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Price wars heat up as dollar store echoes Wal-Mart's battle cry

A one-dollar price tag appears on a greeting card at a Dollar General store.
Emile Wamsteker | Bloomberg | Getty Images

The price wars are officially underway.

Dollar General on Thursday said it has cut prices on hundreds of items across more than 2,000 of its stores, as it tries to drum up visits from its core low-income shopper. The announcement comes just three months after competitor Wal-Mart said it would speed up the price cuts it's unleashing across its stores, in an effort to regain its reputation as the lowest-price retailer.

Wal-Mart's price cuts helped its U.S. division deliver the largest same-store sales increase it's seen in four years last quarter, driven by a seventh straight period of increased traffic. Meanwhile, Dollar General recorded its most tepid same-store sales growth since the fourth quarter of 2007, as traffic posted a rare dip.

"These price reductions are meaningful and recognizable," Dollar General CEO Todd Vasos told investors, adding they're focused on fast-turning categories including consumables. "These are the items that will actually drive additional foot traffic into our stores."

The idea is that shoppers will then pick up extra, more discretionary items once they arrive. Dollar General plans to "refresh" its investments into price across categories and additional markets over time. The retailer is passing off some of the costs related to these investments to vendors, management said.

Vasos emphasized that Dollar General is being "proactive" in its decision to lower prices by an average 10 percent across key categories, as the low-income consumer continues to struggle. Even as this segment of shoppers has caught a bit of a break from a stronger labor market and lower gas prices, rising health-care and housing costs continue to squeeze their wallets. A reduction in food stamp benefits that began rolling out in April has likewise weighed on the group's finances, Vasos said.

Dollar General estimates this reduction, along with deflation in food products including milk and eggs, weighed on its comparable sales by 0.6 to 0.7 percent.

"For our core consumer price is everything," Vasos said.

Still, the timing of Dollar General's announcement was not lost on Wall Street. Back in May, Wal-Mart said it had already begun lowering prices on "key items" in certain markets, which it would continue to roll out over the next few years. Though Wal-Mart has been mum on what exactly its price cuts entail, Moody's analyst Charlie O'Shea said at the time that he had already seen the retailer lower some of its grocery prices.

"We're going to see margin compression for retailers," O'Shea predicted.

Indeed, Dollar General management told investors that its actions "will impact margin," but that it's focused on the long-term payback. Yet to get that long-term payback, the retailer will have to rely on shoppers making additional trips to its stores, or adding incremental items to their baskets. Otherwise its revenue will take a hit.

Dollar Tree, which like Dollar General reported more tepid same-store sales growth than Wal-Mart, also said it's increasing the value to shoppers across its stores. One way it's doing so is rolling out more private-label merchandise, which cuts out the middleman and is sold at a lower price.

"We still believe the consumer is under a lot of pressure," the company said.