Channel Report: Dollar Stores on the Rise

Dollar stores have been a part of the American retail landscape for half a century. Recent years, however, have seen the channel transformed into a growth phenomenon, with expansion outpacing the rest of the consumer packaged goods industry. The top five dollar store chains added some 1,400 stores in the past year. According to Information Resources Inc. (IRI), Chicago, Dollar General will add about 800 stores this year, with Family Dollar opening another 400."The time is right," says Sheila McCusker, West Suffield, CT-based editor of Times & Trends, a publication of IRI. Growth of the low-income consumer segment, along with the swift expansion of Wal-Mart, Target and other value chains, has helped turn ours into a highly value-conscious society, she explains.In addition, dollar stores have now become so well dispersed geographically that more shoppers than ever have access to them. And, in a channel long characterized by fragmentation and ruled by mom-and-pops, the largest dollar store companies have come of age. "You now have these very sophisticated retailers playing in this space," McCusker observes, citing the top four: Dollar General, Family Dollar, Dollar Tree and 99 Cents Only.Powerhouse retailers are raising the channel's profile with their ability to broaden their stores' product assortments and bring national brands on board. In a conference call with investors, Dollar General CEO David Perdue revealed that his company's focus on major brands is part of a broader marketing strategy that will "be much more aggressive in 2006," with a new-store prototype set to debut in the middle of the year that features new layout design and twice as many SKUs in some categories. According to Perdue, Dollar General plans to "add more promotional energy in the way of special purchases." Total sales for the chain in fiscal 2005 increased 12% to $8.5 billion, with same-store sales rising 2%.McCusker estimates, however, that the market may become saturated in the next five years. At that time, the biggest dollar store chains will need to stop focusing on expansion. "When the focus turns to same-store sales, we will then see much more emphasis on merchandising," she predicts.A Unique ChannelDollar stores boast an exceptionally targeted consumer base, McCusker notes, with about 85% of dollar stores' sales coming from the 33% of patrons who are its heaviest shoppers. Those consumers skew heavily toward lower-income Americans.Convenience stores and drugstores feature outstanding convenience but are not known for low pricing. Mass merchants offer attractive prices, but aren't necessarily convenient places to shop. "Dollar stores provide both," says Jeff Friedlaender, vice president of Meyers Research Center, New York, who conducts a recurring study called "Dollar Store Close-Up," probing the behavior, attitudes and decision-making patterns of North American dollar store patrons. Dollar stores reduce shopper stress with pricing patterns that are not only low, but also easy to add mentally. Some stores, referred to as "single-price retailers," price everything at one dollar. The other kind of dollar store, referred to as an "extreme value store," such as Big Lots or Aldi, sells most products at $10 or less. Dollar stores further simplify shopping by featuring a limited assortment of goods. Consumers won't find a wide range of product categories, and within product categories won't encounter a broad array of brands, McCusker says. The kinds of brands typically found in dollar stores today tend to be second- and third-tier brands. But that is changing. Dollar stores are now looking to increase the presence of top-tier national brands. "When a consumer walks into a dollar store and sees national brands at dollar store prices, it helps reinforce the value positioning," she says.Limited Space for P-O-PDue to dollar stores' compact size and crowded shelves, not much P-O-P can be placed in these outlets. Moreover, what is used doesn't generate an abundance of consumer awareness, Meyers Research's Friedlaender says. That doesn't mean P-O-P can't be effective if employed properly. Friedlaender's research indicates a high level of impulse buying taking place in many dollar store categories. Among those categories are snacks and other food products, candy, and beverages."High-impulse behavior reinforces the importance that in-store communications like displays and signage can have in dollar stores," he says. "It's a matter of not only getting them in the stores, but in the right locations within those stores, such as front ends, endcaps, places where the highest level of foot traffic occurs. Those impulse-driven consumables will be even more effective with displays in the right place."What P-O-P does appear in dollar stores tends to vary with the nature of the store itself, Friedlaender observes. Large dollar store chains, whose stores tend to be bigger and offer a greater merchandise assortment, are more likely to work closely with brand marketers to develop proprietary displays solely for them. Perdue of Dollar General says that the chain's new prototype stores include "a significant increase in the number of endcaps," specifically geared to call attention to national brands.At the other end of the spectrum are independents more likely to purchase product through jobbers or distributors, and not work directly with manufacturers. These stores will most likely accept what's provided to them, Friedlaender says.Because dollar stores are "constant low-price retailers," P-O-P is not as effective in dollar stores as in other retail establishments, says Diana Moore Eschhofen, spokeswoman for Spangler Candy Co., the Bryan, OH-based maker of Saf-T-Pops and Dum Dum Pops. Stores must rely on seasonal displays as in-and-out promotional vehicles. "The size must fit the small-box format, but have ample product to offset the cost of these vehicles," she notes.Further, brand awareness is the only true value proposition the dollar store customer uses to differentiate one product from others, she maintains."Limited SKUs do not allow for duplication of like items, so we compete with other candy or snack items for consumer dollars," she reports. "Price-value proposition is the key to getting the business with recognized and trusted brands. Dum Dum Pops has a high level of brand recognition, and is well-known as a high-quality, low-cost product."Eschhofen believes shoppers do notice price promotions in dollar stores, and that such promotions are important sales builders in this high-traffic consumer environment. They also notice brand names, and buy on "brand-name trust," she says.Basic P-O-P is BestFriedlaender reports seeing little dollar store P-O-P other than preassembled shippers, and says there's good reason for the choice of this display format. Dollar stores tend to have small staffs: That means when brand marketers do create P-O-P for these stores, the displays have to be turnkey.Ray Batkiewicz of River Grove, IL-based Regent Products Corp., a firm that provides P-O-P displays and other items to dollar stores, confirms the popularity of prepacked shippers. They are intended to stand alone without any shelving or store fixtures and can typically hold from 96 to 144 items, such as coloring books or kitchen gadgets, he says. The lids typically serve as the displays' headers and are generally large enough to feature messaging.Another P-O-P display format found in dollar stores is the clip strip. Clip strips may be used to display small bags of chips or other snack food items but are most often utilized in cross-merchandising ventures. For instance, bows from a dollar store's party section might be affixed to the dozen hooks on a clip strip, then displayed in a gift-wrapping area of the store during holiday season. Clip strips rarely include messaging or logos, due to space limitations and the fact that they frequently display different products at varying times. Counter displays, also popular in the channel, offer limited room for messaging and frequently deliver a product's tagline or logo on their "bottom faceplate" or tray.Do Shoppers Notice P-O-P? Meyers Research's interviews with dollar store patrons indicate only about 10% to 20% even notice displays. "But you need to temper that with the realization that there's very little P-O-P out there," Friedlaender says.On the other hand, there's little doubt shoppers notice brand names. That comes as little surprise to Simon Sinek, CEO and founder of SinekPartners, a New York strategy and marketing consultancy. "Just because these people are buying cheap and are price-driven doesn't negate that they still have brand preferences. And given a choice between a brand they've heard of and one they haven't heard of, where price isn't an obstacle, they're more likely to take the brand they know," Sinek says.When Meyers Research Center compared results from its Dollar Store Close-Ups in 2003 to those of its 2005 study, the organization found "more and more brand name merchandise being purchased in these stores," Friedlaender reports. "That's one of the reasons the channel has continued to do well, because it has evolved from a channel that originally did not offer brand names to one that features brand names in addition to lesser products," he adds.Sixty-four percent of customers now visit dollar stores at least weekly, and it's the growing presence of brand names driving that frequency, Friedlaender maintains.Shoppers seeking household cleaning products, for instance, increasingly think of dollar stores first, because they know they can purchase top brands at economical prices, and do so conveniently.Packaging Power"There's a perception that there's a limited amount of displays that can be placed in these stores, and given that, creative packaging has to carry the message," Friedlaender says. "In packaging created just for dollar stores, the value message, the special sizing or the unique nature of the product itself gets communicated."Given the limited space in candy sections, the most effective packaging for Spangler Candy tends to be "lay-down bags" that prominently showcase its products' names. Spangler Candy's sales and marketing teams undertake frequent retail audits to ensure execution of displays and promotions, Eschhofen says.Brand packaging and P-O-P expert David Kendall, principal of Seattle's Kendall Ross Brand Development & Design, agrees that a compelling container, or billboard-style labeling, can speak volumes in this tough environment. Label designers must remember the best billboards are simple, and create labeling that's "pared down," he says.The in-store presentation can also boost sales. "I've seen very successful product displays that make use of the six sides of the product," Kendall says. "How the product is arranged -- for instance, in a checkerboard pattern or using imagery that spreads over multiple packages of the brand -- can make for a very engaging display," Kendall says. An Expanding AudienceThe dollar store target audience is defined as lower-income consumers, those with annual household incomes of $35,000 or less.As a subset of that group, the lowest-income bracket -- those with annual household incomes of $25,000 or less -- is particularly appealing, having increased in raw number by 10% over the past five years, McCusker says. But bargain-hunting shoppers from other income brackets are browsing the aisles in increasing numbers. "You have these other [better-off] consumers shopping there for fun, for the thrill of the hunt," she says. "You see some Mercedes parked in the lots. That is happening."Meyers Research's data shows that consumers from households earning $60,000 and more a year are the fastest-growing segment at dollar stores. "People are looking for deals, and it doesn't matter what your household income is," Friedlaender says. "People have accepted this is not merchandise that has fallen off a truck. It's quality merchandise at good prices. So if you're a savvy shopper, there's no reason not to go to dollar stores." Dollar stores are evidently eyeing the potential of this higher-income consumer and planning their strategic initiatives accordingly, McCusker reports. Major chains are undertaking substantial investments to upgrade their stores and merchandise, which should boost their appeal to middle- and upper-income patrons.What's Ahead?Friedlaender predicts a bright future for dollar stores, in part because there's still room for growth. While the South is well populated with dollar stores, even the biggest chains in the channel don't enjoy an enormous presence west of the Rockies, and are underrepresented in some pockets in the Northeast, he says.The major players have ambitions not only for expansion, but also for augmenting their product offerings, he adds. Dollar General, for instance, has tested coolers, and the sale of milk and eggs in some locations. The chain is adding more packaged food and condiment brands to its assortment, and changing the planogram for housewares, pet supplies, domestics, hardware, automotive and paper products. It also intends to be "more flexible in making planogram changes throughout the year," says Perdue."A lot of people thought it would be a fad, but it has shown staying power," Friedlaender says of the dollar store phenomenon. "And I don't see any reason why it wouldn't continue to flourish."

Channel Report: Dollar Stores on the Rise

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