Follow the Dollar

Not long ago, dollar stores were the red-headed stepchild of retail, filling shelves with slightly damaged goods, overstocks and closeouts. But the deep-discount sector has become one of the most attractive channels in retailing, and manufacturers have taken note. According to research released in April by A.C. Nielsen U.S., the dollar store sector is the fastest-growing retailer channel for consumer packaged goods, attracting volumes of new shoppers in recent years.

Though dollar stores traditionally cater to lower-income households, nearly half (49%) of all households earning $70,000+ per year now shop at these stores (see chart). Nearly two-thirds of all U.S. households shop in the channel, averaging 13 visits per year. As a result, major CPGs, such as Procter & Gamble, Clorox and Hershey, are repackaging brands at dollar price-points.

Dollar stores are also the fastest growing when it comes to locations. According to A.C. Nielsen subsidiary TDLinx, store count grew from 13,342 in 2002 to 15,703 in 2003, an increase of 18%. Todd Hale, senior VP of consumer insights for A.C. Nielsen, points out that the three largest chains — Dollar Tree, Family Dollar and Dollar General — plan to double their store counts within the next four to six years.

“Manufacturers are no longer calling them an alternate or specialty channel,” agrees Don Stuart, a partner with Wilton, CT-based Cannondale Associates.

Dollar Tree is the third-largest deep discount chain, but the largest with a price-point of $1 or less. Adam Bergman, spokesman for the Chesapeake, VA-based chain, relates the popularity of dollar-stores for manufacturers to the club-store craze of the mid-1990s. “Before the club stores, no one ever made three-gallon-size jars of mayonnaise,” points out Bergman. “But if you see a store like ours, with a 20-year track record of profitability, you may change the size or the specifics of the product to do business with [us].”

Hale agrees it makes sense for manufacturers to re-package to fit in the dollar-store price channel. But the deep-discount route isn’t for all manufacturers. “It’s good for items like basic household goods,” Hale says. “Laundry detergents and disinfectants are doing well there, as are paper products.”

Dollar stores have been immune to the “Wal-Mart phenom,” he says. Wal-Mart may pride itself on the lowest prices in mass merch, but it doesn’t offer dollar store convenience. New consumable goods make it alluring for CPGs to sell into the deep-discount sector. Consequently, Stuart believes, dollar stores are pinching Wal-Mart for market share.

“This is a key opportunity for marketers and the next wave for manufacturers,” Stuart says. “Dollar stores don’t have the buying power of a Wal-Mart, but they have a lean operating philosophy that makes them desirable.”

Goodlettsville, TN-based Dollar General, with more that 6,700 outlets, wants to add more branded merchandise. Its traditional stores have a price-point of $5 and less, but its Dollar General Market concept includes merchandise like fresh produce and inexpensive DVD players.

“They are trying to increase the dollar amount spent per visit,” Hale explains. “It’s a challenge for these stores to generate year-over-year sales increases when playing with a small basket and price point.”

Many Penny Pinchers

Growth in household penetration for dollar stores is partly a function of the channel’s growing availability to shoppers. While dollar stores are popular with low-income households, more affluent shoppers are increasing. Higher income groups are also showing growth in shopping frequency.