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Rapid Dollar Store Growth Could Pose Obstacles

High growth and geographic expansion will continue to characterize the small format value retailing sector during the next five years, and leading companies will continue to get bigger and smaller players will find it tougher to compete, according to Retail Forward Inc.

However, the picture is not as pretty as it’s been in recent years as some big players begin to experience growing pains, according to the outlook report titled, “Dollar Stores and Other Small Format Value Retailers.”

The small format value retailing sector has grown from a $31 billion channel five years ago to more than $42 billion today and channel sales growth will remain solid. After surging in recent years, Retail Forward projects sales growth will moderate at an average rate of 5.4 percent per year through 2009.

Five years ago, the top 10 players represented 44 percent of industry sales. Today the new top 10 control nearly two-thirds of sector sales. Retail Forward expects the top 10 players will operate more than 27,000 stores by 2009, up from 20,000 today.

“Aggressive new store expansion by the leading players remains the primary growth driver for this sector,” states Nick McCoy, senior consultant with Retail Forward and co-author of the Dollar Store report.

While dollar stores and small format value retailers will continue to grow, same-store sales gains are becoming harder to achieve and some profitability issues are beginning to surface. The sector is operating in a tough environment. Core low- and lower-middle income shoppers are plagued with rising gasoline and food costs as well as high unemployment.

“As these core shoppers’ budgets get stretched to the limit, we’re seeing a reduction in the number of shopping trips and a postponement of discretionary purchases,” McCoy comments. “However, these same economic pressures may lead to more consumers trying the format because everyone loves a bargain and American shoppers increasingly are value-oriented shoppers,” he added.

In an effort to give same-store sales a shot in the arm, small format value retailers will use expanded food offers, more “treasure hunt” and private label merchandise and alternative payment options to drive shopping frequency, raise transaction size and attract new customers, according to Retail Forward.

Market leaders will also continue to make sizeable investments in existing stores, processes and organizational structures that will better enable them to manage future growth.

Given the torrid pace of store expansion in recent years and wider geographic reach, existing processes and management information systems at many small format value retailers are being pushed to their limits. “Looking forward, industry players will need to invest in the infrastructure necessary to control bigger businesses and a growing network of stores,” McCoy said.

Small format value retailers will work to maximize potential in existing markets, improve food distribution processes, make it easier for core customers to fulfill their shopping needs and expand private label and direct sourcing capabilities.

“Once the appropriate infrastructure is in place, expect that small format value retailers will continue to raise the competitive bar in terms of convenience, price and value,” McCoy added.

A wide range of opportunities are open for suppliers to share the wealth with small format value retailers as they continue down a growth path. To take advantage of continued geographic expansion, suppliers increasingly must offer more unique, channel-specific deals, specially tailored national brand products and economically attractive private label merchandise, Retail Forward concluded.

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