Not so long ago, dollar stores were the oddballs of the retail world, home to an assortment of discontinued groceries, party supplies, cheap toys, and other low-priority products. . They were so non-threatening to traditional retailers that some, like Wal-Mart, co-located with them.
What a difference a few years and an economic downturn make. Beginning with the 2008 recession, value-oriented consumers began to turn their attention to dollar stores in their communities. Companies like Dollar General and Family Dollar have capitalized by tightening their operations and increasing their assortment of groceries, household items and other consumables.
Not only did dollar stores manage to seize the moment, but they retained many of those long-term customers and continued to make gains. According to research firm GlobalData Retail, dollar store sales grew from $30 billion to $45 billion between 2010 and 2015, a 50% growth that far exceeded the 17% growth seen by the retail trade as a whole.
But can dollar stores sustain this growth?
An updated and desired store format
“Twenty-five years ago you would see dollar stores in malls and supermarkets because they got decent traffic,” Richard George, professor emeritus of food marketing at the Haub School, told Food Dive. of Business from St. Joseph’s University. “Over the past 10 years, their amount of consumables has grown to the point where it’s become a major competitor.”
With three-quarters of their stock devoted to daily necessities like toilet paper, cereal and cleaning supplies, dollar stores have long supported regular refill trips. In recent years, analysts say, dollar stores have bolstered their consumables lineup by improving merchandising and stocking more in-demand brand name products.
Dollar stores have also understood what other retail formats have long understood: food drives traffic. Customers visiting a dollar store today can pick up frozen meals, prepared sandwiches and salads, and even fruits and vegetables. On its website, 99 Cents Only advertises daily deliveries of “farm-fresh produce.”
Ken Morris, director of consulting firm Boston Retail Partners, said customers aren’t the only ones taking dollar stores more seriously. Manufacturers are too.
“CPG manufacturers are paying more attention to dollar stores and offering dollar-sized packaging and more branded merchandise beyond the traditional secondary brands and discontinued products they sold in the past. “, he told Food Dive.
At the same time, dollar stores retained what many sources called their “treasure hunting” appeal by offering a limited assortment of home decor, clothing, and miscellaneous knick-knacks.
Dollar stores have a product line that appeals to the core demographic of low- and middle-income consumers. What surprises many about the industry — including the dollar stores themselves — is that it’s also appealing to millennials and high-income shoppers. According to payment data collected by the NPD Group, 25% of customers at the three largest dollar chains are millennials from households earning $100,000 or more.
This makes perfect sense to Morris, who says millennials adjust their spending by category.
“Many affluent millennials choose to save money on consumables and splurge on experiences and big-ticket items,” he said.
The data doesn’t surprise George either. He has studied Millennials’ shopping habits for several years and says they are very receptive to buying through alternative channels.
“If you talk to millennials, you learn that a lot of them haven’t set foot in a traditional supermarket in a very long time,” George told Food Dive.
The growth of dollar stores across revenue levels has weighed on traditional retailers by putting pressure on their prices and squeezing margins. Some supermarkets, in response, tapped directly into the dollar store playbook, offering more dollar items and deals like ten items for $10. Many stores like Target now have a special section filled with $1 products.
Pushing back the Wal-Marts
No retailer knows the pressures of dollar stores better than Wal-Mart, which serves many of the budget-conscious shoppers targeted by Dollar General, Family Dollar and society.
“What the dollar stores did was reverse the formula on Wal-Mart,” Neil Stern, senior partner at retail consulting firm McMillanDoolittle, told Food Dive. “Wal-Mart made a lot of money by putting a supercenter in one community and then tapping into three or four communities. Dollar stores came in and said, “We’re going to put five of our stores between the customer and their trip to Wal-Mart.” ”
The world’s largest retailer has retaliated with its own dollar store offshoot called Wal-Mart Express. But the format failed to catch on and closed down last year. The company sold its 102 stores to Dollar General.
If dollar operators can fend off Wal-Mart, the sources say, they can survive just about anything. This is because dollar stores are shielded from many of the headwinds that can slow other retailers down. They thrive in a weaker economy; they are small, which means they have little overhead and are easy to build and dismantle; and stores do not require a lot of investment. The formula for growth for dollar businesses, Stern said, is to build many small stores that generate about $1.5 million in sales each year, and let the numbers add up. This year, Dollar General plans to open 1,000 stores, or about three a day.
Some wonder, however, if this frenetic pace will eventually catch up with dollar store operators. Neil Saunders, managing director of GlobalData Retail, said while their small footprint means they have “lots of room to grow in the US”, some stores have reached saturation point in some markets.
“In some areas, stores are cannibalizing each other’s sales,” he told Food Dive.
Dollar stores are also susceptible to economic pressures. Minimum wage increases could have an impact, according to Stern. And just as the recession has pushed many into the dollar format, a bountiful economy could give more expensive competitors a chance to lure them in.
A new administration gives these issues added relevance.
“If the economy improves, we could see the wind blowing a bit on their sales,” Stern said.
New growth opportunities
Dollar retailers aren’t waiting to see which way the wind is blowing. In addition to its ambitious store growth plans, Dollar General is also experimenting with new formats and expanding its selection of private labels. Last month the company opened DGX, a store concept aimed at urban millennialsin Nashville.
Meanwhile, Dollar Tree, which acquired Family Dollar in a $9.1 billion deal in 2014, is starting to realize operational efficiencies from its joint venture. The number of stores under the newly formed company now stands at almost 14,000.
Continuing at the same breakneck pace they have enjoyed in recent years will be difficult, sources say. Most likely, sales will grow at a more modest pace that reflects market maturity, consumer preferences, and various adjustments that competing retailers are making.
“I don’t see their growth being as exponential as they have been in the past, but I don’t think it’s going away,” George said. “I think you’re seeing an evolution with the urban format, and I think you’re going to see more and more evolution in food and consumables.”
George sees an avenue of growth for dollar businesses targeting convenience stores, which offer similar products and the same type of groceries.
“They have convenience store products at dollar store prices, and they’re in the same places as convenience stores,” he said.
Likewise, Saunders said growth becomes increasingly difficult as big dollar companies become. This may, he said, require a shift in their usual tactics, such as focusing resources on existing stores in addition to opening new ones.
“We will likely see a greater focus on making existing stores work harder and on how to increase basket sizes and customer conversions in those stores,” he said. “That said, the pace of new store growth will still be significant, especially relative to other retail sectors.”