Channel Report: Dollars Make Sense

By the time you finish reading this sentence, another dollar store will open.That statement might seem exaggerated, but it's not far off the mark: One chain alone -- Dollar General -- opened 81 stores in February and 84 more in March; the chain's store count now stands at nearly 6,200 outlets.According to Retail Forward, a consulting and research firm, Goodlettsville, TN-based Dollar General and the channel's other leading player, Family Dollar, have been opening new stores almost at a rate of one per day since 2001.By the time you finish reading this sentence, another dollar store will open.That statement might seem exaggerated, but it's not far off the mark: One chain alone -- Dollar General -- opened 81 stores in February and 84 more in March; the chain's store count now stands at nearly 6,200 outlets.According to Retail Forward, a consulting and research firm, Goodlettsville, TN-based Dollar General and the channel's other leading player, Family Dollar, have been opening new stores almost at a rate of one per day since 2001.Family Dollar, Charlotte, NC, has stayed ahead of that pace recently, opening 34 stores in February and 32 in March to bring its total count to 4,753. What's more, the company says it will open between 475 and 500 more stores (while closing 65) by August 2003, the end of its fiscal fiscal year.Those two chains, along with Chesapeake, VA-based Dollar Tree and its 2,272 units, comprise the Big Three among dollar stores, a fast-growing retail channel that can no longer be ignored. Information Resources, Inc., which recently published a report on the channel, estimates current market volume to be $12.5 billion--peanuts compared with the $400 billion mass merchant and $680 billion supermarket channels, to be sure, but big enough to warrant serious consideration.It is the market's rapid growth, and future sales potential, that is opening the eyes of brand marketers -- not only in terms of sales, but also in terms of in-store merchandising opportunities.While dollar stores are still, in large part, overflowing with not-quite-household brand names, the bigger chains recently have increased efforts to carry national brands--particularly in the packaged foods arena--as a means of attracting new customers and increasing store visits.Conversely, a number of national brand marketers including Unilever/Bestfoods, M&M/Mars, General Mills and Good Humor/Breyer's are actively seeking shelf space in dollar stores, or at least have launched plans to target the market. Thanks to an expanding share of shopper trips and baskets, they're no longer considering the channel only when there's excess inventory to be dumped.Such an influx of new merchandise has made getting shelf space -- or cut-case room, as is often the case -- much more competitive. This trend, coupled with the store redesigns undertaken by some leading retailers and an evolving realization that presentation is as important as inventory, has created a new merchandising landscape in the dollar store channel.Traditionally, dollar stores had small footprints, and therefore placed their emphasis more on merchandise, not merchandising. (The "Stack 'em High" adage has never been followed so literally). Despite the segment's extraordinary growth, the implementation of in-store merchandising materials is still not as common as it is in other channels like supermarkets or convenience stores. The presence of P-O-P displays is growing, however, especially since the top chains are expanding their prototypes and revamping their merchandising policies.Shopping TrendsOver the last decade or so, as mass merchants and supermarkets increasingly moved to the supercenter format (which requires large chunks of real estate), they left a literal niche for dollar stores to fill. "Due to their small size, dollar stores can fit in locations that simply can't support a large mass retailer," says Sandy Skrovan, vice president of Retail Forward and author of the firm's July 2002 report on the "Value Retailer" channel."A lot of the supermarkets have looked for new and bigger sites and are adding more non-foods items to their assortment," Skrovan adds. "The dollar stores and other small-format retailers can fit just about anywhere -- urban areas or a small suburban strip mall. And they can go into small markets that a supercenter could not conceivably go into because the volume just wouldn't be there."Thus, dollar stores provide a convenience factor that larger outlets can't match. "Consumers are looking for [an] alternative -- to driving five miles or more to get to a supercenter," she says. "So dollar stores are cropping up: park in front of the store, easy in-out, quick payment process -- that type of thing."With the growth has come an image makeover of sorts, similar to the change in consumer preferences that sparked the rise of the warehouse clubs in the 1990s. The new dollar stores are no longer perceived as cramped aisles of second-hand, second-rate products, and even evoke wistful memories of the old "five and dimes" with their plentiful and affordable merchandise.And, of course, there's the price factor. Dollar stores are great at "buying low and selling low, with small transaction size offset by the high volume that moves through the store," according to the Retail Forward report. Inventories are shifting to include more consumables and other "frequently purchased products, which has resulted in more foot traffic, repeat patronage, more impulse/convenience purchases, and faster inventory turns," it states.That's why the shopper demographic remains predominately skewed to low-income households. IRI's study finds that 82% of heavy channel shoppers have yearly incomes of less than $45,000. These "heavy" shoppers, which represent about 20% of U.S. households--but account for more than 80% of dollar store sales--also tend to be female, over 35 and from small (three or fewer members) households. While the urban setting is most typical, some chains are finding success by becoming the de facto "supercenter" in rural towns too small for the likes of Wal-Mart.According to IRI's October 2002 report, more than three million households made their first trip to a dollar store last year. That boosted the penetration rate from less than 50% to 56% of all U.S. households. (ACNielsen puts total penetration even higher -- at 62%.) The statistic "speaks to [the format's] popularity with shoppers," says Kali Klena, vice president in IRI's retail analytics group.IRI's report also notes the trend of shifting inventories away from novelty items and seasonal product toward more food, household staples, and health and beauty care (HBC) items -- the types of SKUs that can make the dollar store a regular destination."What the retailers tend to be focusing on is the right mix, the right items, and the right price for the right area," says Klena. "The major players [are] getting to know their shoppers, and they're trying to put in more of the items they would need for quick trips -- that are going to turn pretty quickly. People are finding more items in there and more to spend on, [and] more reasons to go back more frequently."Retailer ResponseDollar stores have been generating enough business that other CPG channels are taking notice. Most supermarkets and drug stores are at least regularly hosting "Dollar Days" sales at some level, and many are clearing space for dedicated "dollar" sections. That's a good business move, not only because it can stem attrition, but also because it helps retailers gain a "value" reputation without having to cut prices elsewhere in the store, according to Steve Dillard, vice president of education for Associated Wholesale Grocers. (See sidebar.)Grocery store operator and wholesaler Supervalu has been successful at integrating product from its Deal$-Nothing More Than a Dollar chain (a recent acquisition) into its Sav-A-Lot supermarkets; Fifteen combination stores are due this year, according to Shopping Center World.Even Wal-Mart, which usually is in the more enviable position of having other retailers copy its strategies, is flirting with the concept. The Bentonville, AR, giant has been experimenting with a dollar format in a few stores since early 2002, confirms spokesperson Tom Williams.Williams says the idea came from within the organization. "We noticed that a number of our [store] managers would take items that are a dollar or less and isolate them either in the aisles or in the front of their stores, and they'd market [the area] with signage," Williams says.That spurred testing of a formal program that allocates 600 to 800 square feet of space for 350-odd SKUs selling for $1, according to Retail Merchandiser. Branded as "Hey Buck" in some locations (but carrying more generic price signage in others), the stores-within-a-store are given prominent real estate."When we test concepts like this, we do it quietly," Williams says. "We learn from consumer and customer reaction, and we just compile all the data. With customers, there's always a certain curiosity about what you can actually buy for a dollar. If you can cross-merchandise or isolate your products and make them attractive to customers -- and they like that -- then we'll do it."Williams declined to share specific information on the program or its results thus far. But according to a report in the February 2003 Shopping Center World, initial disappointing results have led to some additional strategizing.Co-Marketing Opportunities?Still, the dollar store channel is tricky for most marketers. Most national brands have worked very hard to get their price points well above $1 and don't want to mess with their brand equities, and their profit margins -- not to mention their relationships with other retail partners -- by aligning themselves too closely with dollar stores.On the other hand, it might be better in the long run for marketers to get involved rather than to ignore the channel. After all, a lot of product is moving through those doors: Dollar General, for instance, purchased 11% of its 2002 merchandise directly from Procter & Gamble. That's roughly $600 million, or slightly less than 3% of P&G's U.S. sales. (For comparison's sake, Wal-Mart accounts for 17%, or $6.84 billion, of P&G's worldwide sales.) That's why such blue-chip companies as American Greetings, ConAgra, Keebler and Unilever will be in Las Vegas in June to exhibit at the second-annual Dollar Store Expo.Then again, most dollar stores generally aren't as yet terribly interested in huddling with vendors to develop sophisticated co-marketing programs. Dollar General, for instance, handles most merchandising in-house, although it will work with suppliers on a case-by-case basis, according to a spokesperson."The larger stores get hit up and get all the P-O-P they need, but the smaller mom-and-pops don't have access to the manufacturers to receive any kind of materials," says Kristina Mullen of the Retail Dollar Store Association, which launced in 2002. "In most cases, stores basically create their own marketing and their own P-O-P displays. Some are really picky -- some stores don't want cardboard. They all have their own little looks to them."This undemanding nature is at least partly a blessing for brand marketers: "We look at dollar stores as a 'clean' industry," says Dave McAuliffe, Eastern sales manager for Noodles by Leonardo, a supplier to dollar stores across the country. "It's a 'net-net' industry: it's just the cost of goods. It is not encumbered with accruals, superfluous deductions, marketing funds, slotting fees or a whole host of financial embellishments that [make it] quite cost-prohibitive for an independent company to participate in traditional channels of retail."Mullen, for one, doesn't think the channel needs as much heavy in-store advertising as other retailers. "These are stores that people tend to loiter in. They're fun stores, because the turnover is phenomenal," she says. "It's not like going into a mainstream grocery store, where you're always going to see the same thing. You never know from week to week what a lot of these stores are offering."Price-Unconscious MerchandisingOpportunities are, however, growing. "Some of the stores -- Dollar General, Family Dollar, even Dollar Tree -- are starting to remodel and re-merchandise their stores so that they are a little more consumer-friendly and, perhaps, easier to shop than aisles and aisles of just merchandise," says Retail Forward's Skrovan. "So that could provide opportunities for suppliers to assist with some more interesting P-O-P merchandising.""We know that certain items will sell much quicker off a P-O-P display than off a shelf," says Dick Saklad, vice president of business development at 99 Cents Only, a 154-store chain operating primarily in California. "With many items--for example, Tic-Tacs--we might put five or six displays around the store. If we just had them located by the register, we wouldn't sell nearly as much."In contrast to its competitors, 99 Cents Only relies almost completely on brand marketers to supply display materials. "Since we sell everything for 99 cents, customers don't have to think about pricing," Saklad says. "They can walk down an aisle, and not think [about price], so it's more impulse. If they see a P-O-P display and [the product] appeals to them, they'll just pull it off the display."Recently opened 99 Cents Only stores can be as large as 23,000 square feet, making them more accessible to free-standing displays. For some categories, such as candies, it's not uncommon for a store to have a few hundred P-O-P displays on the floor at any given time. (The chain accepts both metal racks and corrugated displays, and makes good use of banners and window signs, Saklad notes.)And think of the last time you heard a supermarket executive make this statement: "Most of the products we have in the stores are name-brand products," says Saklad. "But even the small companies have a lot of P-O-P."With quick inventory turns and low employee headcounts (most dollar stores staff only a handful of employees for each shift), it's even more of an imperative for merchandising units to be self-sufficient. "Almost everything that comes in is already filled by the vendor," says Saklad. "Some [vendors] make a certain quantity [of a product] for us, and with others it's just whatever's available," he says. "Generally, we buy full truckloads. We did about $4.8 million per store last year, so it's pretty high volume. And with everything at 99 cents, you're bringing in a lot of product."Testing the WatersIt's the level of volume that brand marketers find most attractive. McAuliffe at Noodles by Leonardo is always willing to tailor display designs to retailer spec's. The standard design is a five-foot-tall modular pallet, 40 inches by 48 inches wide, with limited signage. But that's only if stores want the help."Most stores are limited as far as physical geography, with very limited retail merchandising that takes place, at least from a food perspective," he says. And the top three chains do most of the merchandising themselves. "They accept very little support from suppliers because they know that these costs are factored into the costs of goods."Recently, both Dial Corp. and The Shansby Group (marketers of the venerable Spic and Span brand) expanded distribution into the channel. Following suit this spring was Rit Dye, a brand of global packaged goods maker Unilever's Bestfoods division.Unilever has done its research homework on what chains want, but remains "wide open and will do whatever we need to do in those stores," says national sales manager Jim Hallonquist. "I have my own fixtures, but if they're not what they want, we'll make something that's conducive to their stores. You've got to let people know that these types of stores are now carrying your products."

Channel Report: Dollars Make Sense

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