Dollar stores are raking in dollars faster, and offering consumers
Once dismissed by many manufacturers,
these stores are increasingly coming to be viewed as precisely what they
are, a growing class of trade that appeals to a very specific and loyal
customer base. More vendors than ever before want room on their shelves,
The number and size of dollar stores
dotting the American landscape is increasing, and according to retail
experts will grow still more. Many boast sales per SKU as high as the more
high-profile, higher-end retailers. Some call dollar stores recession
proof, a characteristic that only adds to their growing appeal. As one
retail analyst put it, "They're doing more than just the kind of
schlocky stuff they once did."
This entire class of trade is
"definitely booming," says Debbie Howell, associate editor for
Discount Store News, a New York City-based trade publication. The concept,
she suggests, is proving "to be recession-proof. When times are bad,
more people will go patronize the store. And when times are good the
people who may have a little higher income will also patronize the
"What they're doing is bringing in
the brands," says analyst Tom Tashjian of Banc of America Securities,
"but they're not moving up the retail price." Indeed, these
retailers have been holding firm on price for a quarter century.
The industry recognizes small differences
in store concept. First, there are dollar store chains, like 99 Cents Only
Stores, the nation's oldest existing one-price retailer, in City of
Commerce, CA (about 90 stores in Southern California and Nevada), Dollar
Tree Stores, Inc. of Chesapeake, VA (the nation's largest single-price
retailer, with more than 1,500 discount stores in 35 states), and
Dollarland. The 99 Cent Only store format includes food and consumables as
well as general merchandise. Dollar Tree recently bought another chain,
Dollar Express. Both carry more general merchandise and less food.
Then there are low-end discount stores
like Family Dollar Stores, Inc. in Matthews, NC (3,600 stores in 39
states), Dollar General Corp. based in Nashville, TN (more than 4,700
discount stores in 24 Midwestern and Southeastern states), and Memphis,
TN-based Fred's Inc. (about 300 stores in 10 southeastern states).
They are considered two similar yet
distinct retail categories because, as one analyst points out, "they
do different things."
The low-enders, says Tashjian, target a customer whose annual
income is under $25,000. "Most of those stores are in either smaller
towns or urban markets that will pull people in from about a 15-mile
The prototypical dollar store customer is
someone "looking for real attractive value on basic
necessities," according to Mark Miller, equity research analyst for
William Blair & Company, L.L.C. Product selection includes
"probably the fastest- turning low-end consumables that a K mart or a
Wal-Mart would offer."
Miller notes that "the dollar-store
operating model has three very attractive aspects: pricing at or below
mass merchants; efficiencies similar to those of wholesale clubs; and
shopping convenience much like drug retailers."
While Family Dollar and Dollar General
stores measure just 6,000 sq ft each, Fred's stores are about 15,000 sq
ft., and include pharmacies. Both, of course, are dwarfed by Wal-Mart
stores' average 115,000 sq ft size. Over the past four years, Dollar Store
General sales have risen 129% to $3.9 billion as the number of locations
almost doubled to more than 4,200. The chain has added five-million sq ft
of warehouse space -- five times what it had five years ago -- which can
reportedly support the addition of 2,000 more stores within its 24-state
As these companies have grown they have
naturally drawn the interest of national vendors, who view them as
potentially more lucrative partners. As a result, that additional
brand-name merchandise is finding its way into those stores.
"They end up being large
accounts," says Tashjian. For example, Family Dollar's 6,000 sq ft
stores carry only 6,000 SKUs. "But if you happen to be one of those
6,000 SKUs you are going to be purveyed through 3,500 stores," he
points out. "That's quite a good account."
"Before, they associated dollar
stores with inexpensive, cheap merchandise," says Rex
Mehta, founder and president of Dollarstore.com Inc an
e-commerce pioneer who established portal Web sites four years before
today's Internet became popular. "Now it's inexpensive but quality
merchandise. You have imported products, of course, but also you have some
brand name items in there.
"With some of the mom-and-pop stores
we get comments that they are not clean," he adds. "People want
the feel that they are walking in a grocery store. Some people are even
buying their groceries from these dollar stores."
The pricing is still the same, "but
it's a better mix," adds Mehta. "Uniform pricing is what excites
the consumer." Dollarstore.com's main emphasis is business-to-
business with on-line wholesale catalogs.
Wholesalers, says Miller, "need to look at these companies as
having volume on a per-SKU basis, which can be equal to that of retailers
many times their size. Take Dollar General, for example. They do more
volume on a per-SKU basis, probably, than Safeway."
Such stores have "a lot of
efficiencies which, in some ways, I would compare to a wholesale club like
Sam's or Cosco," says Miller. "You could think of them for clubs
for low- to middle-income or fixed-income consumers. By that I mean they
have limited SKUs. They have a very simple store layout, which lowers the
operating costs and allows them to pass savings on to their
One characteristic to remember, says
Miller, is that dollar store retailers are not heavily promotional. They
have, in fact, dramatically cut back on circulars; in fact, Dollar General
does not have any. Family Dollar has a limited number of circulars.
"Still, they have increased store traffic by featuring well-known
branded products at highly competitive prices."
They may not have the depth or range of
SKUs of a Wal-Mart or other discount chains, but they are increasingly
featuring big-name products like Tide, Crest and a host of others.
"They're adding more of what I would
call branded consumable products, basic personal care, household products,
cleaners, etc.," says Miller. "That's been an ongoing process
over the last couple of years, and we expect it to continue going
The addition of more name brands has not
meant rising prices. Suppliers "sort of like being able to sell to
that customer base," says Tashjian, because it is one that they
"usually can't come in contact with."
A key consideration, Banc of America has
found, is that 40% to 45% of the Family Dollar and Dollar General
customers do not own cars. Understanding this low- end market "takes
a little while," says Tashjian, "but at the same time, that's
the market that doesn't have access to Wal-Mart. They can't go to Wal-Mart
unless they're going to take a bus, I guess, to get there." Family
Dollar has changed up its merchandising mix by reducing SKUs and offering
more name brands.
As far as reaching consumers directly is
concerned, says Howell, the internet is "relatively insignificant for
these companies at this point in time compared to other retailers. The
customer base is probably not what I would categorize as really movers on
the internet. Plus, the items tend to be of smaller dollar value, so it's
not one that initially lends itself well to the internet."
"To me, it wouldn't make very much
sense to try and purvey dollar goods over the internet," says
Tashjian. "The cost of advertising and delivery is probably going to
According to Miller, the larger dollar
store players now have the opportunity to gain share from other channels,
such as grocery or drug stores and independents, even as they take
business away from other dollar stores which don't have the efficiencies
of these large chains.
"If you go to any inner city or a
lot of small towns," he notes, "you'll see a number of dollar
stores, many of which are independent or small groups of stores. They
don't have the ability to price goods as competitively or make as strong a
margin as these companies do."
Miller believes Dollar General and Family
Dollar have the ability to develop a combined 30,000 stores around the
country. "Within retail we think this is one of the largest
store-growth opportunities. It's a very open-ended, large-growth
opportunity as we see it."
The secret, says Howell, is multiple
stores and high traffic. "Interestingly enough, Dollar Tree, the
nation's biggest single-price retailer 'everything sells for $1' is
among the best performers right now." The average sale is $7 or $8,
"but the reason they're able to pull it off is that they have so many
stores and high-volume customers."
Dollar Tree is using acquisitions to move
into a larger store format (about twice the size of existing stores); it
bought the 100-plus store Dollar Express chain in 2000. Says Howell,
"They've been on a real acquisition streak. They've purchased a
company in each of the last three years. They're really expanding."
article is used with permission from Wholesale