Channel Report: Dollar Stores

Dollar General Corp. reported same-store sales increases of 9.4% for its fourth quarter, ending Jan. 31, and 9% for the 2008 fiscal year. Family Dollar Stores reported comparable store sales up 6.4% for its second quarter, ending Feb. 28, compared with a year earlier. And Forbes reports the stocks of Dollar Tree and Family Dollar produced returns of 45.8% and 43.2%, respectively, for the year ending in February.The core reason why doesn't take an industry expert to figure out. "We are seeing expected shifts of consumer behavior, specifically into the dollar store channel, through numerous consumer segments that heretofore might not have been active shoppers," says Ted Flinn, director, U.S. brand strategy and marketing at Daymon Worldwide, Stamford, Conn."We've seen channel-shifting going on," adds Virginia Morris, senior marketing manager at Daymon. "We see that the average consumer that goes into a dollar store is in there on a very frequent basis."Low Income to All IncomeA study from Meyers Research Center, New York, called "Cross-Channel Shoppers 2009," pegged the typical aggregate demographic profile for dollar-store customers as a 42-year-old Southern white suburbanite with a household income of $70,000 -- up from $45,000 in 2007 -- and household size of three people. Nearly three-quarters of women and more than half of men said they had visited a dollar store in the past year, and 7% of all shopping trips were to the channel, the study showed."The dollar channel used to be for low-income folks. The dollar channel is now for all-income folks," says Thom Blischok, president of consulting and innovation at Information Resources Inc. (IRI), Chicago. In fact, a new study from The Nielsen Co., Schaumburg, Ill., found that high-income shoppers (making more than $100,000 a year) spent 18% more at dollar stores in the second half of 2008 compared to the previous year. Despite that increase, Nielsen research contends that 45% of dollar store sales are from low- annual-income households (below $30,000). These are rural and urban shoppers, largely seniors and young families.Don Hootstein, principal at consulting firm Proteus, Boston, says he has seen research that suggests loyal dollar store customers have become more loyal -- not that dollar stores are siphoning business from big-box chains. "Everybody thinks that the Walmart shopper is coming down to the dollar store," he says. "Quite honestly, it's the dollar store shopper that's being more frequent."That's essentially accurate, says Josh Braverman, public relations manager at Family Dollar, the only chain in the channel to agree to an interview. He adds that Family Dollar has seen "some evidence of trade-down" but more that "our core customer is coming into our store more often and buying more when she's here."Eugene Fram, marketing consultant and professor emeritus at Rochester (N.Y.) Institute of Technology, sees dollar stores responding to the middle-class shift by pricing certain items slightly higher, at $5 to $10, and opening up locations in middle- and even upper-middle income areas, soaking up some of the spaces left empty by Circuit City, Linens 'n' Things and other shuttered retailers.Better Insights, MerchandisingDollar stores are trying to figure out who their new customers are, where they're shopping, what they're buying -- and how to market to them, says Sanjit Bhoumik, vice president of research and analysis with the retail division of New York-based WNS, a provider of business process outsourcing services and solutions. "There's definitely an increased emphasis on understanding who the customer is," he says of his company's clients. "Where are the price-sensitive ones? Who is still going to go out and buy luxury items? Should I change my merchandise depending on where my shoppers live? Do all my stores need to have the same look and feel, or should the merchandise be customized?"It's early in the cycle, but dollar stores have at least begun to ramp up their shopper marketing research and change their messaging, in part to emphasize that their image as closeout havens -- once accurate -- is long outdated, says Hootstein, whose company works with Dollar General. He urges them to seize the day."They have fresh goods, not old goods, but they're tainted by their roots," he says. "To keep the customer, they'd better fix up their stores and make the shopper experience better. We don't know how long the economy will last that way."Dollar stores will need to find the right mix of their own, hopefully new-and-improved private-label products and national brands, Hootstein says. "They're trying to create a destination brand. They should." But, he adds, "you can't have, in my estimation, just private label."Daymon's Flinn sees stores improving their understanding of customer segmentation and need states. "The dollar stores are understanding how to create in-store messaging that targets different consumer groups," he says. "It used to be category management. That is slowly shifting. There is a greater emphasis on brand management."Blischok says the shopper profiles between dollar stores and big box are very similar, except that dollar store shoppers are more focused on the basics and are more time limited. He advises retailers to continuously evolve their assortment to reflect these factors, drive value for price, and actively market in-store."This is a growing channel," he says. "There is a huge opportunity for the invention of P-O-P and in-store marketing activities: I might see more aisle displays; I might see some orientation around the top 25 things you should be thinking about every week; I could see dollars moving into meal solutions, and ingredients and components."Although Dollar General has its own in-store TV network, consultants and other observers aren't sure that will become a broad trend among other chains. Blischok suggests they work on the basics first. "In-store media, at this point, is a little early in the cycle," he says. "There's a lot of headroom left in using traditional media, traditional in-store signage, for dollar stores."Dollar stores face merchandising challenges given their tight space, generally between 5,000 and 15,000 square feet, Flinn says. "There's more of an active monitoring of turn than there has been in the past, to ensure that each piece of planogram real estate is actively producing revenue.""We've not really increased any of our marketing to reflect the changing times," says Braverman of Family Dollar. "For us, it's providing what customers need in tough times: food, household chemicals, household paper products."The chain has been gradually ramping up its own Family Pantry brand for these categories of items but has not done much with in-store signage yet, according to Braverman. "That program is still, relatively, in its infancy." The chain also continues to increase branded offerings with partners like Kraft. "As the need for more economical food is out there, as people look to save money on pretty much everything, we thought there was an opportunity to work with our vendor partners," he says.The Brand PerspectiveSome brands are moving forward with programs in dollar stores. Kraft has rolled out meal solution campaigns at Family Dollar and Dollar General, like those in Walmart and in supermarkets. Unilever and Kimberly-Clark teamed up with Dollar General on the "Fresh Start New Year" sweepstakes in early 2009.Even more brands are researching the channel. Flinn cites Kimberly-Clark and Procter & Gamble, "to name a few, who are actively working with dollar stores to focus on consumer segmentation, customized programs, and unique packaging focused on value. As volume has gone up in the dollar stores, they are receiving more attention [and] greater trade allowances from national brands."Proteus has been working with Johnson & Johnson within the channel, Hootstein says. "It's very important that they have branded items in their stores, for destination," he says. "P&G's important, all the majors are. You want to make sure the customer feels like they're entering a store that has quality in it."Blischok also believes research is under way en masse among CPG companies. "Many of the brands are trying to understand the dollar channel and what role it plays in the shopping experience," he says. "It's reasonable to say that you could see another 3,000, 5,000, 6,000 dollar stores come into the market in the next five to six years."Bhoumik of WNS says it's a little premature to comment on what's coming out in terms of research. "The emphasis is around these areas: understanding consumer behavior, shopping trends, pricing, how to stock [shelves], how to cut down on SKUs," he says. "From the manufacturers' point of view, that is an opportunity. That's an evaluation that's going on at the 30,000-foot level."Professor Fram says name brands wanting to enter or expand their offerings in dollar stores face the same challenges as when they first targeted mass discounters: How to do so without diluting their overall middle- to upper-tier images. "The challenge is to develop alternate brands designed for the dollar channel that do not significantly harm their longstanding brands," he says. Only three of more than a dozen brands contacted for this article would speak on the subject, presumably a sign that brands are still figuring out the dollar store channel. Companies called included Kimberly-Clark, Procter & Gamble, Coca-Cola, Unilever and Johnson & Johnson; retailers included Dollar General, Dollar Tree and 99 Cents Only.The market share of Kraft Foods, Northfield, Ill., grew 3.3 points in the channel in 2008, accelerating as the year went on with a 7-point share gain in the fourth quarter, according to figures sent by Bridget MacConnell, senior manager of corporate affairs. "Kraft is investing to exploit our sales capabilities by expanding our reach in nontraditional channels in North America," she says, while noting that Dollar General recognized Kraft as "vendor of the year" for its sales performance. "Our categories are growing well in all of these alternative channels, including dollar stores."Susie Frausto, senior director of marketing for Jel Sert, West Chicago, Ill., says her company sees great potential in the channel and some immediate possibilities. "There's definitely more of an opportunity for this channel because consumers are more willing to try them than in the past," she says. "We're seeing a lot more in-and-out opportunities from brands, on a national level, not necessarily every day but special promotions tied to an ad."Frausto believes consumers find a comfort level when they see a recognized brand, rather than a cheap knock-off, and she adds that the channel might work particularly well for certain modestly priced items."There's still an opportunity for some brands that may not be available in grocery stores to thrive in dollar stores because of the price point," she says. "It might become a good strategy to become a destination item for dollar stores, because consumers know they can only get those brands in dollar stores."Jel Sert has customized its offerings for dollar stores by offering items at "special price points" and by making merchandising units that work either vertically or horizontally. "We like to give the flexibility to the dollar stores," Frausto says. The brand has not provided customized messaging for the channel."We definitely factor this channel in when we start our annual planning," she adds. "It's really more on the front end, as opposed to the back end. That said, we do accommodate some customer requests to do stickering that's specific, or price points specific to those channels and stores on the package. In that sense, it's a collaboration. It's a very interesting time."Bhoumik wonders how long the interest will last. "The real question is whether this is a temporary phenomenon, which is only going to last as long as the economic situation," he says. "That's the $1 million question. There's definitely evidence on both sides of the argument."

Channel Report: Dollar Stores

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