Top Dollar

Cokes, smokes and beer: Why today's dollar store is looking so convenient.

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Samantha Oller, Senior Editor/Special Projects Coordinator

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Another complex category—alcohol—has also entered dollar stores’ retail equation. At Dollar General, beer had been rolled out to 3,900 stores or about 40% of the chain, with a goal of reaching 5,000 by the end of the year. “When beer is in the basket, those stores have a 1% additional comp, so we’re real pleased with what we’re seeing,” said Dreiling during an earnings call. The com­pany has also launched a private-brand wine and plans to begin sales of spirits. (Family Dollar is currently testing beer, with no timeline for completion.)

Joe Vonder Haar, beverage industry consultant and managing partner in iSEE Store Innovations LLC, St. Louis, says beer is a natural way for dollar stores to build the basket. “They’ve looked at their core consumer; it’s not a matter of bringing new consumers in, but just converting existing consumers in their stores who are already there,” he says.

After visits to St. Louis-area Dollar General stores, Vonder Haar describes the beer offer—two cooler doors and two shelves of warm packs—as a “very limited assortment,” composed mainly of premium and subpremium beer. Smaller packs are also the focus, with 18-packs the maximum pack size. Based on the assort­ment, he suspects that the 12-pack of Bud Light cans is the No. 1 SKU. This compares to c-stores, where Bud Light 12-, 18- or 24-packs are typically the top-selling SKU, depending on the current promotional strategy of the brewer.

Also notable: The dollar stores sell no single-serve beer, from which c-stores gen­erate nearly one-half of their beer sales, and which also provides the highest mar­gin. “The sweet spot for convenience is the ‘for me, for now’ occasion,” Vonder Haar says. “There’s only a small piece that [dol­lar stores] are going after. It is fill-in, not necessarily for immediate consumption.”

It serves as a nice add-on that builds the basket for their customer, says Vonder Haar. The prices on the multipacks are competitive, he says, although not the low­est in town.

In the short term, Vonder Haar says dollar stores pose a greater competitive threat to drug stores, whose beer sales also tend to be fill-in, impulse-type occasions: “In the longer term, if they go after better merchandising … and go after smaller, single-serve pack sizes, because of their consumer profile, I think the biggest threat is in a convenience store.”

Vonder Haar recommends c-stores focus on their strengths: variety, price competitiveness and promotions. He highlights monthly promotions popular with beer wholesalers, such as tickets off a local baseball game or a sweepstakes. “That’s an area that the dollar category is just not used to participating in,” he says.

“If you have [a Family Dollar or Dollar General] in your neighborhood, pay atten­tion,” says Vonder Haar. “Don’t give them a chance to out-execute you, because con­sumers are creatures of habit. Once you have a loyal customer, you want to keep them; you don’t want to give them any opportunity to change buying patterns.”

The Convenient Response

Beyond playing defense as dollar stores grow into tobacco and beer, c-stores can be aggressive by targeting the conve­nience-value equation.

“There is some magic, frankly, in $1 merchandise,” says Stern, who points out that Target’s One Spot dollar section posi­tioned at the front of its stores success­fully re-creates some of the excitement.

Paglia says he has not yet seen a com­petitive response he would classify as “a dollar-store killer.” Some grocers have come close, he says, such as Kroger, which has an area of the store dedicated to value, with a different look and competitive pricing.

Beyond this literal approach, Stern says retailers can consider simple mer­chandising techniques. Supermarket chains, for example, have embraced 10-for-$10 promotions that meet the $1 price point. “You’re really not taking mar­gin hits, just communicating value in a different way,” he says. (For more on Alon Brands’ effort to create an effective value center, see “Alon’s Dollar Killer,” p. 100.)

Another tactic is to match price with package size and occasion. A retailer requesting anonymity, who oversaw an ambitious dollar program at a large regional c-store chain, says one takeaway from the two-year experiment is the need to consider how each product can deliver convenience and value.

Consider, for example, hemorrhoid cream. At the time of the dollar program, the retailer was able to buy a massive quan­tity of large tubes of hemorrhoid cream at a discount and sell them for $5.99, a price competitive with that of Walmart. “The problem is, the person who needs a gigantic tube of hemorrhoid cream isn’t coming to a c-store to buy it,” he says.

It’s better to have offered a trial size or smaller $1 or $1.99 offer. “Just having a great deal on an item isn’t enough,” he says. “It’s a great deal on what the customer

wants. And that requires a great deal more thought and follow-through to figure out how to make the concept successful. That’s what dollar stores have done well: They’ve figured out what the customer wants and how to get it to them at a package size that’s at an appealing price point.”

So, for example, to be able to sell it for only $1, a dollar store would sell a 12-ounce box of dog biscuits instead of a 64-ounce package. It’s an approach that appeals directly to that core dollar con­sumer, often living paycheck to paycheck.

“If you go to Walmart and Target, here’s a 30-pack of toilet paper that’s $7,” says Stern. “That’s a great value if you can afford to spend $7 of your food dollars on toilet paper, but a lot of people can’t. The core appeal of Dollar General and Family Dollar is they’re going to give an option that costs $1.50, and if you only have $25 to spend this week, that’s the right value at the time.”

There are already hints of this in the grocery category; for example, consider single-serve bowls of ready-to-eat cereal as an alternative to a 15-ounce box.

“The opportunity in a lot of grocery and HBC segments is to really tailor to more of a dollar-store program, where people can say, ‘Hey, I got a really good deal today,’ ” he says.

Room for Growth

In a January 2011 white paper, Ann Natunewicz, manager of retail research for Colliers International, a commercial real-estate services firm based in San Jose, Calif., revealed dollar stores had reached an incredible milestone: At that point, the four major dollar chains had surpassed the store count of the three national drug-store chains by nearly 2,000 locations.

For 2012, Family Dollar plans to add 450 to 500 sites and is entering California, Oregon, Washington and Montana, with a net store growth target of 5% to 7%. Dollar General plans to add 625 new sites, including 50 in California.

And as far as the dollar chains are con­cerned, they are far from the saturation point. Dollar General CEO Dreiling said in a conference call that research shows 8,000 existing opportunities to expand in the 40 states where it does business.

“There’s another 3,000 to 3,500 oppor­tunities in the states we’re not in,” he said. “So there are 11,000 opportunities to grab out there.” In addition, because of Dollar General’s smaller trade area, stores can be placed closer together. “Remember, one of the driving pieces of this model is not only the value equation the customer gets, but the convenience angle as well.”

Of course, this growth is not hap­pening in a vacuum; some analysts have suggested that the dollar channel will lose steam as the economic recovery picks up. Another possible brake hinges on whether they can move effectively from their base—small to midsize towns and rural markets—and effectively penetrate bigger and more sophisticated markets.

“The biggest issue for them is they have a very simple model that’s worked,” says Stern. “But now when they want to expand geographically, or drive more business out of the box they have, they find business opportunities, but they require more complexity.”

This includes higher build-out costs for the new refrigerators and freezers, different service models to handle selling age-restricted products, and different labor models and increased supply-chain complexity to accommodate more per­ishables. “All of those things that enable them to grow and get more sales are also inherently tougher to handle,” he says.

The competition is getting wiser to the threat as well. Increasingly, supermarkets are asking landlords to block dollar stores in their lease agreements because of their expanding mix of consumables.

“Look statistically at what Family Dollar has been doing, and the amount of food and consumables they’re sell­ing is increasing, so they’re essentially a food store,” says Stern. “Ten to 15 years ago when a lease was signed, dollar stores were more variety or general merchandise stores. If supermarkets hadn’t built it into their leases, they certainly would now.”

Stern believes all retail channels need to take notice. “When someone opens up a $1 million store down the block from you, no one worries about it,” he says. “The issue with dollar stores is that they’re opening 1,000 of those $1 million stores a year. That’s where it’s interesting: It’s the sheer numbers of them that make them a threat to everybody.”

It’s this vigilance that, in the end, may prove to put the biggest brake on dollar-store growth. For years, dollar stores have flown under the radar of big boxes, supermarkets and c-stores.

“As dollar stores become more promi­nent, it’s another side to that sword,” says Paglia. “Their competitors will figure them out and will try to differentiate and get back the competitive advantage. It’s going to be a constant challenge to dollar stores to remain relevant and competi­tive. That’s also the price you pay when you want to take over the world.”


Refrigerated and Frozen Food

The offer: The average Family Dollar site has eight cooler doors, and stores are now opening with 15 to 20, as space permits. Beyond staples such as milk and eggs, the chain is introducing full meal solutions, including frozen chicken and steak.

Most new Dollar General Plus stores have 16 cooler doors. The 20,000-square-foot Dollar General Market concept serves as a small grocery store, with half dedicated to food and beverage and half to grocery and general merchandise.

The purpose: It’s all about increasing basket size and trip frequency. Consider that since installing coolers, Family Dollar has seen dollars per trip grow 38% and trips per shopper jump 18%. Beer and Wine

The offer: At Dollar General, the goal is to roll beer out to 5,000 sites. The company also plans to begin sales of spirits. Family Dollar is testing beer, with no timeline for completion. Its set features two cooler doors, and two shelves of warm packs are dedicated to a limited assortment of premium and subpremium beer. Smaller packs are also the focus, with 12-packs the maximum pack size, and no singles. In addition to beer, Dollar General is selling private-label wine.

The purpose: Serves as a nice addition that builds the basket. Acts as an impulse or add-on purchase, similar to that of the drug-store occasion. Wine is a piece of the home-meal-replacement objective. Tobacco

The offer: Family Dollar is rolling out tobacco sets to 6,000 sites by the end of 2012. The stores’ 4-foot, locked metal cabinet is typically placed behind a counter. Contains a limited assortment of premium brands such as Marlboro, Newport and Camel, and value brands such as Pyramid and Maverick—all packs. The OTP selection is limited to cigars.

The purpose: Family Dollar’s core customer overindexes for smoking. Serves as a trip driver and basket builder: Sixty percent of baskets with cigarettes also include other items.


Alon’s Dollar Killer

Like many c-store retailers, Alon Brands has dabbled with dollar-store merchandise. In 2006, it created a short-lived value grocery section. While the value for customers was there—product was priced competitively to dollar stores—it was only because Alon had purchased the items in bulk to earn and pass along a lower price. However, there was just too much product to sell.

“We had 48 cans of tomato soup sitting on the shelf,” says John West, vice president of retail marketing for Alon Brands, dba 7-Eleven, Odessa, Texas. “We did get a price break and were able to pass along the savings, but the cost of goods and the cash flow were not where it should be. That wasn’t what our customers were actually going to the dollar stores for.”

Here’s where Alon’s latest stab at dollar stores differs. While West considers dollar stores’ current tobacco and beer offer not an actionable threat, calling it “very weak,” he believes Alon has an opportunity to compete head-on in the health and beauty care (HBC) and grocery category.

His team identified 40 to 50 HBC and grocery items in local dollar stores that appear to be the top-moving SKUs. Then they teamed with Alon’s distributor, Core-Mark International, to set up a 20-foot set of paper, soap and HBC that they could sell at value prices, such as a 54-ounce bottle of name-brand detergent at two for $4. After a two- to three-week test in El Paso, the store sold through its entire stock—without advertising or signage highlighting the offer.

Alon’s key to making the program worth the investment is its ability to buy the product in lower quantities from Core-Mark but still get a low price. “The value is now we’re sourcing at a very low cost of goods that still have proper quality, but we’re able to price it very near what dollar stores are, and we can buy it per unit,” says West. “If we only want six units of this item, we can get six items, whereas before maybe we had to buy 24 or 48.”

The company has since rolled out the program to six sites in El Paso, and is finalizing the plan-o-gram so that all 100 sites in El Paso and Albuquerque will have a value center, ranging from 8 to 20 feet, depending on the size of the store. “As [the set] gets a little smaller, we put in the fastest-moving items, and as it gets a little larger, we can put in some of the slower-moving products,” says West. “We’re going to be watching that scan data very, very closely and seeing what we need to adjust, and adjust it on a per-store basis.”

Over late summer, Alon added ceiling and shelf signage to highlight the center, and the company plans to begin promoting it once the program is fully rolled out.

Another area where Alon is tackling dollar competition head-on is novelties. Through a program with Core-Mark, Alon added a 36-SKU spinner rack of inexpen­sive toys ($1.79 each or two for $3) that has proved very successful, with one-third of stores selling out of product the first week, and most stores emptying the rack within two weeks. The company plans to change the SKU mix by season, with water guns for spring and summer, for example, and trucks and dolls for the Christmas season. Total general merchandise sales bounced up 23% year over year thanks to the new offer.

“C-stores have a good variety, but a variety built around quick snacking,” says West. “Most everything bought in our stores is consumed in the first one to two hours. Value stores really do have a large variety of housewares, personal goods such as socks, HBC, etc. It is a lot of variety. … In their minds, possibly in their customers’ minds, it’s another reason to shop at those stores. We want to show we can do similar things, but more along items they’re looking for on an everyday basis.”

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