February 13, 2013
Are Dollar Stores Headed Up or Down?
I have to admit being a bit flummoxed by recent stories pitched to RetailWire around the prospects for dollar stores. The pitches have taken two angles, both ultimately questioning the future prospects of individual businesses if not the channel as a whole.
The first pitch posits that dollar stores have opened up thousands of locations over the past decade and have finally arrived at an over-stored state.
The second suggests that dollar stores have achieved great growth in recent years largely due to the Great Recession and its after effects. Surely, an improving economy, even at the modest three to four percent annual growth rates projected by many economists, will work against dollar stores.
Now, I have to admit that while not a dollar store shopper myself, there is plenty of evidence to suggest that Dollar General, Family Dollar, Dollar Tree and others fulfill a need for a large number of consumers.
While the economy has slowly improved in recent years, it is not unusual to hear from retailers, both inside and outside the dollar channel, that ads at the beginning of every month drive a greater lift than those in the back half. Food retailers will point to specific WIC (Women, Infants, Children) items helping to drive a particular brand’s share of market.
It’s true that retail organizations, similar to living organisms, have a life span and none goes on in its original state forever. As a kid, I can remember rummaging around Mickey Finn’s (a so-called five and dime store) searching for the cheap treasures contained in its bins. Back then I probably never envisioned five and dimes going away, but they did. It wasn’t until many years later that a new version emerged — the dollar store.
Discussion Questions
For how long do you expect dollar stores to continue riding the current wave of success? Is there anything happening in the market today, such as consumer trends or new formats, that you see as a potential risk to dollar stores going forward?
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The best-run dollar stores (Dollar General and Family Dollar) aren’t going away anytime soon. But it’s likely that their store-for-store sales growth will slow as post-recession shoppers start “trading up” to Walmart. It’s also likely that their rapid store expansion will cause some cannibalization of their own comp-store sales.
A bigger concern is the dollar stores’ increased focus on food and consumables during the last few years. Margins are tight in these categories, and the competition is intense—not only from the discounters but also from rapidly growing chains like Aldi.
While there are no signs of the dollar stores losing business, I do agree that there are a lot of them. It is now the time for them to push forward if the recession was the start of their success.
Dollar stores need to keep their customers by expanding their reach. I have noticed a number of stores adding convenience items and more grocery items, hoping to become the new c-store for their customers. Walmart and Target have been able to keep customers from the recession and dollar stores will also keep many of their customers.
Dollar stores have a ways to go. Many are picking up the slack in the food sector in inner cities where conventional supermarkets don’t want to be. I’m also seeing them pop up in rural areas where a general store once stood 80 years ago. I would not be surprised to see a Dollar General open in Death Valley Junction one of these days.
Conventional retailers seem to want to avoid putting too much “dollar” merchandise in their stores. They don’t want consumers trading down too far. It’s really not worth it for a $500k per week supermarket to go to all that effort to compete with a $23k per week dollar store.
Conventional retailers gladly tolerate them, just like the way Walmart tolerates Aldi. Walmart will compete on price, but they are not going to let some little $150k per week Aldi force them to drop some of their food prices 20% to compete. If dollar stores were suddenly doing $100k per week it would be a different story, but so far, most are relatively low volume.
You are right George…everything is on a life cycle, even those entities like Walmart or the NRA that some think will endure forever. The only way to avoid extinction is for an organization to make a “chaordic” leap to a new ‘S’ curve and begin life anew. “Chaordic” refers to a transformational experience where we dance between chaos and order. Both are essential to transformation. Open a cocoon and you’ll see what I mean.
But about the ‘dollar’ category. First dollar stores are fun, they just are. Give them a shot George! Even if all you do is marvel at what you can get for a buck. But the chaordic leap they need to make is from being positioned as ‘poverty retail’ to ‘possibility retail’. What if they could tell a story of really cool and unique products at extremely low prices? What if they could encourage people to bring simple ideas or inventions and help get them to market? What if they started “Inventors Anonymous?” Could they become a testing ground for new gadgets? This may mean they need to drop the “Dollar” label—I remember how shocked and duped I felt when I found something that was a whopping $2.
This whole category has incredible possibilities.
There are many factors that create “market conditions” both good and bad. Regulation, deregulation, expansion, revolutionary technological advancement, armed conflict, climate change and dozens of others. Sudden, uninvited change and the relative economic state of preparedness are the key factors to survival for those impacted.
In history we are enlightened to many unforeseen rapid market developments which gave reason for little known companies becoming giants. Just as peculiar is the way these giants stagnated into Chapter 7, or settled into the oblivion of corporate mergers as market changes happened again.
The DOLLAR this and that retailers were fuel injected into the mainstream by this greater depression and are expanding into the forward progressing slump in spite of their demonstration of poor growth management skills. Nevertheless, economic change is as certain as ever and there is no sign of these new giants in retail creating a market presence that will endure when the economy rebounds to real growth numbers.
Another perspective that I visited recently was taken from the viewpoint that this may in fact be a form of clearance stores with new labeling aggressively hacking its way into a permanent place and role in retail. Supporting this thought was a review of the repositioning of wealth and new economic class structures on a global scale. This manifesto predictably supported and downplayed the loss of the American middle class as insignificant compared to the size and total economic might of the world’s working poor.
Keeping this in one’s sights and attacking the opportunities of this new economic giant with affordable discretionary spending avenues and product is a highly probable way of creating a sustainable retail industry worldwide. Or so the story goes. As long as you are not a member of the giants in the retail “BRICKS” community, this is going to be fun to watch for the next several years.
It is for sure that clearance and clicks need to grow a pair of strong legs now when they can afford to if they wish to survive the good times (hopefully the near future) against the retail giants that have such long memories and short tolerances for the competition.
As with all things in retail, one must keep their finger on the pulse of the consumer and evolve as needed. I don’t see the ‘idea’ of dollar stores going away, though they may/will, at some time, look a little different.
I love going to the dollar store. When I need certain things, I can’t think of any other place. I go there for gift bags, wrapping paper, little stuffed animals for my mother-in-law with Alzheimer’s. [We take her one every time we visit.] And of course, when you go in, you can’t help but pick up other stuff. It’s only a dollar.
The dollar store industry may be maturing, but I don’t see any significant decline for them, regardless of how the economy progresses. These stores are cheap, easy to shop, conveniently located, and you can typically park right in front. What’s a consumer not to like?
Neither premise is completely correct. Dollar stores have benefited from the recession and a general growth in value-conscious shopping. And they have grown store count at a torrid pace. But they are in no danger of suffering from either event. Dollar stores are successfully exploiting the single most compelling aspect of convenience retailing—proximity.
The dollar store concept has proven itself to be an important part of the retail landscape. It is true that retail formats come and go, but this one still has a way to run.
Clearly, the Great Recession served to accelerate the process. Like the migration to private label brands, once shoppers have discovered the value in dollar stores, they are unlikely to simply return to more traditional outlets.
It is important to understand the concept is more that just discount; proximity is also key as well as limited assortment. Once they added fresh foods and beverages, many people turned to these stores as the preferred outlet for “quick trips.”
Perhaps it is time to ditch the “dollar store” terminology. Maybe they have become “convenient, local, value stores.”
Dollar stores will continue to survive as an extreme value retailer. With the addition of frozen, refrigerated, and fresh foods, they have been transformed from novelty discounters to bona fide food shopping alternatives to traditional supermarkets. With close to 60% consumables, they are real competitors.
Remember, some people need to save money, but everyone likes to save money.
One reason dollar stores have experienced blazing growth is that the stigma associated with shopping there has disappeared. Customers won’t be changing their bargain habits for some time.
Based on the volume necessary per location and the success with a diversity of demographic in location, I don’t see their success being challenged. Other retailers are trying to emulate them in many ways. Do they see a downside going forward? No.
These stores were on the rise, quietly growing, and capturing a place in the market prior to the recession that continues. Did the recession benefit them in sustaining that growth? Sure. I do believe that the duration of the economic downturn we continue to experience has over time changed shopping habits. Habits don’t change easily once you have experienced value from the habit.
In the meantime, they have gotten even better at what they do and how they do it. I see no change going forward.
Splicing together many of the comments, the consensus seems to be that they can continue to grow because (1) they have a winning model based not just on cheapness but also proximity, something exploited by a host of retailers—like Kohl’s—and of course the ultimate cheap/local seller (online); and (2) despite years of rapid growth, they’re still not really big enough to incite defensive moves from larger competitors…yet. And the economy can’t continue in its hyperdrive growth of 1-2% forvever, sooner or later it will revert to the stagnation that (supposedly) gave this business model the boost it first needed.
On a related note, if George wishes to relive his childhood, I have a whole basement full of dime store like “cheap treasures,” and if he’s willing to leave with more than he brings in, he’s free to rummage…I’ll even spring for an ice-cream cone!
There is a segment of the population that attracts dollar store customers, and that need isn’t going away for quite some time. While the driving force for consumers is price, how the dollar chains leverage their offerings to remain relevant and valuable will determine their staying power.
If recent market share gains are any indication, smart retailers will adapt. I like Ian Percy’s idea of a story-line around products. Also, smart buyers will adjust. Once my aunt learned Dollar General sold batteries for $1, she’s never paid a penny more. They will need more than batteries, however, to drive growth in larger categories.
As long as the middle class keeps disappearing due to stagnant wages and increased family expenditures (like health care), we can expect the dollar idea to continue to proliferate. It’s a consumer-driven phenomenon that some smart retailers are taking advantage of.
Every one of the dollar companies we’ve talked to this year and towards the end of last year is only interested in one thing: pedal to the metal growth. So, from their perspective, there’s no such thing as a slow down.
As a whole, I don’t believe the dollar store type retailer is going anywhere. Dollar stores were around and successful pre-2008, and I believe that there will continue to be a target market for them. That said, they did go on a tear following 2008, and it is fair to assume that as economic conditions improve, the pendulum will shift away from them to some degree. In effect, I think we have two countervailing forces at work: 1) the general human desire for the highest level of quality and status; and 2) the general economic benefit of saving money by purchasing at the lowest price. With the ebb and tide of economic forces, it is fair to assume that there will always be a place for dollar stores, but that their relative strength will rise and fall based on economic conditions.
One other trend I do see in the sector, however, is consolidation. Large chains such as Family Dollar or Dollar General have the benefit of significant economies of scale, and as much as there has been growth in the sector since 2008, it will become increasingly more difficult for smaller dollar stores to compete.