Extreme value

Forget the five and dime—the bargain price today is one dollar, or perhaps 99 cents, and there's a whole retail category devoted to general merchandise to be had at that price or low multiples of it. Dollar stores are one of the highest growth retail sectors today, driven by aggressive new store expansion. Two of the three U.S. retailers with the most stores are dollar stores (Dollar General with about 6,930 stores and Family Dollar with about 5,300 stores).

Sales growth at dollar stores is booming despite a hesitating economy. Dollar General sales grew 13 percent in 2003 to $6.9 billion and Family Dollar sales grew 14 percent to $4.8 billion in the same period. "America is just waking up to this new channel," says Macon Brock Jr., CEO of Dollar Tree, Chesapeake, Va., the third largest dollar store chain with about 2,500 stores.

With larger numbers of higher-income shoppers joining low-income customers who find the treasure hunt and convenient bargains of dollar stores attractive, A.C. Nielsen found in 2002 that 62 percent of U.S. households were shopping stores in the category—compared to 63 percent for supercenters. And dollar store fans are growing in numbers. Store growth keeps leading to greater penetration in new markets. Meyers Research Center found 75 percent of dollar store shoppers have annual household incomes above $30,000 and 44 percent earn more than $50,000 per household.

However, dollar stores are not forgetting their base. "We believe we are successful because we've never lost sight of our target customer: the value-conscious, low-income consumer who depends upon us for everyday low prices on quality, basic consumables," says Angela Martin, director of communications for Dollar General Corp., Goodlettsville, Tenn., the leader in the category. Dollar General sees more than 9.7 million shoppers per week, and the chain is planning to build 675 new stores in 2004.

Dollar stores usually have a small footprint—typically 6,000-8,000 sq. ft. and occasionally larger. "A dollar store can fit just about any location available," says Sandra Skrovan, vice president of Retail Forward, Columbus, Ohio. The chains often open their doors right next to a Wal-Mart or another superstore, eager to draw in customers from the built-in traffic. Aiming for the ultimate in convenience, parking is usually at the front entrance, and shoppers can duck in and cover the store within minutes. Retail Forward reports that a typical dollar store in one of the leading chains offers about 4,000 to 6,500 SKUs.

Women are the typical dollar store shoppers, so retailers keep the shelves stocked with merchandise that caters to them. Dollar stores are full of basic household products that fit today's fast-paced and stressed-out lifestyle. "If our customer can't read the label in 10 seconds and buy the item, we don't want it," says Dick Saklad, vice president of business development, 99 Cents Only, Commerce, Calif. "Our stores are very simple to shop."

Groceries are the largest single department in most dollar stores, usually nonperishable foods and beverages, although 99 Cents Only features deli, dairy and freezer cases in its stores. Nonfood items account for 73 percent of total sales overall in the category. High use, high turnover items are also featured such as paper products, household cleaners, and health and beauty aids.

Design-wise, dollar stores offer a low-frills environment that maximizes the use of space for merchandising. Saklad of 99 Cents Only says his chain has been consciously building better-designed stores with all-new fixtures, low shelving and extra windows. "The dollar industry has a long way to grow as far as professionalism is concerned," he says. Saklad says that in order to attract higher-income customers, 99 Cents Only has to overcome these customers' impressions of other dollar store chains.

The industry leaders have been taking action to improve the look of their stores. Dollar General phased in a redesign concept at its larger locations to reduce clutter. The chain announced plans to remodel or relocate 145 stores in 2003. Family Dollar's remodeling program involves about 150 stores a year, including expansions and renovations. Dollar Tree is remodeling and relocating smaller, older units to bigger stores, substantially increasing its average square footage and enabling the units to appeal to a broader demographic mix.

A related category, closeout stores, also features merchandise at "extreme value" prices and is aggressively led by Columbus, Ohio-based Big Lots Inc. with more than 1,400 stores. The category sells brand-name goods that have been overproduced or discontinued at deep discounts. Dollar stores and closeout stores together are called small format value retailers, and Retail Forward collectively forecasts 4.5 percent annual sales growth for them over the next five years.

At the rate they're going, dollar stores will fill in untapped markets across the United States at more than a store a day. But they are far from the saturation point. Retail Forward estimates that American shoppers are ready to support another 15,000 small format value stores—about twice as many stores as the top 10 players in the channel operate today. That translates to another decade of viable expansion at the current pace of an average of 1,500 new units per year.

Retail Forward suggests that 4,000 households are required to support one dollar store, and the greatest opportunities for expansion remain on the West Coast, upper Midwest, and Northeast. The greatest penetration for the category is in the South, where dollar stores got started after World War II. The current aggressive wave of expansion harks back to the '90s, however.

"I definitely see aggressive expansion in the future for dollar stores—just as aggressive as in the past," says Skrovan of Retail Forward. J.P. Morgan predicts that dollar stores will be raking in $26 billion in sales by 2007. The cash register is ringing across America—one dollar at a time.