Rex Mehta

By Howard Riell

Dollar stores are raking in dollars faster, and offering consumers more brand name products, than ever before.

Once dismissed by many manufacturers, these stores are increasingly coming to be viewed as precisely what they are, a growing class of trade that appeals to a very specific and loyal customer base. More vendors than ever before want room on their shelves, and ....

The number and size of dollar stores dotting the American landscape is increasing, and according to retail experts will grow still more. Many boast sales per SKU as high as the more high-profile, higher-end retailers. Some call dollar stores recession proof, a characteristic that only adds to their growing appeal. As one retail analyst put it, "They're doing more than just the kind of schlocky stuff they once did."

'Definitely Booming'

This entire class of trade is "definitely booming," says Debbie Howell, associate editor for Discount Store News, a New York City-based trade publication. The concept, she suggests, is proving "to be recession-proof. When times are bad, more people will go patronize the store. And when times are good the people who may have a little higher income will also patronize the store."

"What they're doing is bringing in the brands," says analyst Tom Tashjian of Banc of America Securities, "but they're not moving up the retail price." Indeed, these retailers have been holding firm on price for a quarter century.

The industry recognizes small differences in store concept. First, there are dollar store chains, like 99 Cents Only Stores, the nation's oldest existing one-price retailer, in City of Commerce, CA (about 90 stores in Southern California and Nevada), Dollar Tree Stores, Inc. of Chesapeake, VA (the nation's largest single-price retailer, with more than 1,500 discount stores in 35 states), and Dollarland. The 99 Cent Only store format includes food and consumables as well as general merchandise. Dollar Tree recently bought another chain, Dollar Express. Both carry more general merchandise and less food.

Then there are low-end discount stores like Family Dollar Stores, Inc. in Matthews, NC (3,600 stores in 39 states), Dollar General Corp. based in Nashville, TN (more than 4,700 discount stores in 24 Midwestern and Southeastern states), and Memphis, TN-based Fred's Inc. (about 300 stores in 10 southeastern states).

They are considered two similar yet distinct retail categories because, as one analyst points out, "they do different things."

The low-enders, says Tashjian, target a customer whose annual income is under $25,000. "Most of those stores are in either smaller towns or urban markets that will pull people in from about a 15-mile radius."

The prototypical dollar store customer is someone "looking for real attractive value on basic necessities," according to Mark Miller, equity research analyst for William Blair & Company, L.L.C. Product selection includes "probably the fastest- turning low-end consumables that a K mart or a Wal-Mart would offer."

Miller notes that "the dollar-store operating model has three very attractive aspects: pricing at or below mass merchants; efficiencies similar to those of wholesale clubs; and shopping convenience much like drug retailers."

While Family Dollar and Dollar General stores measure just 6,000 sq ft each, Fred's stores are about 15,000 sq ft., and include pharmacies. Both, of course, are dwarfed by Wal-Mart stores' average 115,000 sq ft size. Over the past four years, Dollar Store General sales have risen 129% to $3.9 billion as the number of locations almost doubled to more than 4,200. The chain has added five-million sq ft of warehouse space -- five times what it had five years ago -- which can reportedly support the addition of 2,000 more stores within its 24-state region.

Attractive Retail Venues

As these companies have grown they have naturally drawn the interest of national vendors, who view them as potentially more lucrative partners. As a result, that additional brand-name merchandise is finding its way into those stores.

"They end up being large accounts," says Tashjian. For example, Family Dollar's 6,000 sq ft stores carry only 6,000 SKUs. "But if you happen to be one of those 6,000 SKUs you are going to be purveyed through 3,500 stores," he points out. "That's quite a good account."

"Before, they associated dollar stores with inexpensive, cheap merchandise," says Rex Mehta, founder and president of Dollarstore.com Inc an e-commerce pioneer who established portal Web sites four years before today's Internet became popular. "Now it's inexpensive but quality merchandise. You have imported products, of course, but also you have some brand name items in there.

"With some of the mom-and-pop stores we get comments that they are not clean," he adds. "People want the feel that they are walking in a grocery store. Some people are even buying their groceries from these dollar stores."

The pricing is still the same, "but it's a better mix," adds Mehta. "Uniform pricing is what excites the consumer." Dollarstore.com's main emphasis is business-to- business with on-line wholesale catalogs.

Wholesalers, says Miller, "need to look at these companies as having volume on a per-SKU basis, which can be equal to that of retailers many times their size. Take Dollar General, for example. They do more volume on a per-SKU basis, probably, than Safeway."

Such stores have "a lot of efficiencies which, in some ways, I would compare to a wholesale club like Sam's or Cosco," says Miller. "You could think of them for clubs for low- to middle-income or fixed-income consumers. By that I mean they have limited SKUs. They have a very simple store layout, which lowers the operating costs and allows them to pass savings on to their customers."

One characteristic to remember, says Miller, is that dollar store retailers are not heavily promotional. They have, in fact, dramatically cut back on circulars; in fact, Dollar General does not have any. Family Dollar has a limited number of circulars. "Still, they have increased store traffic by featuring well-known branded products at highly competitive prices."

They may not have the depth or range of SKUs of a Wal-Mart or other discount chains, but they are increasingly featuring big-name products like Tide, Crest and a host of others.

Brand Names

"They're adding more of what I would call branded consumable products, basic personal care, household products, cleaners, etc.," says Miller. "That's been an ongoing process over the last couple of years, and we expect it to continue going forward."

The addition of more name brands has not meant rising prices. Suppliers "sort of like being able to sell to that customer base," says Tashjian, because it is one that they "usually can't come in contact with."

A key consideration, Banc of America has found, is that 40% to 45% of the Family Dollar and Dollar General customers do not own cars. Understanding this low- end market "takes a little while," says Tashjian, "but at the same time, that's the market that doesn't have access to Wal-Mart. They can't go to Wal-Mart unless they're going to take a bus, I guess, to get there." Family Dollar has changed up its merchandising mix by reducing SKUs and offering more name brands.

As far as reaching consumers directly is concerned, says Howell, the internet is "relatively insignificant for these companies at this point in time compared to other retailers. The customer base is probably not what I would categorize as really movers on the internet. Plus, the items tend to be of smaller dollar value, so it's not one that initially lends itself well to the internet."

"To me, it wouldn't make very much sense to try and purvey dollar goods over the internet," says Tashjian. "The cost of advertising and delivery is probably going to be prohibitive."

Looking Ahead

According to Miller, the larger dollar store players now have the opportunity to gain share from other channels, such as grocery or drug stores and independents, even as they take business away from other dollar stores which don't have the efficiencies of these large chains.

"If you go to any inner city or a lot of small towns," he notes, "you'll see a number of dollar stores, many of which are independent or small groups of stores. They don't have the ability to price goods as competitively or make as strong a margin as these companies do."

Miller believes Dollar General and Family Dollar have the ability to develop a combined 30,000 stores around the country. "Within retail we think this is one of the largest store-growth opportunities. It's a very open-ended, large-growth opportunity as we see it."

The secret, says Howell, is multiple stores and high traffic. "Interestingly enough, Dollar Tree, the nation's biggest single-price retailer 'everything sells for $1' is among the best performers right now." The average sale is $7 or $8, "but the reason they're able to pull it off is that they have so many stores and high-volume customers."

Dollar Tree is using acquisitions to move into a larger store format (about twice the size of existing stores); it bought the 100-plus store Dollar Express chain in 2000. Says Howell, "They've been on a real acquisition streak. They've purchased a company in each of the last three years. They're really expanding."

That kind of growth is fast becoming a regular feature of the dollar store segment. Americans like them. Product suppliers like them. Wholesalers, Wall Street investors and analysts like them more than ever. Dollar stores simply mean more dollars than ever before.