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Nickle And Dimed By Dollar Stores


Addition of perishables and low price points threaten c-stores

With aggressive store growth and expanding product lines, the dollar store segment is riding a wave of consumer interest, quickly gaining market share in key convenience categories.

The burgeoning dollar channel is recording the largest increase in shopper visits of all consumer goods retailers, according to SymphonyIRI figures. In the last year, dollar chains such as Dollar Tree, Dollar General, Family Dollar and 99 Cents Only reported healthy sales increases as the number of visits grew 2.6 percent from June 2009 to June 2010 compared with the same period a year earlier.

“The dynamics of the dollar store channel are keeping a lot of people up at night now,” Sean Seitzinger, senior vice president of marketing at Symphony IRI. “Innovation continues to challenge the traditional retail business model. Dollar stores have decided they can do more, including the geographic rush from rural and suburban to urban environments, which have been dominated by convenience, and getting more out of each customer's trips by thoughtfully moving into food, beverage and household goods.” While retailers of all types are adding low-price-point sections or less-expensive product lines, the dollar channel has successfully reallocated space to better compete with convenience retailers, Seitzinger said, noting 50 percent of the selling space in new Dollar General stores is dedicated to food, beverage and household items, including a large lineup of refrigerated and frozen products.

“They are doing food and beverage better than convenience stores and doing it at a value-based price,” Seitzinger noted. “The dollar store can capture a lot of those quick shopping trips.”

Craig Johnson, president of Customer Growth Partners LLC, a consultancy in New Canaan, Conn., agreed that c-stores need to be aware of the dollar store threat. “Dollar stores are going after the money-starved and the time-starved. They are serving people who may only have $10 or $12 to get them to the end of the month and need a few diapers, and the customer who needs a gallon of milk but doesn't want to pay $4 a gallon at a supermarket or navigate a Walmart for the discount.”

While many dollar-store shoppers are desperate to make ends meet, the segment also is attracting more higher-income buyers, according to Nielsen figures. Households with incomes higher than $100,000 spent 18 percent more at dollar stores in the second half of 2008 compared to the year prior.

One reason for the broader consumer base is the expanding variety of products now being offered by dollar stores. While many commonly purchased items are traditional to the channel — napkins, paper towels, cleaning supplies and the like — edibles such as candy and snacks are popular sellers. What's more, noncarbonated soft drinks, prepared foods and other perishables are among the top-growing categories in the channel.

In September, for example, the nearly-300-unit 99 Cents Only chain began selling gallons of milk for just 89 cents in all of its Dallas/Fort Worth area stores for a limited time. The price, it claimed, was the lowest in the nation. The milk was available in all three varieties, whole, 2 percent and skim, but limited to two per shopper.

Additionally, 99 Cents Only Stores' customers can now find fresh fruit and vegetables, including 5-pound bags of potatoes or a pound and a half of peaches, plums or nectarines, all for “99.99 cents.”

“We don't lower our prices on some items and raise the prices on others to make up the difference,” CEO Eric Schiffer said in a statement. “We work hard to provide our customers with great values on dairy, produce, deli, frozen food, as well as other household items for about a buck.”

Indeed, more than half of the chain's sales come from food and beverages, including produce, dairy, deli and frozen foods, along with organic and gourmet foods. “We have always been committed to delivering great value to our customers, but now more than ever, our customers are relying on us to help them make ends meet as they struggle with increasing costs of daily necessities,” the retailer announced on its Web site.

The channel's low prices are clearly hurting sales at Quick Stop Food Mart LLC in small town Danville, Ky. Owner Roy Phillips told Convenience Store News “dollar stores are popping up everywhere. They're in locations where I wouldn't believe — out in the middle of nowhere. Still, there are a bunch of cars in the parking lot all the time. Now, every little town around us has one. It's hard to compete on price when they are selling milk for $2-something and it costs me more than that to get it into my store.”

Dollar retailers are taking two paths. One strategy, like that of 99 Cents Only Stores and Dollar Tree, strives to keep products pegged at a single price point. Others have moved to a variety of low price points. Both have been successful.

Headquartered in Chesapeake, Va., Dollar Tree operates thousands of stores in the 48 contiguous states and expects 2010 sales to reach $5.77 to $5.86 billion. Its leading categories include food, health and beauty care products and party supplies.

In its second fiscal quarter, which ended July 31, Dollar Tree saw consolidated net sales rise 12.7 percent, while comparable store sales rose 6.7 percent, on top of a 6.8-percent increase for the same quarter last year.

“Sales were strong throughout the quarter, driven by increases in both traffic and average ticket,” said President and CEO Bob Sasser. “Customers are responding in record numbers to our outstanding values and fun shopping experience.”

Digging deeper into company performance, operating margin increased 200 basis points for the quarter to 9.3 percent. The improvement was driven by a 60-basis-point increase in gross margin and a 140-basis-point reduction in selling, general and administrative expenses.

Typical of the fast-growing segment, Dollar Tree opened 56 stores during its second quarter and expanded or relocated 34 stores, while closing just five stores.

But perhaps even more threatening to the c-store channel are Family Dollar and other dollar store operators who are less married to a single-price point, instead expanding their offer and stressing discounts. Family Dollar's mission is “To be the best small-format convenience and value retailer serving the needs of families in our neighborhoods.”

To that end, the chain increased its assortment — consumables is now the strongest selling category — and has poured resources into making the stores easier to shop, while expanding operating hours. “These investments have delivered solid results and position us well for continued growth in fiscal 2011. Customers continue to respond well to the values and convenience we offer,” Howard Levine, the chain's chairman and CEO said.

Another strong performer, the chain of 6,785 stores saw sales for the fiscal year of $7,867 billion, 6.3 percent above 2009 sales. Net sales for the fourth quarter, which ended Aug. 28, increased 8 percent to $1,957 billion. Family Dollar opened 75 new stores during those three months.

Also growing fast is Dollar General, which is now the nation's largest retailer in store count, with more than 9,110 stores as of midsummer and plans to open a total of 600 this year. The chain's goal is to eventually have 20,000 stores, according to industry buzz. The retailer's aggressive freestanding build-to-suit program is supplemented by its search for existing sites anchored by a grocery or major retailer. Dollar General typically opens stores with 7,500 square-feet of selling space and another 1,000 to 1,500 square feet for a stockroom.

“I almost group dollar stores with Walgreens and CVS, who are open about the fact they are coming after us. The dollar store chains are taking steps to capture our market, no doubt about it, but they haven't been as open about it.” — LARRY BOWLING, WORKMAN OIL

The Goodlettsville, Tenn.-based dollar retailer boasts a mix of products that are “frequently used and replenished,” such as food, snacks, health and beauty aids, cleaning supplies, basic apparel, house wares and seasonal items, all sold “at low everyday prices in neighborhood locations.”

This strategy resulted in a bump in the chain's second fiscal quarter same-store sales of 5.1 percent, a rise in gross margin of 101 basis points to 32.2 percent and an increase in operating profit of 29 percent to $301 million. Its net income rose an impressive 51 percent to $141 million.

How much of a roll is this chain on? Dollar General expected sales for the 2010 fiscal year to increase 8.5 percent to 10.5 percent, including an increase in same-store sales of 4 to 6 percent. Along with the new store spending, the retailer will remodel or relocate another 500 locations.

“These stores are picking up the trade because people think they are cheap. But some of the stuff is not so cheap. They do have cheap prices, but some of quality is also cheap,” Quick Mart's Phillips said.

To counteract the dollar store encroachment, Lynchburg, Va.-based Workman Oil began experimenting with dollar sections in 2007 and now has eight to 12 feet of products priced at $1 in 15 of the chain's 47 Apple Market stores.

“We are pretty satisfied with the results and how the strategy ties in with our overall merchandising philosophy,” said Larry Bowling, Workman Oil's vice president, operations and marketing. However, he warned that c-store operators who simply put out cardboard boxes with $1 items in them are not effectively competing in the dollar marketplace. “We're selling 35 to 40 cases of product per quarter per store,” he said. While choosing stores to carry the dollar items — which include a packer's label version of household cleaning products, personal care items, paper goods and more — Workman Oil considered proximity to dollar stores and, in some cases, supermarkets. Stores not close to those retailers were more likely to fill a need in the market with a dollar section, he said.

When the retailer first ventured into dollar items, some of the products were poorly packaged or of poor quality. “We realized they were generic products, but we didn't accept something below our standards,” he said.

Even with improved dollar-section mix, Apple Market still is unable to match the dollar store price of many of the items found in both channels. To better compete, the chain has gone to an everyday low price on staples such as milk, bread and eggs.

“We keep those items priced as close to cost as we're allowed to,” Bowling said. “Those are items that years ago c-stores sold a ton of. In many areas of the country, those sales in c-stores have shrunk. We've been able to grow sales of those products.”

The chain is also upgrading other parts of its business, including moving to Seattle's Best coffee, as a proactive move. “So far,” he said, “dollar stores aren't selling food to go.”

At Apple Market stores, the low-price-point merchandise is identified with window signs and ceiling danglers. When the products were first launched, the sections were advertised with real estate signs outside.

“I almost group dollar stores with Walgreens and CVS, who are open about the fact they are coming after us,” Bowling said. “The dollar store chains are taking steps to capture our market, no doubt about it, but they haven't been as open about it.”

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