People want to shop with others of similar taste/preferences. They presently cater to the one of the lowest common denominators (Dollar stores could be lower, I guess), so how could they appeal to other shoppers?

That’s the crux of the question. The current stores appeal to one audience but not another.

Whole Foods has the same problem, except from the other direction. Working class folks will sneer at Whole Foods. It’s not their bag. Amazon would have to open something that caters to price conscious shoppers if they wanted to expand groceries to working class shoppers...

Furthermore, I'm wondering what shitholes these people live in or near where they actually experience this sort of thing.

The Walmarts around Keller, Texas are nothing like what's being described here... although granted, this is an upper middle class area of Texas, and unlike California, we don't allow people to steal shit out of our pharmacies with impunity, nor do we allow people to shit on our streets.