BrainTrust Query: The Squeeze on Dollar Stores
Through a special arrangement, presented here for discussion is an excerpt from a current article from Newmarketbuilders’ Blog.
Both Walmart and Dollar General have recently made it clear that high-low price shenanigans are off the table and that building trust through price consistency is of the highest values. In a presentation at last month’s William Blair Growth Conference, Rick Dreiling, Dollar General’s CEO, claimed that “price integrity is building loyalty” with its customers and that those customers “truly trust” the retailer’s everyday low price positioning.
But dollar stores are facing new competition from big-boxers — from Best Buy to J.C. Penney, Staples, Target and Walmart — who are determined to downsize their way in by shoving small formats into previously unexplored urban and rural markets, many of which are already populated with the original small format specialists. At the same time, rising fuel and raw material prices are pressuring margins. Combining the inflationary dynamics with the encroachment by the big boxes, and dollar stores’ inherently narrow wiggle-room on both price and physical space, dollar stores’ sovereign reign over some urban and rural fiefdoms may be at risk. Yet they aren’t betraying much vulnerability.
Dollar General’s Mr. Dreiling, for instance, recently spoke of the company’s “radical shift” to “proudly” selling national brands alongside private brands. However, the more Dollar General focuses on procuring the same national brands that Walmart and others carry, the more they will have to obsess over comparative value, especially since local price adjustments are standard operating procedure for both Target and Walmart.
Family Dollar’s CEO, Howard Levine, noted in the company’s Q3 2011 earnings call that “so far, our market and price checks are confirming that our competitiveness remains strong” and went on to say that Family Dollar is looking at the competitiveness of various markets and taking advantage of “higher pricing opportunities” in those that aren’t as competitive. He added that Family Dollar is continuing “to learn more about these opportunities, particularly as we open up more and more stores in urban markets where that’s a lever that we can pull to help the margin.” In other words, Family Dollar is banking on localized pricing winning the day, even as others who have arguably had more practice at it head their way.
Dollar stores have a very defensible position as they are thousands of stores ahead of the interlopers, but the nagging exceptions (markets that the big boxers have taken a shine to) have the potential to upset their apple carts as everyone attempts to adjust pricing to increasingly complex local market dynamics. Throw in Walmart’s Site-to-Store and Pick Up Today services, which have the potential to transform every Walmart Express location into an endless aisle delivery mechanism (the brands and products in the store may eventually represent only a fraction of the actual item transactions that occur in the store), and you have a multi-layered, localized moving target. So how will dollar stores be able to carry out a balancing act and live up to price consistency claims as others encroach and as the continuous upward crawl of commodity prices adds even more complexity to the picture?
Discussion Questions
Discussion Questions: How vulnerable are dollar stores to inflationary pressures as well as the rollout of smaller urban and rural formats from the big boxes? How should they be positioning themselves around price and product?
Three quick observations.
1. The only big box that can mount a credible threat to dollar stores with small formats is Walmart. The other retailers mentioned might do OK with small formats, but it won’t be Dollar General’s sales they will be taking, it will be other local merchants.
2. Dollar General is doing precisely the right thing by bringing in national brands that Walmart will be offering. They can’t afford to let Walmart have the additional advantage of being the only low-price, local store that is offering “the good stuff.”
3. In general, dollar store format operating costs remain below those of big box retailers. And the purchasing power of 8,000 stores is leverageable no matter how small those stores are. Even Walmart will have to go a long way to beat the typical dollar store net cost structure.
Small format Walmarts are indeed a threat to dollar stores in general and to lesser chains and independents in particular. DG and FD can stand up to the challenge — but not without taking some hits along the way.
Every retailer is always subjected to being vulnerable when some new, changing or more powerful force enters their environment. In the case of today’s dollar stores, their vulnerabi1ity lies in big box stores with reliable supply chains and strong balance sheets duplicating the dollar stores format in urban and rural areas.
I am sure others will knowledgeably comment on how Dollar Tree/other dollar stores and big box interlopers compete financially. The perspective that I feel is also significant is the consumer experience in each store. Big box is definitely about value…it’s all around you in terms of environment, i.e. the big box and the signage. Dollar Tree is about wandering and finding the unique (it wasn’t here last time) values that make a shopper feel good and successful. That feeling is inducement to coming back…again and again. Sometimes feelings outweigh efficiency. And that’s where I think Dollar Tree and other dollar stores have an advantage that big box retailers won’t be able to replicate.
The vulnerability comes in the form of an effective “small box” format backed by “big box” logistics. Right now, dollar stores have the advantage of being able (and willing) to go into smaller locations others don’t want or can’t operate in, whether strip malls or free standing retail outlets.
If big box stores crack the code of operating in units of roughly 1,000 sq. ft., their superior logistics, buying power and access to the brands customers really want will help them win the day.
Actually, the squeeze on dollar stores looks like it’s coming from several different directions. The supermarket industry has woken up to the power of this style of retailing, and grocery stores and other mass market retail outlets, Walmart in particular, are setting up with increasing sophistication dollar sections in current stores, never mind smaller formats in smaller markets. Supermarkets and other retailers are noticing that the dollar store customer base is not just low income groups, but that, according to one merchant, “the parking lots of dollar stores are filled with Mercedes and BMWs and the aisles are filled with soccer moms.”
At a recent supermarket industry event, a discussion group of retailers and suppliers noted that supermarkets were setting up dollar sections, some as large as 64 running feet. It was also noted that the use of the dollar promotion is advancing from items scattered throughout the store to special sections of dollar or the 4/$5 format. Many supermarketers are contemplating creating such sections in the front of the store to help make a price image. The discussion also noted that merchants are being careful in item selection not to merchandise cheaply made products and to make sure that they do not cannibalize the in-line sections.
All this adds up to the fact that dollar stores’ turf, because it fits well with an economy with over 14 million out of work, is being invaded from several different directions. However, it is their turf, they continue to grow, and many of them have successfully made themselves in a retail brand of power and appeal. They may have to share the market but they won’t be extinguished.
I don’t believe it will be so easy for Walmart to shift from being a “tonnage” retailer to an LTL retailer. The differences are significant. I also think I’ve said this before.
Amid all the concerns about Dollar Stores’ results, the truth is they are still ringing up significant comp store sales increases. I would suspect their margin hits are more because of increased food sales than anything else.
How should they position themselves? To be honest, I think they should return to their “dollar store roots”–which means finding more items to sell for a dollar. They can still sell other merchandise at different price points, but I believe if your name includes the word “Dollar”–well, you should sell a high proportion of your inventory for a dollar. That might change the merchandise mix a bit, but I think it’s the right idea.
I have had conversations with Dollar Store executives and it becomes clear that they are having three problems right now:
1 – Competition from larger box stores.
2 – Fewer buying opportunities for a wide variety of products that can be sold for $1.00. Customers are bored with the same assortment of the same products without new items or new surprises.
3 – They can do a lot better if they can sell items that are under $5.00, rather than $1.00.
If you’ve seen the video about Tesco markets in South Korea that carry no merchandise, you’ll know the power of the really small format store! That said, dollar stores know their audiences and I wouldn’t count them out any time soon. Big-boxers will have to scramble to put together the advanced BI capabilities of the dollar stores.
It really could prove to be challenging times for all dollar stores with inflation, increased competition, and the conflict with more co-tenants’ use clauses. Dollar Tree has done the best job in positioning themselves. One of their keys will be to continue to leverage the market for superior real estate deals and locations.
Since the beginning of the Great Recession, dollar stores et al have been doing a great business at the expense of Walmart. The dollar store customer now views Walmart as an aspirational retailer who they will return to once their lot in life gets better. If Walmart’s small format offers the same stuff as the dollar stores for the same price and then adds the online and more in-store selection, I think dollar stores days are numbered.
Supercenters are making a major move at a very opportunistic time. Even though gas prices have subsided in the past several weeks, the average price of gas remains well above where it was at this time last year and is having a significant impact on consumer shopping behavior. In fact, recent SymphonyIRI research reveals that 55% of consumers are making fewer, larger purchases in an effort to save on gas. Supercenters are well-positioned to compete in this type of environment, as they generally have a much broader selection versus dollar format stores, and they boast a following of nearly three-quarters of the U.S. population that already shops the supercenter channel.
The challenge for supercenters is in downsizing. In addition to facing the daunting task of finding “the right” location, supercenter operators will need to equip their locations with “the right” product assortment, as well. The fact is supercenter operators are not accustomed to working within the confines of a footprint typical of more urban retail outlets. Here, dollar store operators have the distinct advantage of experience. They have been students of the more limited assortment environment for some time, and they have been honing their skills along the way. Ongoing dollar store focus on building out national brand assortment is an added bonus, and it has already proven successful at attracting consumers from a wide range of demographic groups.
The battle for bragging rights to (relatively) small urban marketplaces is sure to heat up in the coming months and years. Dollar and supercenter operators each possess enviable and formidable strengths. Those that can consistently capitalize on those strengths in near-real time to address evolving consumer behaviors will win the bragging rights in the end. Right now, though, it seems the scale could tip in either direction.
Walmart is hungry for vehicles that can add sales volume in big chunks. Urban markets and dollar store shopping trips are two obvious targets.
The dollar store leaders hold defensible market positions, but they are not invulnerable. Remember that Walmart once was not in the supermarket business either….
Thinking as an analyst, I’d take the rural and urban formats as two separate business cases. Walmart must be careful not to overload on complexity, and blending big trucks with small van deliveries will challenge its distribution system.
I expect the dollar stores should be able to make a few chess moves to counter the Great Wal. Greater brand focus may be one tactic. I think store brand programs could be a key area of contention too.
Mini Walmarts will never have the geographic base that Family Dollar and Dollar Tree have. Family Dollar loves to blanket an area. They aren’t afraid to have multiple outlets in a single zipcode. Both Family Dollar and Dollar Tree are department store convenience store chains. They have the goods people want at the right price points. Walmart still has a problem about thinking small, and along with having to grasp what it means to merchandise locally, I don’t think they can seriously hurt FD and DT in the long run. It’s really cool to shop these stores.
We can debate the nuances but the plain and simple truth is that no player–big or small–is safe in the current environment. The entire retail landscape is shifting as an era of unrepeatable demand comes to an end. This isn’t simply economic–it’s demographic and technological as well.
It’s also tempting to default to a world where Walmart wins every battle, but I don’t see this happening. If anything, the scramble on Walmart’s part to reinvent itself across multiple formats and footprints may even further erode its core model of big and cheap.
One thing is certain–the race to the bottom is going to get a lot more competitive.
Success for either the Dollar Stores or big box stores depends upon having the right selection for the right consumers, having efficient logistics, the right real estate, and the right shopping experience. It is difficult for everyone.
I don’t think they are any more or less vulnerable to inflation than anyone else. Inflation tends to be an across-the-board phenomenon. It is very difficult, beyond buying futures contracts, to cheat inflation. As Dollar General and Family Dollar already have economies of scale that allow them to buy with Walmart and the major grocery chains, I can’t see much they can do, but neither can anyone else!