A thorn in supermarkets’ sides
Elsevier Food International, Vol.7, no.2, May 2004 Len Lewis
They sport banners like Dollar General, 99-cent dreams and Dollar Tree—names that have been a part of the rural landscape for many years. But with little fanfare, dollar stores are expanding at an extraordinary pace across the US, giving supermarkets, discounters and even the mighty Wal-Mart a run for their money.
This latter 20th century version of the old five and dime has flown under the retail radar for 50 years by focusing growth largely in rural, lower-income communities. However, uncertain economy, cautious consumer spending and an unlimited geographic potential are making this format increasingly viable and profitable. Today, 25,000 dollar stores are operating in the US and double-digit growth could push that number past 40,000 by 2010, according to recent research.
Industry leaders like Family Dollar and Dollar General, while maintaining growth in small town America, are moving away from their rural roots into suburban and urban markets. Family Dollar is rolling out a new prototype that emphasises dairy and fresh produce and several chains are moving to higher quality private labels along with deeply discounted national brands. And, in addition to a high level of penetration among low-income consumers, dollar stores have attracted the attention of middle and upper income shoppers who simply cannot resist a bargain. As such, they are no longer confined to 1950s-style strip centres in rundown areas and are often on the preferred tenant list among shopping centre developers.
Convenient at good value
“Frank Woolworth was right. The world always needs a variety store,” said Tom Rubel, president of Retail Forward, an Ohio-based research agency and consultancy. “People want small, convenient general merchandise stores that offer good value—and that’s the dollar store,” he said.
This segment is comparatively small and top five chains operating 16,000 stores only account for about $17 billion in sales. But the lesson in extreme retailing has not been lost on the supermarket industry—chains and independents—many of which have installed dollar sections within their stores to meet this rising competitive tide.
“Every retailer goes into it for a different reason,” said David Bishop, director of Willard Bishop Consulting Ltd., Barrington, Ill. “Wal-Mart went into it because they understood that their customer was spending money at a competitor’s store that was just outside its four walls. They decided to put the concept in their own store to capture these dollars rather than have customers go next door and spend the money.”
CPG companies are also looking at dollar stores in a new light since a single SKU with 100 per cent distribution at Family Dollar or Dollar General yields US$1-US$1.3 million in retail sales. The same item with 100 per cent distribution at Kroger is US$1.4 million, according to Bishop’s research. However, manufacturers looking for dollar store distribution should keep several things in mind. Products must be available in US$1 increments to make it easier for consumers to see prices and determine value. Items should be pre-priced and available in display-ready loads or special packs. Finally, products need to be competitively priced with competitors’ advertised prices offering gross margins in the 29 to 25 per cent range.
Expanding customer base
The dollar store concept is by no means uniquely American. The Dutch chain Hema was originally a guilder store. In Great Britain, pound shops have been operating successfully for some time and in Japan the so-called ‘100-yen shops’ or ‘one coin shops’ have been proliferating for the past several years—the result of a decade-long recession. Daiso Industries, which opened in 1991, has emerged as the leading player with 1,300 stores in Japan and increasing at the rate of 40 per month.
However, the dollar store format has really taken off in the US and more than 800 companies operate an estimated 25,000 stores. Consider the following:
• Dollar General has more stores in the US than Wal-Mart has worldwide and is opening an average of 40-70 stores per month.
• Dollar General and Family Dollar have more stores than the top five supermarket chains, combined.
• Family Dollar opened 1,600 stores in the past five years—equal to the total number of units opened by Ahold.
• More consumers shop at dollar stores than at convenience or club stores.
Additional research by Retail Forward shows that 36 per cent of US households shop at dollar stores on a monthly basis, up from 26 per cent in 1997. The format is catching on with higher income customers as well, according to WSL Strategic Retail, New York, whose recent survey found that 53 per cent of Americans with annual household incomes in excess of US$100,000 shop dollar stores. Furthermore, shoppers are fairly well dispersed geographically. Not surprisingly, 39 per cent of frequent shoppers are in rural areas. But an additional 35 per cent are in suburban markets and 24 per cent in urban areas.
This shift in location strategy has given the segment access to a higher income population. The concept has become so popular that a 19,000 square-foot 99 Cents Only Store, was opened in the exclusive Beverly Hills area of Los Angeles. The store, whose parking lot is filled with BMWs and Mercedes, is outperforming expectations, according to company officials.
“Dollar General has acknowledged that in order for them to grow profitably they have to expand their customer base. The fastest growing demographic for them right now is the US$70,000 and up segment which is increasing at a rate of 21 per cent. Earlier this year they announced that they’re going to accept credit cards. This brings them into mainstream retailing and not just a cash and carry business where transaction sizes are restricted by the amount of money people have in their pockets,” said Bishop.
Gaining ground
In addition to attracting a broader cross-section of consumers, dollar stores are gaining ground as the format of choice in several important supermarket categories, including greeting cards, household cleaning products, personal care items, paper and over-the-counter drugs, Retail Forward noted.
“You have to put everything in perspective. The supermarket industry is over $400 billion and dollar stores are just over $40 billion. But they are chipping away at supermarket sales in categories like paper and cleaning supplies, categories that supermarkets had lost to other formats like supercentres. Dollar stores are another thorn in the supermarket’s side when it comes to centre store sales,” said Sandy Skrovan, vice-president of Retail Forward.
“We see this increasing. There’s been a shift in the merchandise mix at the major dollar store chains toward more consumables like perishables and dairy. At the same time, they’re paring back soft goods and general merchandise.”
Based on consumer demand, overall sales growth is likely to continue, albeit at a slow rate, Skrovan said, forecasting a 4.5 per cent average annual growth rate between 2004 and 2007. Store expansion is also expected to slow down a bit as the segment matures. “Family Dollar and Dollar General alone were rolling out 500 to 600 stores a year. There’s going to be some pullback. But it’s still a viable segment and I don’t see a lot of consumer defection as the economy picks up. Once consumers try the format, they like it. They become repeat patrons and increase their shopping frequency,” she said.
Todd Hale, senior vice-president, consumer insights, ACNielsen, Schaumberg, Ill., expects growth to continue virtually unabatedly. “Family Dollar plans to open another 565 stores by August 2004 and Dollar General is opening 675 stores this year. Both are going into new states and new marketing areas.” Dollar General, now in 27 states, is moving into Wisconsin, Arizona and New Mexico as well as expanding in such large population states as Texas, Florida, Ohio, Pennsylvania and Illinois. Family Dollar follows pretty much the same pattern, particularly with expansion in Western states and urban markets, the latter growing 60% this year, according to company reports. The move into larger markets will also offer companies greater supply chain efficiencies, observers said.
Focus on Food
In a move to appeal to a broader consumer group, increase frequency and basket size, Dollar General has opened two new prototype stores designed to draw shoppers away from conventional supermarkets. Dollar General Markets place the emphasis on food and beverage-related products, particularly perishables like dairy and milk. The company is reportedly rolling out 20 of these new format stores this year and plans to increase cooler capacity in all units by the end of 2005, according to observers. Family Dollar is also adding refrigerated cases to some stores, but mainly units that have been acquired rather than built.
“We believe what Dollar General is doing in Hendersonville and Nashville, Tennessee, indicates a strategy toward expanding size and assortment of all stores,” said Bishop, noting that the prototypes are about 20,000 square feet and producing average transactions of about US$16—twice the amount of other units. “Once the model is perfected, they’ll continue to migrate away from the dollar orientation and more toward a limited assortment format like Aldi and Save-A-Lot.
Additionally, Dollar General and Family Dollar, while still selling a lot of products at the US$1 price point, are putting in higher ticket items ranging from $5 to $15. “Dollar General is also trying to sell DVD players in some of the new concept stores,” said Hale.
Industry-wide, the average transaction in dollar stores was US$11 in 2003, according to Nielsen research. By comparison, the average in c-stores was U$10; drug, US$21, grocery, US$33; mass merchandisers, US$41; supercentres (including Target, Kmart and Wal-Mart), US$55; and club stores, US$83.
“They’ve done a tremendous job of coming into markets where Wal-Mart is strong and offering consumers a more convenient shopping trip, and Wal-Mart has been hurt a bit by them. It’s interesting. As people become heavier Wal-Mart shoppers they shop less in grocery, drug and other channels. Dollar stores are the one exception. It’s a different trip and they’re immune to Wal-Mart,” Hale noted. “In fact, Wal-Mart is their anchor. They set up stores nearby and draw traffic away.
“Adding consumables like candy boxed cereals and crackers, encourage frequency and repeat patronage, Skrovan added. “And while they have the customers in the store, they incorporate that ‘treasure hunt’ feel for special buys and liquidation deals on general merchandise.”
Seasonal products have also been an area of opportunity for dollar stores with holiday-specific merchandise or summer picnic items becoming high value, impulse purchases, Bishop noted. “We call it the ‘Costco effect’. People almost always come out with things they didn’t plan on buying. If they stumble across something they buy it since they’re not sure it will be there next week.”
Leading Dollar Store Chains (2003)
| Sales (US$bn) | Net income (US$mn) | 1-year income growth | Employees | |
| Dollar General | 6.1 | 264.9 | 27.7% | 53,500 |
| Family Dollar | 4.7 | 247.5 | 14.1% | 37,000 |
| Big Lots | 3.4 | 76.6 | n.a. | 44,451 |
| Dollar Tree | 2.8 | 154.6 | 25.6% | 27,400 |
| Fred's | 0.9 | 28.2 | 43.9% | 7,850 |
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