Are Dollar Stores Still a Threat?

Channel remains force to be reckoned with, report says

CHICAGO -- Dollar stores have been around for more than 50 years, but the channel has only recently reached the status of major retail outlet. While the channel only captures a fraction of consumer packaged goods (CPG) industry sales, it represents a viable growth path for many categories and brands and a competitive threat to traditional retailers, according to a recent Times & Trends report, Dollar Stores: An Industry Growth Phenomenon, from Information Resources Inc. (IRI), a provider of enterprise market information solutions for the CPG, retail and healthcare industries.[image-nocss]

Today's dollar stores have captured the hearts and imagination of the under $25,000-a-year income consumer, while simultaneously penetrating the upmarket consumer with a very appealing value equationtwo major feats in retailing, said Thom Blischok, president of retail solutions, strategic consulting and integrated solutions for Chicago-based IRI. Dollar stores are just hitting their stride, so CPG manufacturers and retailers should give serious consideration to this channel.

The recent success of dollar stores, including both extreme discount retailers, which offer a majority of products for under $10 and single price retailers, which offer all products for $1 or 99 cents, is the culmination of a number of factors that have been at work for several years. For instance, the general population has become highly value-conscious due in large part to the availability and positioning of value retailers.

Also, the number of low-income consumers who need rock-bottom pricing is on the rise. Those with an income of below $25,000 have increased in number by more than 10% in the past five years. Dollar stores have also worked hard to increase appeal to consumers through upgraded stores and merchandise and have increased access through rapid store expansion. The dollar channel has grown to $27.5 billion in North American sales and 23,000 store locations.

According to the IRI study, the channel has evolved from one in which small independents were loosely setting industry direction to one in which large, sophisticated companies are implementing strategic plans and programs that are literally reshaping the industry. Despite the fact that there are more than 800 dollar store companies today, the industry is highly concentrated with the top four publicly traded retailers controlling roughly two-thirds of sales.

During the last several years, dollar channel store expansion has occurred at a remarkable pace, said IRI. The top four publicly traded dollar store retailers alone added more than 1,400 stores during the past year. And, this expansion shows no sign of slowing. Dollar General announced plans for an additional 800 stores in 2006, while Family Dollar plans to add 400 stores. Despite this expansion, the channel is still far from saturated, IRI added. Since a majority of consumers shop at dollar stores within five miles from their homes, an individual market can support numerous locations.

Led by general merchandise categories, nonfood products represent more than half of dollar store CPG sales. Leading retailers are increasing their focus on food and beverages to increase store traffic, however, so product mix is shifting away from non-foods.

Each of the major players is in the process of adding refrigerated and frozen food sections to their stores. Family Dollar added coolers to 1,000 stores in 2005 and has plans to install an additional 2,500 this year. While Dollar Tree's single price format$1 for all itemsmay limit the chain's ability to add higher-ticket food items, the chain will also increase focus on food with the addition of 200 coolers this year. Dollar General has taken the emphasis on food one step further in creating a new format, Dollar General Market, which has twice the square footage of a traditional Dollar General store and plenty of room for a wide assortment of food and beverages, including produce and meat.

Dollar stores are not only extending their reach among consumers, but have also increased basket size and trip frequency. The stores have surpassed club stores in trip frequency and are not far behind drug stores. Shoppers are now in dollar stores slightly more than once per month on average. For manufacturers, the stores now offer significantly greater exposure to their products. For competing retailers, dollar stores are now potentially converting trips and are certainly impacting basket size to some extent.

The dollar channel's heaviest shoppersthe top one-thirdrepresent 85% of channel sales. Dollar stores also hold a 5.3% share of total CPG spending among these shoppers, versus a 1.4% share among all households. Heavy dollar store shoppers skew lower income and are older than age 35.

While dollar stores continue to broaden their consumer reach, this core consumer group is critical to industry sales, and it is imperative that product assortment is aligned with these consumers' needs. The dollar channel is an ideal growth venue for brands targeting this consumer segment and is a formidable competitive outlet for retailers with a high mix of lower income consumers across their stores, IRI said.

The IRI report cited the following category opportunities within dollar stores for manufacturers and retailers: Within the under-developed dollar store categories, which include pet food and supplies, dry packaged dinners, cosmetics and vitamins, among others, manufacturers should explore category development opportunities with leading dollar store retailers; competing retailers should feature these categories in marketing initiatives targeting lower-income consumers.

Within well-developed dollar store categories, which include household cleaners, candy, soap and cough syrup, among others, manufacturers should consider developing or increasing brand dollar store presence; competing retailers should feature these categories in dollar promotions, such as 10 for $10, and dollar store sections.

Nonfood retailers with an existing dollar store presence should monitor shelf space allocation as dollar store retailers increase focus on food and beverages; manufacturers should partner with leading retailers to determine optimal space allocation based upon brand contribution to sales, margin and store value perceptions.

Major national brands should explore leveraging the dollar store channel to drive trial and incremental purchases among core dollar store lower-income shoppers.

Click here to view the report.