The Almighty Dollar (Store)

Three top dollar contenders up the ante with convenience offerings.

By
Linda Abu-Shalback Zid, Senior Editor

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In the earlier part of this century, cstores endeavored to compete with dollar stores, with NACS featuring a dollar aisle at its annual show and progressive chains such as Canastota, N.Y.- based Nice N Easy Grocery Shoppes testing out dollar sections in its stores.

That eventually fizzled, for the most part. NACS didn’t repeat its effort. And Nice N Easy’s senior executive vice president Fran Duskiewicz explains what happened at his chain: “We kind of abandoned that. Not that we don’t think the dollar stores are competitors; we just needed to possibly change our approach because we think they have.”

The dollar stores’ newer approach actually seems like a turning of tables: While c-stores such as Nice N Easy once incorporated dollar-store strategies, dollar stores now work to offer more convenience.

A look at one of the so-called dollar stores, with price points now up to $10, helps tell the tale.

Back when Nice N Easy was working on its dollar initiative, Dollar General (DG) had 6,700 stores in 29 states, its average store size was 6,800 square feet, and it spent $5.4 million on advertising. More important, highly consumable products accounted for about 60% of DG’s sales. DG considers consumables to be food, paper and cleaning products, health and beauty products and pet supplies—in other words, some of the very staples c-stores sell.

Flash forward to today: Consumables now account for a hefty 70% of DG’s sales. And there’s substantial growth elsewhere, too: As of July 30, 2010, DG had 9,113 stores in 35 states, and the average store size has grown to 7,100 feet. And the company has become much more aggressive in advertising to get the word out about its offering—spending as much as $41.5 million last year.

Such sizable growth has made DG and other dollar stores impressive competitors. And Duskiewicz says dollar stores, c-stores and drug stores are now vying for the same niche: the fill-in trip. “Whoever is able to do the best at filling that niche, and giving the customer a lot of reasons to stop, will wind up doing the best job of it,” he says.

“I tend to think that c-stores have the potential to do the best job of it,” he continues, “because we still have the best real estate, we still have gas and we do foodservice—and we can bundle a lot of opportunities for our customers into one package if we focus on it.”

Research from Chicago-based SymphonyIRI confirms that, to some degree. Consumer packaged goods’ dollar sales per trip were up for both dollar stores (3.8%) and c-stores (8%)—attributed to a change in trip mission, due to cash-strapped consumers. Susan Viamari, editor of SymphonyIRI’s Times & Trends, which published the study, explains: “People aren’t doing quite as much pantry stocking as they had been doing before. They’re making more quick trips and fill-in trips. In terms of trip missions, convenience stores are well positioned.”

Meanwhile, however, the dollar channel saw a 2.6% increase in shopping trips and convenience saw a 9% decrease, which Viamari attributes partly to a decreased dollar-store stigma, aided by improved assortments and store appearances. And, she says, the stigma of saving money has also decreased in the new economy. “Nowadays, people are not embarrassed to be saving money, to be clipping coupons or doing something else to save money,” she says.

Nick Mitchell, senior vice president of Cleveland-based Northcoast Research, explains that dollar stores also have improved private-label-brand quality, increased national brands and improved the cleanliness of their stores. “So those three things have also resonated with their shoppers, in addition to the convenience and low price points that are hitting their sweet spot in this downturn,” he says.

These improvements, in addition to providing a compelling consumables offering, might seem familiar to c-store operators. But Mitchell clarifies that dollar stores aren’t becoming convenience stores—just more convenient: “I think that they actively adjusted their product offering to what the demand from the consumers was, and that was for a greater offering of consumables within the stores.”

In addition, the three big contenders— Dollar General, Family Dollar and Dollar Tree—have made recent efforts that have included expanding operation hours, adding coolers to stores and accepting more forms of payment, such as food stamps.

None of the three responded to requests for interviews. But Marshall Cohen, chief retail analyst for marketresearch company The NPD Group, explains that each has its own advantages. “Dollar Tree has one advantage in that they’re a little bit newer, so a lot of their platforms are a little more modern- and clean-looking,” he says. “But then you have the other two that are also actually going out and creating new platforms and developing some new programs.”

However, most consumers likely won’t know the difference among the three, because they are simply looking for the best deals. “And they find that their local store, whichever one it is, tends to be the one that they’re most familiar with,” he says.

As for which one will be their local store, a recent Morgan Stanley research report estimates that the market can support another 10,000 dollar stores. And all three will be contributing toward that mark, each adding hundreds of stores next year.

And, Viamari adds, today’s frugality will only augment dollar stores’ success for the foreseeable future. “What we’ve seen in consumers is even when personal finances are stronger, a lot of consumers are telling us these ‘sacrifices’ that they made earlier in the recession aren’t as bad as they thought,” she says, “and so why abandon these money-saving tactics as their income situation improves?” CSP examined the competition c-stores face from the three most prominent dollar stores. 

Dollar General, Goodlettsville, Tenn.

In Business Since: Roots date back to 1939, although the first store with the Dollar General name opened in 1955.

Number of Locations at Press Time: At 9,113 stores in 35 states, it is the largest of the three, although it is concentrated in the fewest states.

Notable Numbers: Full-year 2009 net sales were $11.8 billion, an increase of $1.34 billion, or 12.8% over 2008. Same-store sales increased 9.5% in 2009, with customer traffic and average transaction amount contributing to the sales increases in both years.

Growth Plans: DG opened 500 new stores in fiscal 2009 and planned approximately 600 new stores in fiscal 2010. Longer-term, the company’s 2009 annual report shares the belief it has long-term potential to more than double its existing store base. The company said recent market analysis suggests as many as 12,000 opportunities, most in the 35 states in which the company operates, and others on the Pacific coast and in the Northeast.

How It Competes

Overview:DG prices most items at $10 or less, with approximately 25% at $1 or less. Its stores average 7,100 square feet, with more than 60% of them serving communities with populations of less than 20,000. The majority of customers live within 3 to 5 miles of their store, with the company saying in its annual report, “Our close proximity to customers drives customer loyalty and trip frequency and makes us an attractive alternative to large discount and other large-box retail and grocery stores.” The stores’ smaller size allows parking to be located near the front entrance. In the 2009 annual report, the company said its stores offer approximately 10,000 to 12,000 SKUs per store. The company recently expanded its hours of operation, making it “more relevant for the fill-in grocery trip,” according to Mitchell. “And that really has appealed to shoppers.”

Private Label: DG offers national brands from leading manufacturers but is also focusing on higher-margin private brands. The company has updated the quality of private brands and redesigned packaging to convey that products are “fresh and inviting.” According to its 2009 annual report, in two years it more than doubled the number of private-brand consumables to more than 1,300 items. The products come with a 100% satisfaction guarantee. As a percentage of consumable sales, the company increased private-brand penetration from approximately 17% in 2007 to roughly 21% in 2009, and it plans to expand efforts.

Merchandising: DG raised the height of merchandise fixtures to a uniform 78 inches, allowing the company to broaden selections of packaged foods, snacks and beverages; HBC and apparel are next. Coolers and freezers are stocked with dairy products, juice, eggs and a focused selection of packaged convenience foods. The company’s focused merchandising efforts resulted in a 15.3% increase in consumables sales for 2009.

Family Dollar, Matthews, N.C. 

In Business Since: 1959

Number of Locations at Press Time:More than 6,800 in 44 states

Notable Numbers: Net sales for fiscal 2010 increased 6.3% over fiscal 2009 to $7.9 billion. Sales in comparable stores increased 4.8% in fiscal 2010, with the strongest sales in consumables, which increased 7.5% for the year. According to a Morgan Stanley research report, “We believe Family Dollar’s comp progress has been from gaining more share of its customer’s wallet, rather than gaining more new customers from trade-down as other dollar stores have been.”

Growth Plans: Open 300 new stores (a 50% increase over openings in fiscal 2010) and renovate 600 to 800 stores in fiscal 2011. The company is targeting 5% to 7% net new store growth through at least 2014. As it grows, the company plans to expand to new markets, including California, in 2011.

How It Competes

Overview: Pricing at Family Dollar ranges up to $10. (In fiscal 2009, the average customer purchase was $9.84, according to its 2009 annual report.) Store sizes range from 7,500 to 9,500 square feet, and the stores serve primarily low- to middle-income customers within five miles of each store. The report says the company’s relatively small size allows it to “provide neighborhood convenience.”

Private Label:The company refreshed or introduced 10 private brands in 2010, affecting approximately 1,000 items. According to the company’s 2009 annual report, brand names accounted for about 52% of sales in fiscal 2009, with private label 19%, closeout merchandise 2% and the rest accounted for by unlabeled products. The company plans to introduce more categories of private brands next year and communicate their value to customers.

Food Focus: In fiscal 2009, the company expanded its food assortment by more than 200 new items, including major brands. And it is increasing space allocated to food to target midweek fillin trips, expanding the dry-goods section and doubling the cooler area from five to 10 coolers.

Health and Beauty: The company added 500 items to health and beauty care (HBC) that appeal to baby boomers, and it redesigned that area of the store so it is self-contained. HBC also is one of the company’s highest shrink areas, and it has placed it at the front so cashiers can monitor it.

Renovation: Family Dollar has been investing heavily in renovations, to the tune of $100,000 to $130,000 per store. The renovations include wider aisles that are tilted to allow visibility from the center of the store and colorful, easy-to-see wall and endcap signs. Higher-margin items now are placed at the front of the store near the entrance. Checkouts are placed where cashiers can greet customers and watch over HBC, as well as focus on speed processing. Also, along the new cash lane, the company expanded merchandise space by roughly 65% to encourage impulse purchases.

Dollar Tree, Chesapeake, Va.

In Business Since: Roots trace back to 1953, although the Dollar Tree name has been around only since 1993.

Number of Locations at Press Time: 3,961 in 48 states. (The chain is also in the process of acquiring 85 Dollar Giant stores in Canada, where everything is $1.25 Canadian.)

Notable Numbers: For full-year 2009, net sales were a record $5.23 billion, a 12.6% increase over the previous year. Comparable store sales increased 7.2%, attributed to traffic growth and average ticket. According to the company’s 2009 annual report, each store averages $1.4 million in annual sales, and more than 175,000 customers visit each year.

Growth Plans: For 2010, the company planned to add 230 new stores and relocate and expand 95 existing stores. It plans to keep that momentum going; over the longer term, it believes it can operate 7,000 Dollar Tree stores across the country. The company also hopes to one day operate 900 to 1,000 stores across Canada.

How It Competes

Overview: Dollar Tree is the only one of the three to remain true to its $1 roots. Everything in the store costs a maximum of $1, and in 2008, Dollar Tree joined the Fortune 500, “largely a dollar at a time,” as CEO Bob Sasser puts it in the company’s annual report. The stores’ sizes have evolved to a range of 10,000 to 12,000 square feet in strip centers and freestanding locations, double the size of its small, mallbased stores a decade ago. Sasser said this is the ideal size for the chain for a number of reasons: It is small enough to be convenient, but large enough to accommodate a broad assortment of merchandise, including the growing selection of needs-based product. For the year ended Jan. 30, 2010, consumables accounted for 48.1% of sales, up from the prior year’s 45.7%, and Dollar Tree plans a continued emphasis.

Private Label: The company has 45 corporate brands, which account for about 35% of sales, according to chief merchandising officer Bob Rudman at a Capital Markets Conference earlier this year. Purchasing:Approximately 40% to 45% of the company’s merchandise is imported, primarily from China. The rest is purchased domestically and is promotional merchandise or closeouts. According to a Morgan Stanley research report, despite Chinese inflation, “Dollar Tree has a strong sourcing department and is able to pit vendors against each other for its business. On a typical trip, a merchant will meet with about 100 vendors.”

Advertising: The company spent $8.3 million in advertising in the year ended Jan. 30, 2010, up nearly 26%from $6.6 million the prior year.

Increasing Freezers/Coolers:As of July 31, the company had frozen and refrigerated merchandise in about 1,680 stores, compared to about 1,400 on Aug. 1, 2009. During a secondquarter earnings call, CFO Kevin S. Wampler said adding frozen and refrigeration leads to a lift of 5% to 8% in the store, even though those products might be lower-margin. “Really, what we don’t see is we don’t see it go away; it really helps our business all across the entire store,” he said.

Other Formats:The company acquired Deal$ in 2006 and now has 161 Deal$ stores. The Deal$ stores offer items predominantly $5 and less. Rudman said, “By lifting the restriction of the $1 price point, we’re able to offer the customer more complete assortments, more brand names, more compelling values.” As an example, he said the company can offer pillowcases at $1 at Dollar Tree, but the whole sheet set at Deal$.

Dollar Tree Direct is the company’s e-commerce platform, launched in the first quarter of 2009. It caters to small businesses, organizations and individuals planning events. It means purchasing larger quantities, but everything is still $1 and can be shipped free to the nearest Dollar Tree. Since March 2009, the company has increased its available SKUs by 80%, added AmEx and Paypal payment options and launched a call center. The company has more than 1,700 products available for online purchase and is looking at creating Web-only items.

Location: Sasser said Dollar Tree doesn’t consider Walmart a competitor, and Dollar Tree locations are even either co-located with or near Walmarts “because we all try to go where customers are shopping.”

Merchandising: The stores are considered a party-favor destination, so the company moved party items from left rear to front and center, and it expanded the party assortment and SKUs. The company has no plan-o-grams and isn’t tied to a single vendor, category or item. As Rudman puts it, “If an item is no longer available or becomes a little pricey for our model, we move on.” The company’s assortments are always changing, with more than 50% of what the store carries varying over the course of a year. The company has added a home-destination category to several stores, which includes dinnerware and textiles. The company plans to roll out the best SKUs from the test stores to all stores with that category. According to a Morgan Stanley research report, “Dollar Tree’s unique value offering, coupled with strong in-store execution, has captured new customers during the downturn that keep coming back.   


Competing with Dollar Stores

For Keith Brown, vice president of marketing for Scaff’s Inc., a 47-store Lake City, Fla.-based c-store chain, Dollar General (DG) is a formidable competitor, affecting 14 of his 47 stores. At press time, DG had its sixth-largest presence in Florida (with 473 stores), where all of Scaff’s stores are located.

“Dollar General is building stand-alone units in outlying areas that have been traditionally c-store territory,” he says. And they have proven to be competitors on milk, bread, ice cream, grocery, beer, wine and automotive. “All they are missing is cigarettes, tobacco and gasoline.”

But Brown doesn’t take the competition lying down, and advises others to do the same: “Don’t relent. Compete.” Scaff’s has always sold milk and bread at competitive prices, he says. Recently, DG began selling beer and wine, and Brown said they typically price beer 4 cents below c-stores. Scaff’s is competitive on 12- and 18-packs of beer; it picks up margin on six-packs and singles.

And Scaff’s is also trying out new categories. “We have begun trying seasonal items like toys and plush and now have low-priced sunglasses,” Brown says.

Jeff Lenard, vice president of communications for NACS, points out that this isn’t the first time c-stores have faced challenges from other channels. He points to hypermarkets competing on gas and tobacco stores.

 “The bottom line is that for all three threats, the main selling point was price, and it turns out that when your only compelling offer is price, two things happen. First, only one place can win on price and everyone else is a loser. The second thing is if someone has an offer more compelling than price, the price leader loses.”

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