CHICAGO — Inflation, economic uncertainty and overall consumer pessimism may keep many retailers up at night with fears of slipping sales, tighter margins and increased competition. But these same factors are helping pave a pathway to profitable performance in the dollar channel, where customers historically flock when bargains and lower-priced merchandise are prioritized due to severely stretched budgets.
While they, too, face challenges and wildcard difficulties, the major players in this space—Dollar General, Dollar Tree and Family Dollar, as well as Five Below and Big Lots—continue to survive and thrive. (See statistics below.)
And that’s a cause for concern for convenience-store operators. Because dollar stores are increasingly valued by Americans as go-to convenience providers that boast larger footprints, a wider array of products and, most importantly, lower prices—or at least a perception of lower prices.
Here’s a look at where the major dollar-store chains stand today …
Channel Progress
The dollar channel is well-positioned to weather most retail storms ahead, according to Lorelei Bergin, vice president of retail for Chicago-based NielsenIQ.
“Dollars stores have been expanding their product offerings for many years now. COVID-19 has helped the channel accelerate growth and open nearly 1,300 new stores nationally from 2020 to 2021,” she told CSP Daily News. “The number of store openings has made shopping more convenient, unlike larger retailers, including convenience, drug and grocery stores that have all lost footing and saw declines in the number of stores.”
Insights firm Placer.ai reported that foot traffic to dollar and discount stores is impressive lately, with Dollar General, Five Below, Dollar Tree and its subsidiary Family Dollar posting foot traffic gains in the second half of the year. In October alone, traffic growth in Dollar General hit 26.7%, Family Dollar stood at 20.9%, Dollar Tree 16.1% and Five Below up an enviable 54.1% compared to pre-pandemic 2019.
Per NielsenIQ, the average shopper now makes 28 trips to a dollar store per year, with an average basket size of $15. The firm also reports that deli (up 14.2%), frozen (up 17.1%), and produce (up 33.9%) departments are seeing the largest growth across units in the dollar channel. In addition, basket size across the channel has increased as consumers face heightened recession/inflationary pressures.
R.J. Hottovy, head of analytical research for Placer.ai, Los Altos, Calif., says there’s been a lot of activity and change in the dollar channel over the past year, which saw Dollar General name a new CEO (Jeff Owen) and Dollar Tree appoint a new chairman (Rick Dreiling).
"Price increases are prompting shoppers to move toward less expensive products and remain closer to home."
“Dollar Tree went to $1.25 successfully as its standard price point, and Family Dollar is setting price points lower. All chains are expanding into consumables and growing that business quickly,” he said. “Improving service levels and efficiencies are also major focal points. As the year progressed, inflation became more pervasive, leading to smaller basket sizes, increased in-store brands and lower price points.”
Hottovy added that there has been some migration to dollar stores from other retail segments, but “that’s still early in its development. Lapping last year’s stimulus surge makes reading the trend very difficult.”
In addition, inflation concerns are on the rise, giving the dollar channel an opportunity to trade up customers making around $80,000 to $100,000 a year, Bergin said.
Furthermore, in a year of record-high gasoline prices, the dollar channel has become an increasingly attractive destination for shoppers who don’t want to drive as far to enjoy its expanded assortment centered around basics of everyday living.
“Price increases in general are prompting shoppers to move toward less expensive products and remain closer to home. Even though prices are now above a dollar, the channel is offering great value and convenience,” said Thom Blischok, chairman and CEO at The Dialogic Group LLC in Paradise Valley, Ariz.
Variety and Value
Rising prices may even be giving dollar stores an advantage, according to Bergin, who says this has provided stores an opportunity to bring in new assortment options from consumer packaged goods (CPG) companies that compete at a higher price point, giving consumers more options when shopping.
In one example, Michael Witynski, Dollar Tree’s CEO and president, said during a recent earnings call that the chain is ”aggressively expanding our offerings of protein, pizza, breakfast items and family sizes at price points (to meet customers’) budgets.” That strategy appears to be paying off, as Dollar Tree has enjoyed a 9.3% year-over-year increase in food and beverage, candy, and cookies and snacks sales, per reporting by Quartz.
Meanwhile, at Dollar General, increasingly popular fresh produce is now being sold at more than 3,000 locations, with a goal to offer it in over 10,000 stores.
“Recently, the dollar channel has seen significant growth in perishable items, adding things like produce and dairy to cater to consumer needs and compete with grocery stores,” said Bergin. “We’ve also seen an expansion in freezer space to accommodate this assortment growth.”
Blischok said he’s noticed more tuned assortments in dollar stores, “things like bleaches, household cleaners, home care and personal care products, as well as increases in larger pack sizes and private brands, and improved ‘good, better, best’ assortments.”
Tobacco Expansion
Meanwhile, more dollar stores are introducing and refining their tobacco product selection to better appeal to shoppers, according to Don Burke, senior vice president of Management Science Associates (MSA) in Pittsburgh.
“For these reasons, this channel is outperforming the other classes of trade in year-over-year tobacco sales,” he said.
Dollar’s fastest-growing nicotine item is the disposable e-cigarette, which many outlets only recently added to their product selection.
“Vapor cartridges are also showing strong growth, suggesting that the dollar channel has identified a nicotine vapor product assortment that has strong appeal among their customer base,” Burke adds. “Additionally, it appears the effects of significant price inflation and high gasoline prices are driving more consumers to the dollar-store channel.”
“Dollar stores are laser-focused on assortment, pricing and promotion.”
Shoppers today are seeking extreme value, as evidenced by the double-digit growth of pipe tobacco and roll-your-own tobacco within this sector.
“Consumers that purchase these tobacco items are making their own cigarettes to absolutely minimize cost,” Burke says. “The growth of these two tobacco product types in dollar stores is far stronger than in any other retail channel.”
Dollar Delivery
Another strategy paying off for dollar stores: delivery and in-store pickup of items purchased online. Case in point: Dollar General first partnered with DoorDash in 2021, and it now offers the service at about 9,000 of its stores.
“We’re seeing a lot of dollar stores move their way into the delivery space. Partnerships with third-party delivery services allow consumers to get their dollar channel goods delivered in addition to grocery store goods or even fresh food,” said Bergin. “This is a great way for dollar stores to reach their consumers in a new and exciting way while also keeping themselves relevant in the evolving world of e-commerce. “
She said dollar stores are also looking to make shopping more convenient for consumers by increasingly investing in click-and-collect to keep up with larger retailers.
Expanded Concepts
Sister retailers Dollar General and Dollar Tree have aggressively launched offshoot concepts in recent years that are gaining traction. Dollar General’s pOpshelf, for example, which competes more directly with Five Below, now has 100 locations, with hundreds more in the works, and its Dollar General Market concept is about to celebrate its 20th anniversary.
Dollar Tree Plus, the chain’s answer to pOpshelf, now has hundreds of locations, too. Then there’s the number of combined stores that feature the best of Family Dollar and Dollar Tree; that’s growing, too, expected to reach a total of around 650 locations soon.
“Today, the average dollar channel consumer still typically lives in a rural area, but with new concepts like combo stores, we are seeing more urban shoppers making the switch to dollar channel stores,” Bergin said.
Dollar Difficulties
But not everything is rosy in the growing garden of dollar retailing. Bergin points out that, while dollar sales across departments have been steadily increasing in the last year, unit sales have declined in several categories, including general merchandise.
“As consumers prepare for a recession, they become more discerning with their purchases and may limit spending to necessities,” she said.
Other headwinds facing the dollar channel include tricky logistics, filling demand, transportation costs, and, perhaps most of all, staffing.
“The ability to get people to work in this space and be enthusiastic about a very vibrant channel in retail is difficult,” Blischok said.
Additionally, like most retailers, the dollar channel is challenged with resolving ongoing supply chain issues and maintaining sufficient cleaning standards. Since 2017, Dollar General has been fined more than $12.3 million by OSHA for workplace safety violations, and the chain is also under investigation for charging higher prices at the register than those listed on the shelf in some Ohio stores. Both issues have led to bad press in the media.
A Slice of Convenience
Like convenience stores, the dollar store is limited in physical space, which makes having the right assortment critical to maintaining growth and stealing market share from convenience operators.
“The dollar channel aggressively looks at assortment and pricing items competitively to the market to compete with convenience retailers,” Bergin said. “Assortments are reviewed often, and changes are made more frequently with the added pressures of supply chain and price increases due to inflation.”
Blischok said he believes dollar retailers have perfected the right formula to outpace their rivals.
“Dollar stores are laser-focused on assortment, pricing and promotion. Their trip has been defined: They’re a local market, closer to home, and offer a good assortment for stock-up and fill-in trips,” he said. “And their windfall is that gas prices and transportation costs have increased so much that they are a go-to place.”
Convenience stores, on the other hand, suffer from higher prices—or at least that perception—and assortments overdue for radical improvement, added Blischok.
Still, there’s room for dollar stores to improve.
“Improving the consumer shopping experience would be a big win for the dollar channel, as sentiment around cleanliness and out-of-stock items is lower in this channel than others,” Bergin said. “And the hunt is on more than ever for great deals. Creating more sophisticated loyalty programs and personalized offers would be a great win to compete with bigger retailers.”
Looking Ahead
Navigating 2023 will be tricky for dollar stores and convenience retailers, alike.
“Ask yourself: How will consumers purchase, and how will you operate your business to keep costs under control? You need to carefully manage how you differentiate on products, as well as your inventory levels, logistics, distribution costs and employee costs,” said Blischok.
Many experts believe a recession is inevitable in 2023. Red flags are evident, from rising credit-card debt, inflation still hovering near 8%, increased layoffs, stock-market selloffs and gas prices. Consequently, the convenience sector will need to tread carefully in the months ahead.
“Economic conditions are causing people to rethink where and what they want to buy,” Blischok said.
While some of these factors are beyond a c-store’s control, one area that isn’t is hiring.
“The biggest challenge facing both dollar and c-stores in the coming year is ensuring that your employees are the right ambassadors,” he said. “It’s crucial to ensure that your associates represent the banner values that comprise the core of your business proposition.”