slack in the labor market. For instance, there are still a large number of Americans who’ve been unemployed for 27 weeks or longer (almost 3 million), and the labor-force participation rate has continued its decade long decline. Even the participation rate of those between 25 to 54 is lower than it was pre-recession.

What this means for investors
For investors, this marks the end of a wild ride that saw equity prices rise, bond yields remain muted, and hand wringing over inflation expectations that never materialized.

S&P 500:
Equities enjoyed an impressive run up after then-Fed Chair Ben Bernanke announced the start of a third round of bond buying in September 2012. Of course the last two times the Fed ended quantitative easing, equities faced sell-offs. From the Wall Street Journal:

The S&P 500 rose 35% during QE1 (Dec. 2008 through March 2010), gained 10% during QE2 (Nov. 2010 through June 2011) and has gained about 30% during QE3 (from Sept. 2012 through this month), according to S&P Dow Jones Indices.

Three months after QE1 ended, the S&P 500 fell 12%. And three months after QE2 concluded, the S&P 500 was down 14%.

 

Stocks

10-year Treasury yields:

As has been the case for much of the post-recession recovery, U.S. borrowing costs have remained low thanks to a lack of strong consumer demand — and the Fed’s bond buying. Many investors paid dearly for betting incorrectly on Treasuries, including the Bill Gross who recently left his perch at Pimco for Janus.

Bonds

10-year breakeven inflation rate:

A sign that inflation failed to take hold despite unconventionally accommodative monetary policy is the so-called 10-year breakeven rate, which measures the difference between the yield on 10-year Treasuries and Treasury Inflation Protected Securities, or TIPS. The higher the gap, the higher the market’s expectation for inflation. As you can see, no such expectation really materialized.

BreakEven

Inflation:

Despite concern that the Fed’s policy would lead to run-away inflation, we remain mired in a low-inflation environment.

fredgraph

Unemployment Rate:

The falling unemployment rate has been a real a bright spot for the economy. If you look at a broader measure of employment, one which takes into account those who’ve just given up looking for a job and part-time workers who want to work full-time, unemployment is elevated, but declining.

unemployment rate

Compared to the economic plight of other developed economies, the U.S. looks to be in reasonable shape. That in part is thanks to bold monetary policy at a time of stagnant growth.

Indeed, many economists now argue that the European Central Bank, faced with an economy that’s teetering on another recession, ought to take a page from the Fed’s playbook and try its own brand of quantitative easing.

MONEY

Why Angie’s List Keeps Getting Mixed Reviews

Angela "Angie" Hicks Bowman, co-founder of Angie's List Inc.
Angela "Angie" Hicks Bowman, co-founder of Angie's List Inc. Scott Eells—Bloomberg via Getty Images

Even as the paid-membership review service Angie's List has announced major plans for expansion and increased hiring, investors are bailing on the company.

On Wednesday, the stock price of Angie’s List dropped more than 5%, after a decline of as much as 20% a week ago. Overall, the price of Angie’s List stock is hovering near its 52-week low, and it has fallen nearly 60% over the past 12 months. Last week’s plunge stemmed largely from the release of disappointing third-quarter results. Even as the company decreased marketing expenses by 20% and increased membership revenue by 7%, a slowdown in paid memberships and the failure to meet profit revenue expectations have apparently spooked investors.

Angie’s List watchers have been on a particularly wild rollercoaster ride of late. Roughly one month ago, a report surfaced indicating that the company had hired investment bankers to explore the possibility of putting Angie’s List up for sale. Shares of the stock rose more than 20% on the news but were still down more than 50% compared to a year ago.

A couple weeks later, Angie’s List announced that it was adding 1,000 jobs and expanding its Indianapolis headquarters, leading some to believe there would be much brighter days ahead. One week after that, third-quarter results were released, leading many investors to bail—but also leading opportunistic value investors such as billionaire Ken Griffin, owner of the Citadel Investment Group, to go bullish on Angie’s List.

So what does the future have in hold for a paid membership review service such as Angie’s List? Well, to anyone under the age of 30, the idea of paying for reviews or online content of any sort is probably puzzling. But for nearly two decades, the online review service Angie’s List has built a loyal, paying membership of homeowners and renters who find real value in a network where real-life people can exchange honest, trustworthy recommendations about handymen, contractors, plumbers, electricians, clean-it crews, and other services they’ve used personally.

To these folks, the value proposition is simple: When you’re considering who to hire to do a $50,000 home renovation, forking over $20 or $40 for access to reviews on local contractors is a no-brainer. Indeed, according to the company’s second quarter 2014 results, paid memberships hit 2.8 million at the end of June, up from 2.2 million a year before and just 820,000 as recently as 2011.

So why does Angie’s List appear to be on the ropes?

An in-depth post by the Indianapolis Business Journal suggests why: Angie’s List, founded in 1995, has never turned a profit. A report released last October, for instance, showed the company had a net loss of $13.5 million for the third quarter of 2013, following a loss of $18.5 million for the same period a year prior.

Why hasn’t all its growth translated into profits? Much of it can be attributed to (presumably expensive) expansion into new markets; the service is now available in 253 areas of the country, compared with around 200 in 2012.

More to the point, Angie’s List has been forced to scale back the amount charged for each membership as Yelp, Google+ Local, TripAdvisor, and other user review sites have flourished with an open-to-everyone, completely free business model. The most recent Angie’s List report states that from 2010 onward, the average annual membership fee was just over $12, down from more than $36 a decade earlier.

And the amount members pay continues to drop. A Wall Street Journal post published a year ago detailed Angie’s List’s plans to cut membership fees in several key cities to around $10 annually. Today, it’s a cinch to head over to an online coupon site to find offers for 30% or 40% off, bringing the cost of a one-year subscription down as low as $5.39.

Meanwhile, the company recently agreed to pay a $2.8 million settlement to end a lawsuit alleging it had re-upped members without proper notice and at higher rates than subscribers were led to believe.

Perhaps an even bigger problem is that the trustworthiness of Angie’s List is increasingly being called into question. Critics point out that a growing portion of Angie’s List revenues come from service providers paying for advertising on the site—the same service providers that are supposed to be rated in non-biased fashion by members. “Almost 70 percent of the company’s revenues come from advertising purchased by the service providers being rated,” a 2013 Consumer Reports investigation explained.

CR called out in particular the practice of allowing advertisers with B or better ratings to be pushed to the top of search results as questionable at best. “We think the ability of A- and B-rated companies to buy their way to the top of the default search results skews the results… They get 12 times more profile views than companies that don’t buy ads.”

To be fair, many Angie’s List competitors also actively solicit the businesses reviewed on their sites as advertisers. Yelp is known to flood restaurants, doctors’ offices, and other small businesses with pleas to advertise on the site, to the point that one restaurant in the San Francisco area launched a bizarre “Hate Us on Yelp” campaign to undermine the user-review site. (Despite claims that it engages in what amounts to extortion, Yelp has repeatedly stated that advertising doesn’t affect a business’s ratings in any way.) Porch.com, an online network created to help homeowners find contractors and other home improvement services, launched a partnership referral system with Lowe’s this year. While businesses don’t pay to be listed, the website gives extra visibility to contractors that pay for a premium membership, such as making it easier to see their phone numbers in search results. (Full disclosure: Porch contributes articles on home improvement to Money.com.)

For the time being, Angie’s List seems to have figured out how low it must cut membership fees in order to keep subscriber numbers from falling. But the strategy hardly seems sustainable, especially if the perception that the service’s ratings aren’t trustworthy continues to spread. Convincing consumers it’s worthwhile to pay for a review-and-ratings service when there are free alternatives is tough enough. It’s borderline impossible to convince them that doing so is worth the money when there’s reason to question whether the ratings are entirely legitimate.

Correction: An earlier version of this story incorrectly described how Porch.com enhances the visibility of contractors who pay for a premium profile on their site.

MONEY

America’s Cheapest Airline Looks to Make Flights Even Cheaper

Spirit Airlines
Spirit Airlines

Lower fuel costs helped Spirit Airlines' stock soar this week, and may even mean cheaper flights for travelers. Just don't expect Spirit's fees to disappear anytime soon, or ever.

A sizable chunk of travelers hate Spirit Airlines and its cramped-seat, a la carte, fee-crazed business model. In a new MONEY poll, voters prefer the option of flying with snakes on a plane over flying on a Spirit plane. Yet investors sure are loving the company’s third quarter results, which were made public on Wednesday. Spirit’s adjusted net income for the quarter is up 28% year-over-year, while total operating revenue was up 14%. The results bumped the price of Spirit stock up more than 7% on Wednesday, and Morgan Stanley just named Spirit its top growth airline pick for investors.

What’s particularly interesting is that Spirit’s performance and its plans for expansion are likely to benefit non-investors as well. The airline’s sales pitch to travelers is based almost exclusively on the low prices of its “Bare Fare” flights, and analysts see the stars aligning that will allow Spirit to cut base fares even lower. It’s possible that this turn of events could even help out travelers who would never fly with Spirit Airlines—because other carriers may feel forced to scale back fares, or at least slow the pace of fare hikes, in order to compete with Spirit’s cheaper flights.

Only three weeks ago, Spirit stock dipped significantly because of fears that higher company costs—including tax payments and the hiring and training of more pilots—would be headwinds getting in the way of higher profit margins. Yet a Motley Fool post pointed out this week:

Looking ahead to Q4 and 2015, these cost headwinds are likely to turn into tailwinds due to 1) lower jet fuel prices; 2) faster growth; and 3) a shift toward larger, more efficient aircraft.

Airlines typically spend about 30% of their revenue on fuel. So when gas prices drop like they have been lately, it’s a huge deal for the airline industry. For the most part, airlines will simply pocket the fuel-cost savings rather than pass any of it along to travelers in the form of cheaper flight prices.

But there’s reason to believe that Spirit Airlines is different. After all, the airline’s main (only?) selling point is that the base price of flights is cheap, so it will lower fares to attract more customers whenever a price cut can be justified. In addition to lower fuel costs, Spirit is expanding rapidly (28 new routes added between August 2014 and April 2015), and has been getting more productivity out of planes and employees. All of which helps the company lower costs—and enables it to make its product more attractive to customers by lowering prices.

In a conference call with investors yesterday, Spirit CEO Ben Baldanza said that’s essentially what the airline plans on doing. “The customers we seek to attract overwhelmingly ranked total price as the most important variable when choosing an airline,” Baldanza said. As Spirit manages to keep the costs of fuel and other expenses low, “that’s a great thing for our model, and that means even lower fares for customers and a good thing for investors.”

And who knows? Spirit’s expansion and low-fare strategy may very well compel the larger airlines to compete more on flight prices as well. Now that fuel prices are shrinking and airlines are enjoying record-high profits, it certainly wouldn’t kill them to do so.

MONEY Airlines

POLL: Are You Ready for Cellphone Calls on Airplanes?

Two different federal agencies are now considering revising the rules about inflight calls. What do you think?

MONEY

S.F. vs. K.C. By the Numbers: How the World Series Teams and Towns Match Up

The World Series championship will be determined by how Wednesday night's Game 7 plays out, but how do San Francisco and Kansas City match up off the ball field?

After the Kansas City Royals stomped the San Francisco Giants in Game 6 of the World Series, the stage is set for an exciting winner-takes-all Game 7. The Royals, who skipped through earlier rounds of the 2014 playoffs without a loss, were named as a slight favorite to win the championship when the World Series began, and the Royals’ run is all the more impressive because the Giants’ payroll is more than 50% higher ($148 million versus the Royals’ $91 million).

For that matter, San Francisco blows away its opponent in terms of global cachet and higher incomes, and the home markets of this year’s World Series contenders couldn’t be more different. San Francisco is a hip, high-powered, and high-priced magnet for tech startups where the average home sells for close to $1 million, compared to a mere $186,000 for the typical house in Kansas City, a low-key, highly livable Midwestern hub famed for top-notch barbecue. Nonetheless, the secondary market price of World Series tickets for Kansas City home games has been roughly 30% higher than games hosted by San Francisco. That somewhat unexpected disparity likely comes as a result of San Francisco owning the edge on most recent World Series title. Giants fans have been spoiled of late with championships in 2010 and 2012, whereas Royals’ fans have been waiting since 1985 for another World Series title.

With the Series wrapping up tonight, click through the gallery above for a look at how the competitors match up, on and off the field.

MONEY

NBA’s Empty Arena Problem Tips Off with $5 Home Opener Tickets

Marc Gasol #33 of the Memphis Grizzlies
Marc Gasol and the Memphis Grizzlies play their regular season home opener this week, and fans can buy tickets for around $5. Lance Murphey—NBAE/Getty Images

Basketball fans are showing their excitement—or lack thereof—for the start of the NBA regular season in the form of home opener tickets selling for a small fraction of face value.

The 2014-2015 NBA regular season commences on Tuesday, October 28, and clearly, fans in some markets are excited enough to see their teams back in action that they’re willing to pay top dollar for seats. Four of the top five most expensive NBA games this week, as rounded up by the ticket resale and research site TiqIQ, all currently have “get-in” prices starting over $100 and average ticket prices of $300+.

Tonight’s priciest game is, fittingly, the home opener of the NBA champion San Antonio Spurs, when there will be a ceremony for the team to receive its championship rings; as of Tuesday, the cheapest tickets were selling for just under $200 on the secondary market, according to StubHub. Overall, the most expensive home opener is, unsurprisingly, Thursday’s game in Cleveland, when the Cavaliers get to officially welcome back the return of prodigal son LeBron James, who is playing once again for his hometown team in regular season action. Earlier this week, TiqIQ data indicated that the average price for tickets to Thursday’s Knicks-Cavaliers game was $753, while as of Tuesday the cheapest seat offered at StubHub was around $900.

It’s a very different story, however, in some of the other NBA arenas around the country. Tickets for the home openers for no fewer than nine NBA teams (Dallas, Denver, Indiana, Memphis, Minnesota, New Orleans, Orlando, Utah, Washington) are going for around $15 or less, according to StubHub, while seats for Wednesday’s matchups of Philadelphia 76ers versus the Indiana Pacers and the Minnesota Timberwolves versus the Memphis Grizzlies are available for around $5. If fans are truly excited about the start of the season, they’re not demonstrating it with a willingness to pay good money to see the games in person.

There’s nothing new about NBA teams struggling to fill arenas, even when special ticket deals and secondary market resale sites cause prices to plunge. What’s noteworthy, however, is that the demand for tickets is so low for teams’ home opener games, when the season is (theoretically) filled with promise and when fan enthusiasm should presumably be high.

Fans are staying home for any number of reasons, including but not limited to: 1) the local team stinks; 2) the local team is not fun to watch; 3) the season is so long that the games don’t seem to matter; and 4) going to games is too much of a hassle and too expensive. Even when ticket prices are low, the cost of going to a game can be high, once parking, souvenirs, and a few $5 hot dogs and $7 beers are added in. Interestingly enough, parking passes for this week’s Indiana Pacers home opener were selling at a higher price than the cheapest tickets ($8.85 vs. $4.95), according to StubHub.

Yet the NBA doesn’t seem particularly concerned about its teams playing in arenas where broad swaths of seats are unfilled, nor about what it means in the grand scheme of things when fans are reluctant to part with a mere $5 to attend games. A big reason why that is so is because the league just signed a $24 billion contract allowing various TV networks to air its games. The new deal nearly triples broadcast revenues for the NBA. Look for broadcasts to focus squarely on the action on the court, with very few shots of the upper sections occupied by … nobody.

MONEY Shopping

You’ll Never Guess Which Retailer Has the Cheapest Prices (Hint: It’s Not Walmart)

$1.00 price sticker
Gregor Schuster—Getty Images

A new study reveals that Dollar General is the lowest cost retailer in America.

Often when people think of low prices and retail, the first chain to come in mind is Wal-Mart WAL-MART STORES INC. WMT -0.0524% . Due to the sheer high volume of goods it sells, the megaretailer is a textbook case study for economy of scale. However, sometimes big can be too big and Dollar General DOLLAR GENERAL DG 0.7262% is able to beat Wal-Mart to the low price punch for some very good reasons.

The Kantar Retail Research Team

A study is performed annually by Kantar using a basket of goods across 21 categories in the edible grocery, non-edible grocery, and HBA segments. In order to arrive at the data points for each retailer, the lowest price point for each category was selected no matter what the brand. For example, if a box of Corn Flakes was on the list then the price of the generic brand (if cheaper) was selected over the name brand.

Out of the six retailers analyzed, Target TARGET CORP. TGT 1.3795% came in last while Dollar General finished first. Wal-Mart got second place with 2.5% higher overall prices. The average cost of the basket at Dollar General came out to $26.75. For Wal-Mart, it was $27.41 and for Target it was nowhere close to the other two with a total of $40.61. The $0.66 spread between Dollar General and Wal-Mart is 5.5 times higher than the $0.12 spread a year ago with the same study.

This is despite Wal-Mart’s much more massive size. For example, in the current fiscal year, analysts expect Wal-Mart to post nearly half a trillion dollars in sales compared to just $19 billion for Dollar General or more than 25 times higher. How does David Dollar General manage to beat the Goliath Wal-Mart?

The real low cost leader

Your first suspicion might be that the only reason Dollar General could possibly beat out Wal-Mart on prices is by taking a hit on profits. Wal-Mart has made a consistent 24%-25% gross profit margin for the last three years on the products it sells. Therefore it stands to reason that if somebody only has a 10% markup it could sell at cheaper prices even if it doesn’t get the volume discounts of Wal-Mart.

That’s not the case with Dollar General, however. Not only does it have cheaper prices, but it makes more profit margin on average on each of its products. For the last three years, Dollar General has averaged between 30%-31% in gross profit on its sales, which is higher than Wal-Mart’s.

How could Dollar General have lower costs?

You have to remember — the purchase price of a product from the wholesaler is only part of the ultimate cost to a retailer and the price for the consumer. A typical Wal-Mart Supercenter might have over 140,000 items for sale while a typical Dollar General has between 10,000-12,000 items.

As Megan McArdle of The Daily Beast once tagged the problem,

“A Walmart has 140,000 SKUs, which have to be tediously sorted, replaced on shelves, reordered, delivered, and so forth. People tend to radically underestimate the costs imposed by complexity, because the management problems do not simply add up; they multiply.”

Multiplied management problems equal multiplied costs baked into each average product’s cost and price.

More of less is cheaper

Dollar General, by specializing in far fewer items and brands, has fewer logistical complexities and fewer costs. The secret to low costs is the power of buying in bulk and cheap stocking costs to sell those products. It’s the simple reason a child’s lemonade stand only sells lemonade — to offer a larger variety of drinks would require a lot more effort for less average return on each.

During Dollar General’s last conference call, CEO Richard Dreiling explained it well when he said, “This foundation of limited assortment and distribution efficiencies allows us to successfully compete with much larger retailers and provide our customers with everyday low prices that they can trust.”

Foolish thoughts

Dollar General may still have plenty of potential market share it can take from Wal-Mart. Its biggest disadvantage is lack of consumer knowledge. We’ve been bombarded by the media, and Wal-Mart itself, that if you want cheap prices it’s Wal-Mart or bust and nobody can touch them. As consumers become more and more aware of the Dollar General advantage, don’t be surprised if its sales continue to creep up. It is up to 26 quarters in a row of positive same-store sales growth and may still have a long way to go.

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