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Note to supermarket operators: Wal-Mart may be the least of your worries. Just check out your local dollar store. Its aisles are chock full of consumables, including groceries, paper goods, household chemicals, and health and beauty care items, along with clothing, toys, pet supplies, pots, pans, and other notions, sold at price points even less than Wal-Mart's. Don't have a dollar store nearby? Start worrying—you soon will.
Dollar stores got a big boost in the early 1990s, about the time that Woolworth's, McCroy's, and the other variety chains began their demise. Best known for cheap knick-knacks, kitchen utensils, and off-brands of ammonia, bleach, detergents, and other household cleaners, dollar stores are not only filling the Woolworth void, they're also targeting supermarkets and mass merchandisers with increased food offerings. Not with dented cans and sticky jars of Hungarian pickles, but with quality private-label and name brand offerings. Coca-Cola, Nabisco, Tide, and Pringles are just a few of the supermarket stalwarts that turn up on dollar store shelves. Dollar General is even adding coolers to stock refrigerated and frozen foods in 1,400 of its stores by the end of this year, according to industry analysts.
"We're the 21st century version of the five-and-dime," says Dan Margles, who bills himself as the "Dollar Dan" of the industry and is operations v.p. at Allied Systems, a Las Vegas firm that helps independent entrepreneurs open their own dollar stores with an investment as low as $65,000—including inventory.
And while on the surface that inventory appears to consist of all of the tchotchkes made in China—Dollar Dan estimates that 70 percent of his merchandise is imported—most food, paper products, HBC items, and household cleaners are domestically produced. "We buy closeouts and overruns, so we're able to sell a lot more expensive items for only a dollar," he notes. "We are now a mainstream [retail channel]. The important thing for us is that we have more and more manufacturers, and better and better items. The quality, variety, and pricing is getting better in our industry as more companies try to get a piece of this larger pie."
The moniker "dollar store" is fast becoming a misnomer. Most of the chains list price points well above a buck and resemble mini-discounters. And as the dollar stores improve the quality and breadth of their offerings, they also expand their circle of competition. "We're taking a lot of business away from traditional department stores, discounters, grocery stores, party stores, and greeting card stores," Margles says.
In a David versus Goliath subplot, dollar stores are also facing off with Wal-Mart. "Wal-Mart takes Dollar General very seriously as a challenger to some of their business," says Tom Peddicord, v.p. of sales for Manhattan Products, a Carlstadt, N.J.-based manufacturer of private-label detergents and household cleaners that counts Dollar General and Family Dollar among its customers. "Wal-Mart sees them as a competitor. They watch them, shop them, and price them," he says.
"The dollar store industry is supported by customers of all different walks of life and economic ability," says Kurt Barnard, president of Barnard's Retail Consulting in Upper Montclair, N.J. "People look to these dollar stores for bargains to make the dollars in their pockets stretch. Whether they need to buy bargains or not is not the issue. They are bargain hunters."
Mass class appeal
"We pretty much find that everybody is looking for a bargain, and the demographics across the board hold up to that," says Margles. "Everybody wants to come in and save money, so we appeal to the upper and lower classes." Indeed, the most profitable outlet of 99 Cent Only Stores, a West Coast chain based in City of Commerce, Calif., is just outside of Beverly Hills on Wilshire Boulevard. Famous for its visually distinctive "ribbon" merchandising, in which single brands are stocked top to bottom on shelves, 99 Cent Only Stores is also known for its grand openings, where shoppers will line up days in advance for the opportunity to buy a 19-inch color TV for 99 cents.
That ability to find a bargain is one of they key reasons the five major dollar store chains—Dollar General, Family Dollar, Dollar Tree, Fred's, and 99 Cent Only Stores—are on a growth tear, opening a total of well over 1,000 stores a year. Still, they've become a bona fide retail segment, complete with their own trade association and FMI-style show. In a lackluster economy, they're today's hottest retailing segment and Wall Street's latest darling. For example, Family Dollar has had 25 consecutive quarters of record earnings. Most of the industry growth is coming in its existing Southern and Midwestern markets. The major chains are only starting to blanket the Northeast, and with the exception of 99 Cent Only Stores, they haven't even touched California.
"They now know they can take their hymnal and people can sing out of it almost anywhere in the country," says Peddicord.
"I see a ton of growth for the industry," says Rick Nelson, a securities analyst at Stephens, Inc. in Chicago. "It is still under-stored, and they provide many advantages for the shopper."
"We are very bullish on the dollar store sector," says Michael Baker, senior hard line analyst in the Boston office of Deutsche Banc Securities. "They are evolving their mix and focusing more and more on the core, everyday hard line consumables, or basic needs."
Dollar stores are also more profitable. "Grocers net two or three percent, but typically at a dollar store the net is 15 to 20 percent," says Dollar Dan. "Quite a few grocery operators who have sold their stores or have gotten swallowed up by the bigger chains, but who want to stay in retail, find opening a dollar store is a good opportunity for them."
Shopping center saviors
Often those opportunities are in struggling shopping centers that otherwise might be vacant. "These guys can take recycled real estate, or operate very efficiently in the outer parcels of the shopping center," says Burt Flickinger III, managing director of Reach Marketing, a consulting firm based in Wilton, Conn. "They can go to shopping center owners who might not make it otherwise and get rent for $2 or $3 a square foot. They'll say, 'Give us the low rent and we'll save your shopping center for you.'"
"We like to open stores near a Wal-Mart or Wal-Mart Supercenter because of the amount of traffic it brings to the area," says John Reier, president of Fred's, Inc., in Memphis, Tenn. He notes that his new store in Beaver Dam, Ky. is right across the street from one. "We try to take advantage of these strip centers where a supermarket went out of business," he says. Fred's stores range in size from 16,000 to 18,000 square feet. The chain recently snapped up a bunch of bankrupt Helig-Myers furniture stores. "In many small towns when somebody like a Helig-Myers closes down, nobody is going to come in who will use 18,000 square feet," Reier says.
"We believe there are two shoppers, the one who is going to spend $50 to $100 and is going to end up at Wal-Mart, and the one spending up to $25 on a shopping trip looking for household essentials," he explains. "If you need a quart of oil you'd be silly to go to Wal-Mart because it would take you 15 minutes. In our store you can pick it up in about four minutes. We carry the brands, and the price is right."
Fred's is a step above most dollar operators, with clothing departments, high-quality home furnishings, pharmacies—even an Internet art business offering $400 paintings and custom frames. Its clothing selections are often closeouts bought for pennies on the dollar from Wal-Mart, Target, Kmart, JCPenney, Mervyn's, and other department stores. "There are more closeout goods available today than I've seen in all the years I've been in the business," Reier says, adding that Fred's will buy any quantity. Sometimes goods, like Nintendo games, are bought for just a handful of stores; sometimes it is enough for the entire 385-store chain.
Like the other dollar store operators, Fred's is rapidly growing. It recently broke ground in Dublin, Ga., for its second distribution center, a 600,000-square-foot facility that can be expanded to 1.1 million.
Family Dollar, based in Matthews, N.C., is also rapidly expanding, with plans to open 575 stores in its next fiscal year. In May, Family Dollar entered Utah, putting it in 40 states. "It is just a matter of time until we expand to the West Coast," says e.v.p. George Mahoney. "Our pattern of growth has been outward in all directions. We're in Arizona, so our next step would be the West Coast. But we still have plenty of opportunities even here in our own backyard in North Carolina, where we're still opening quite a few stores every year."
Family Dollar's key advantage is that its stores range from 7,000 to 9,000 square feet. "We have lots of opportunities to open in small towns and rural areas, but also in the largest urban markets," Mahoney says.
In 1995, Family Dollar switched to an everyday low price strategy, drastically reducing its number of circulars in the process. "We cut our expenses and operate with no frills and low overhead. We accept coupons, but don't accept credit cards," he says, adding that just about everything in the store is under $20, with 76 percent of the merchandise consisting of hard lines. "Our percentage of soft lines—hanging apparel, sheets, towels, and other domestic goods—has been declining. We're seeing more growth coming from household chemicals, paper products, food, toys, greeting cards, and giftware."
Mahoney estimates that 30 percent of his product mix is national brands. "All of our products are first quality. There might be a limited amount of opportunistic purchasing, but that is less than 10 percent," he says.
Traditional supermarkets are looking to get in on the action by establishing bargain sections in their stores. "We offer supermarkets a way to compete with the dollar store business," says Nels Leavey, president of Rainbow Distributors, a Baltimore firm that supplies supermarkets on the East Coast—including Safeway and Super Fresh—with dollar-store-type merchandise. Departments Rainbow has erected in supermarkets range anywhere from 20 to 240 feet..
Senior editor Richard Turcsik can be reached at email@example.com.