Sabrina Escobar

Even America's rich are pinching pennies.

The proof is in the stores. Discount retailers Dollar General and Dollar Tree both are drawing in more middle- and higher-income customers. The shift started to take hold a couple of months ago, according to the companies' latest quarterly reports that came out this week.

And the significance of the well-to-do hunting for cheaper prices is a red flag for the consumer economy. Households making over $250,000 a year accounted for roughly half of all consumer spending last year, according to Moody's Analytics.

"Until we see pain among higher-income consumers, it's really hard to get so nervous that you think a recession is here," said Callie Cox, chief market strategist at Ritholtz Wealth Management, in a phone interview. An uptick in so-called trade-down behavior could very well be that sign, she added.

Dollar Tree executives said on the earnings call that higher-income customers had been a "meaningful growth driver" in recent months. In the first fiscal quarter alone, the company added 2.6 million new shoppers, many from households making more than $100,000.

Dollar General has also seen more higher-income shoppers, who executives say are visiting stores more often, spending more, and buying more discretionary items compared to the chain's core customer demographic.

"We believe these behaviors suggest we are continuing to attract higher-income customers who are looking to maximize value while still shopping for items they want and need," said Dollar General CEO Todd Vasos on the earnings call.

Indeed, wealthier consumers' sense of financial well-being has taken a hit in recent months, according to Deloitte's ConsumerSignals survey. The percentage of wealthy survey respondents saying they believe they will have enough money to live their "best lives" in five years' time fell to 58% in April from 65% in December. The percentage of high-income respondents concerned about inflation rose to 76%, the highest reading since October 2023.

It's not uncommon to see shoppers turn to cheaper alternatives when things get tough. Dollar stores saw a temporary uptick in higher-income customers during the 2022 surge in inflation, and discount retailer Walmart has been gaining market share among wealthier consumers for the better part of the past three years.

Concerns about whether the 2022 rise in trade-down behavior would lead to a pullback in consumer spending were assuaged as the year went by. Spending continued at a healthy clip, bolstered by a tight labor market, wage increases, and stimulus payments. Plus, many of those shoppers went back to their preferred retailers once their finances were in a more stable spot (dollar-store executives stopped talking about consumers trading down in late 2023 and 2024).

This time around, however, investors may want to take the warning seriously. The economy is in a more vulnerable state today than it was back then, Cox said. Volatility around trade policy and tariffs have dampened consumer confidence, wage growth has stalled, hiring has cooled, and delinquencies are higher.

"There are more and more trends turning the wrong way in Americans' wellbeing," Cox said. "Spending has a lot of pressure on it and weakness could continue."

Now, it's worth noting that consumers have proved shockingly resilient in the past five years, and economists believe they will continue to spend unless the labor market significantly deteriorates. The unemployment rate of 4.2% is still below the historical average, and many household balance sheets remain on steady footing, particularly among the rich, boosted by a resilient stock market and gains in home equity.

Yet the fact that richer shoppers are again browsing dollar stores adds to the recent spate of macroeconomic data that suggest underlying demand trends are coming under pressure. Andrew Hollenhorst, an economist at Citi, pointed to weaker readings in housing investments, declining home prices, a downward revision to first-quarter consumer spending, and rising continuing jobless claims, which reflects that jobs are harder to get once a person has been laid off.

"For now, a stable labor market means these weaker readings will not cause much concern for Fed officials or investors," he wrote in a note Tuesday. "But if jobs data on Friday or in future months soften materially, assessments of the economy can swiftly become less positive."

Cox agrees.

"It's not the time to freak out, but as the trends move in the wrong direction, it is time to...prepare for what could happen," she said.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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June 05, 2025 10:10 ET (14:10 GMT)

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