Cokes, smokes and beer: Why today's dollar store is looking so convenient.
Cheap flip-flops. Cans of expired soup. Scraggly plastic flowers. Knockoff T-shirts made in China. And best of all—they’re only $1!
Those words may conjure visions of dollar stores past, but the reality today is quite different. Think wide, clean aisles, 20 cooler doors stocked with an array of packaged beverages, beer and home meal replacements, and even competitively priced cigarettes. Sounds a lot like a convenience store, doesn’t it?
And with the largest chains—Family Dollar, Dollar General, Dollar Tree and 99 Cents Only—growing at a combined rate of more than 1,000 sites per year, they’ve got the convenience channel surrounded.
“In reality, they are now direct competition,” says John West, vice president of retail marketing for Alon Brands, dba 7-Eleven, Odessa, Texas. The company’s home state has the highest number of dollar stores in the United States; Alon has identified 137 of them (mainly Family Dollar and Dollar General) within a three-quarter-mile radius of its more than 300 sites.
“They’re definitely trying to set themselves up as somewhat of a convenience store,” says West, citing the stores’ expanding assortment of candy, snacks and dry grocery, as well as the addition of coolers, cigarettes and beer.
“They have changed dramatically, and if you don’t go take a look at what they’re doing, you may find yourself wondering where a chunk of your business has gone,” says Fran Duskiewicz, senior executive vice president for Nice N Easy Grocery Shoppes Inc., Canastota, N.Y. About three-quarters of Nice N Easy’s 82 sites have a dollar store within a 5-mile radius—some even across the street.
“I think they’ve done a really good job,” he says, “especially in tough financial times, of carving out a place where you can get a number of things and not have to pay a whole awful lot.”
“The business has shifted pretty dramatically in the last 10 years from being a general-merchandise store with some in-and-out food … to becoming much more of a consumables, food-driven, weekly shopping kind of environment,” says Neil Stern, senior partner with Chicago-based retail consultancy McMillanDoolittle LLP. “The addition of food, addition and expansion of coolers and freezers, and now addition of tobacco, beer and wine in some stores puts them in much more of a grocery and c-store world than they used to be.”
The two biggest players—Dollar General Corp. and Family Dollar Stores Inc.—have moved the most aggressively into the convenience space, with the latter charging
into tobacco, a category that c-stores not only dominate but which many operators also depend upon for 42% of their in-store sales and 22% of their margin, according to NACS figures. Indeed, the word “convenience” has almost become a mantra for the chains, which see it as the key to luring shoppers from their retail competition.
“For us, convenience is about being in neighborhoods where our customers live,” says Josh Braverman, spokesman for Family Dollar, Matthews, N.C., which has more than 7,300 sites in 45 states. “Oftentimes, our destination is where customers can walk to; we’re in convenient locations, and we don’t charge a premium for that convenience.
“If you think about the model for a drug store or a convenience store, they really do charge a little bit more for being in those neighborhoods.”
This convenience extends to the availability of parking near the store’s front door. “It’s really about that convenient shopping trip, both from location and ease of shopping,” says Braverman. (Dollar General declined an interview because the company is in a “quiet period.”)
And there’s plenty of evidence that dollar stores’ convenient approach is winning over customers. According to Chicago-based SymphonyIRI Group, the average purchase occasions per household at dollar stores jumped 6% in the 52 weeks ending April 15, 2012—compared to a 0.4% increase for c-stores. Meanwhile, dollar stores’ penetration has grown 1.3 points—the greatest increase among the major retail channels, with two-thirds of Americans now shopping the sites.
And their customer base is widening. The core dollar-store consumer has a household income of less than $40,000 and overindexes for household assistance. “In some areas where we’ve lost [electronic benefit sales] … I would wager those have moved over to a dollar store near us,” says Duskiewicz. But while dollar stores may be winning more trips from these customers, higher-income households are among their fastest-growing segments.
In the end, it is a battle being fought among dollar store, c-store, supermarket, drug store and big box on the essence of convenience. It is not enough anymore to simply offer a convenient location; rather, the successful retailer will merge a convenient location with pricing and assortment that encourage a one-stop shop.
“Just because we call ourselves convenience stores doesn’t mean we own convenience,” says Duskiewicz. “The shopper defines convenience. If a shopper finds convenience in a drug or dollar store and that suits their purpose, well, that’s where they’re going.”
The Expanding Basket
The recession and its stumbling recovery have provided some of the fuel for dollar stores’ fire, giving a jump-start to longer-term initiatives such as adding refrigerated and frozen food, remodeling stores and expanding assortment.
“The recession in late 2007 and early 2008 was in a lot of ways the best thing that could have happened to them,” says Mike Paglia, a senior analyst for Kantar Retail, a consultancy based in Cambridge, Mass. “Retailers in that space had already started scratching the surface in those areas but hadn’t gained traction. … Now, all of a sudden, people who have lost jobs or their income is uncertain are very value-conscious. Suddenly these stores are getting a second look: This is actually a nice store and you can get a pretty large portion of your basket at this store.”
For Family Dollar and Dollar General, expanding the basket and consumer base with frequently purchased items is the chief aim behind an expansion of consumables.
“It’s really about: How do I increase the frequency of trips?” says Stern. “The way to do that is to be more relevant in more of those categories.”
Family Dollar first installed cooler doors in 2005, starting with five. While the average site has eight cooler doors, stores are
now being opened with 15 to 20, as space permits. Beyond refrigerated staples such as milk and eggs, the cooler-door expansion “is really about providing full meal solutions,” says Braverman, pointing out that a new contract with McLane Co. will enable the chain to expand the product lineup even more. “We will be able to offer more protein-type items in those coolers—so frozen chicken and steak—to really become a destination where folks can get more of those full meal solutions in our store.”
From 2007 to 2011, Family Dollar saw dollars per trip grow 38% and trips per shopper jump 18%. Food sales—including candy, grocery, refrigerated, frozen, beverage and snacks—rose 18% from 2010 to 2011 and now provide 23% of Family Dollar sales.
Dollar General’s Market format takes this chase of consumables even further. The stores’ 20,000-square-foot space is able to generate an average of $4 million to $5 million per unit—compared to $1.4 million for a typical 9,000-square-foot Dollar General—with a large produce section and expanded grocery offer.
Paglia was impressed by the format, which right now numbers only 60 sites; the company has plans to add 25 more in 2012. “If Dollar General ever decided to ramp up openings on these at a pace we know they can do, it could impact the landscape pretty significantly,” he says.
While drawing shoppers in with food items, Family Dollar and Dollar General are also expanding their health and beauty care (HBC) assortment as basket builders, through both name-brand items and private label.
“Some of the [HBC] and non-edible grocery items are margin builders for them,” Paglia says. “By carrying consumables, particularly food items, they are margin-dilutive items.”
At the same time that the dollar offer is evolving, so is the consumer base. George E. Brown II, senior account executive for New York-based Meyers Research Center (MRC), which conducts consumer research in various retail channels, says that since the firm started tracking dollar stores in 2003, consumer perception has significantly shifted with the chains’ upgraded offer.
Early shoppers described visits as “fun,” likening them to a treasure hunt, with product popping in and out of assortment. Since then, maturing relationships between major dollar retailers and brand-name manufacturers have enabled the chains to establish a more consistent offer.
“They became a destination for many categories,” says Meyer. “Some of those are c-store key categories, such as food, snack and beverages.” As a result of these improvements, the dollar-store demographic is steadily growing older, more female and wealthier.
Meyer says dollar-store trips tend to be planned, smaller fill-in occasions, with an average spend of $10 from four to five items across all categories. Baskets including snack, food and beverage tend to total on the lower side of that figure and typically are purchased by lower-income, younger, more frequent shoppers. “Older shoppers who are gravitating to dollar stores are buying household products; they might buy a few more items, but they also pick up impulse items at the same time,” he says.
Braverman describes Family Dollar’s core customer as a female head of household making $40,000 or less, living paycheck to paycheck. But now, “we’ve seen a new customer come in and check us out
and really like what’s she’s seen: That’s higher income, $40,000 to $70,000,” he says. “That mid- to higher-income customer is looking to save and realizing she can get a lot of the same name brands she can get at the grocery store and big box.”
In a second-quarter 2011 earnings call, Dollar General CEO Richard Dreiling observed that the company’s core customer still made up 59% of its shoppers and 83% of its sales. However, the fastest-growing segments are those trading down to the dollar channel, and those “trading in.”
“We believe we are seeing another category of new customers who are trading in and who are choosing to come to our stores because they like not only our pricing, but also the shopping experience and the product offerings they are finding in Dollar General,” he said. “We believe these trade-ins reflect a new consumerism, which values frugality and smart shopping.”
Paglia of Kantar says dollar stores are performing a balancing act—one not so different from the c-store channel: Keep the core lower-income customer with dollar-priced merchandise while
drawing higher-income shoppers with an updated store, better assortment and brand names. This is why, for example, Dollar General has been increasing the number of its $1 items in its stores—a balance check, if you will, in the midst of cooler expansions and the introduction of tobacco and beer.
Traditionally, “core value” dollar stores such as Family Dollar and Dollar General are engineered to be very low productivity boxes, averaging sales per square foot of about $150 for a store about 7,000 square feet. Compare that to an average of $547 for c-stores, according to the NACS State of the Industry Report of 2011 Data. Sales per store average $1.2 million to $1.5 million a year, according to the companies’ latest earnings reports.
“They’re not trying to drive productivity, which sounds strange in the retail world, but their model is built on a low cost, and simplicity of operations,” Stern says. Historically, these chains would rather open a new store than drive greater productivity from the stores.
At the same time, the chains’ drive to grow trip frequency and basket size has pushed them into categories that introduce a considerable degree of complexity. Family Dollar is rolling out a 4-foot tobacco set to 6,000 sites by end of 2012. In a second-quarter 2012 earnings call, its CEO, Howard Levine, explained that the company chose tobacco as a major business for several reasons.
“First, it only takes 4 feet of space behind the checkout, so it was relatively easy to find space,” he said. He also cited Family Dollar’s new distribution deal with McLane Co. and the shorter and less expensive licensing process for tobacco, which enables the chain to add it to more sites compared to beer or wine. “And lastly, we believe tobacco is a larger opportunity because it is more frequently purchased and drives substantially more trips than beer and wine—in fact, 16 trips vs. 10 trips,” he said. (While Dollar General has not announced sales of tobacco, it has been testing the category in Nevada since late 2011.)
According to Family Dollar’s own research, its shoppers overindex with tobacco products—more than one-third of heavy Family Dollar customers smoke, compared to the national average of less than 20%—and these smokers make more trips. Also, 60% of baskets that include cigarettes have additional items in the basket, which averages $17 compared to $13 without cigarettes. “When you back tobacco out of that basket, the remaining basket is 8% higher than our original basket,” says Levine.
Lou Maiellano, partner in TAZ Marketing & Consulting Group, a tobacco retail consultancy based in Sevierville, Tenn., says Family Dollar’s entry into the category is a “no-brainer.” “It’s always been a part of the business that they were just missing,” he says. “This is all pure plus sell, just an add-on.” He describes the offer as “basic,” with a mix of premium brands such as Marlboro, Newport and Camel, and value brands such as Pyramid and Maverick. The OTP selection is limited to a few shelves of cigars.
While the fixture itself—a high-profile metal cabinet with locked glass doors, typically situated behind the counter—doesn’t always scream convenience, Maiellano says that is not necessarily a negative: “Am I going in expecting convenience? I don’t think you are. …You know if you want a pack of cigarettes, you have to go up to the counter and have someone get them for you.”
None of the retailers interviewed for this story sees Family Dollar’s tobacco offer as a short-term threat. Duskiewicz likens it to a drug-store offer and says that in New York, where Nice N Easy is based, pricing is dictated by a state minimum. West of Alon similarly considers it “very weak” and has no plans to change his chain’s approach to tobacco.
Maiellano considers Family Dollar’s tobacco offer a “work in progress,” with a fair number of OTP SKUs but no moist smokeless tobacco. Prices are competitive but not necessarily the lowest. The stores also do not sell cartons of cigarettes. In the long term, once the offer is communicated properly, he believes “the pie will just be re-sorted” among c-stores, dollar stores, drug stores, tobacco shops and
He does urge c-store retailers to make sure they stay on top of their tobacco categories and pursue opportunities to drive customers to their store; this will become more important as dollar stores learn and perfect the offer. “Their stores in the future when this category begins to grow will end up growing into that business,” Maiellano says.