Will dollar stores keep gobbling grocery share?

Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.

Annual sales at dollar stores are approaching $55 billion, with compound annual growth rates averaging 6.5 percent since 2000 — well above the four percent recorded by conventional grocery.

Kantar Retail expects the dollar store channel to expand 6.6 percent annually through 2020, making it the fastest growing brick & mortar channel.

Mike Paglia, director of retail insights for Kantar Retail, adds that, from a dollar volume perspective, that’s a $14 billion growth opportunity for edible groceries.

While mainstream supermarkets continue to increase their focus on better-for-you, dollar stores still move a lot of belly filler — the lower-priced processed foods more affluent shoppers are trying to avoid but lower-income consumers can afford.

Having hit their limit in traditional grocery, however, many legacy brands are making adjustments to product or packaging to hit certain price points to grow in dollar. Said Mr. Paglia, "We’re talking about 25,000 stores with growth versus the same number of grocery stores with no growth."

Dollar General fresh food

Photo: Dollar General

Helping fuel the food growth is a focus by both leaders — Dollar Tree and Dollar General — on adding a significant amount of coolers. Frozen and refrigerated products are generally lower-margin but faster-turning. Bob Sasser, CEO of Dollar Tree, said recently on his company’s third-quarter conference call, "The increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories, including our higher-margin discretionary products."

Indeed, one report indicates that, at Dollar General, baskets with a perishable item are 50 percent larger than the chain’s average. Moreover, by offering a wider variety of foods, dollar stores can make the jump from fill-in to secondary or even primary retail destination.

Dollar General’s new Market format — more than double the size of its average store with expanded frozen and fresh offerings, including produce — is even well positioned to compete against hard discounters like Aldi and newcomer Lidl.

Mr. Paglia said the additional competition at the value end of the retail spectrum will put pressure on traditional outlets seeking to attract that low-income shopper. "They’ll either have to differentiate to attract that consumer or shift their efforts to more affluent shoppers."

BrainTrust

"The value channel is alive and well ... and will continue to encroach on other formats quite effectively. Especially hard hit will be the traditional grocery segment that is not only under significant financial pressure but is also facing an identity crisis."

Dave Wendland

Vice President, Strategic RelationsHamacher Resource Group


"I live it every day, as we have a Dollar General that shares my building right next door. Over the years, Dollar general has taken away about $10,000 per week of my grocery sales and they are never coming back, as consumers want rock bottom prices."

Tony Orlando

Owner, Tony O's Supermarket and Catering


"There are few points of intersection for dollar stores and traditional supermarkets. For example, both sell products consumers want and both try to attract shoppers with price value propositions."

Joan Treistman

President, The Treistman Group LLC


Discussion Questions

Do you see any reason dollar stores won’t be making strong gains in grocery share in the years ahead? How much do you think the stronger emphasis on fresh is contributing to dollar stores’ increase in market share vs. the grocery channel? How should traditional supermarkets respond to dollar stores gains?

Poll

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Dave Wendland
Dave Wendland
8 years ago

The value channel is alive and well … and will continue to encroach on other formats quite effectively.

Especially hard hit will be the traditional grocery segment that is not only under significant financial pressure but is also facing an identity crisis. The newly-expanded and improved shopping experiences gracing dollar stores will continue to attract new shoppers and rival area grocers.

Survival among legacy grocers will require differentiation on quality, service, prepared foods, atmosphere and supply chain efficiency. Of course this has been the battle cry for several years and unfortunately not all have jumped aboard.

Richard J. George, Ph.D.
Richard J. George, Ph.D.
8 years ago

Absolutely not. The dollar store shopper is not limited to low income households only. While some consumers need to save money on their food bills, everyone likes to save money. Dollar stores’ consumable goods now represent over two-thirds of their total SKUs. Fresh and frozen are making a difference. As noted in the article dollar stores are now offering more fresh and refrigerated products.

Regarding the future, the dollar store phenomenon will only continue to grow. My recent research on Millennials’ food shopping behavior indicated that almost four in 10 (actual 38 percent) shopped for groceries in a dollar store during the previous 30 days.

While the recession gave impetus to value shopping, the expected “frugal fatigue” never occurred in food shopping. The combination of value retailers, which will be further lifted by the impending arrival of Lidl, and grocery price transparency should be a wake-up call for traditional supermarkets. A couple suggestions: 1. Find a point of difference other than low price and give shoppers a reason to pay more and 2. Select the top 50 to 100 known SKUs and position your store as a value provider here.

You don’t have to match dollar store pricing, simply be in a range that will attract shopper interest.

Tony Orlando
Tony Orlando
8 years ago

I live it every day, as we have a Dollar General that shares my building right next door. Over the years, Dollar general has taken away about $10,000 per week of my grocery sales and they are never coming back, as consumers want rock bottom prices and it is difficult to compete on their level. The level playing field has changed and now the dollar stores are taking business away from Walmart, so what do we do?

I knew that making perishables my strength was going to keep me in business way before the Dollar Store came here, but it certainly hastened my pace when they opened up 10 years ago.

I focused more than ever on meat, deli and bakery, and my front page of the ad is mostly meat and deli, which was my best move. We went from a respectable meat mix of 23 percent to 34 percent today, and believe me I’d rather sell ground chuck than a can of beans any day. Our deli mix is around 13 percent and bakery is over 3 percent, so about 50 percent of my sales are along the back wall.

I also price check them on certain staples and match their price year-round, which helps but almost at zero profit, which is why it was critical that I change my way of promoting my business. Facebook has helped us quite a bit as the crazy meat and deli deals I broker are plastered all over social media, and the response to these deals is fantastic.

Bottom line: Do the things in perishables very well and create amazing signature dishes in your deli, and there will always be business in your stores that help pay the bills. Match the key items and you can also kill them on service, as they don’t stand out in that area very well. Once again, “retail ain’t for sissies.”

Naomi K. Shapiro
Naomi K. Shapiro
8 years ago

All I can do is go with the expert. Tony Orlando’s been there/done that, or is doing that every moment and, hopefully, will be around for a long time to tell about it.

Joan Treistman
Joan Treistman
8 years ago

There are few points of intersection for dollar stores and traditional supermarkets. For example, both sell products consumers want and both try to attract shoppers with price value propositions.

There are many differences between the two. Supermarkets are trying to engage shoppers by enhancing the in-store experience. Dollar stores try to engage shoppers with a focus on the value proposition for products they buy on a regular basis.

That focus tells me that dollar stores have an advantage from a financial perspective. It underscores that they have the ability to be competitive with traditional supermarkets, while the supermarkets are competing with each other and the dollar stores. I have to agree with those who are saying that as long as consumers are looking for value dollar stores are appealing. Add to that the expanding array of brands and products available at a great value and there’s every reason to think dollar stores will continue to gain in sales (with more products) and shoppers who want the savings.

Tony Orlando’s strategy is very sophisticated and an in-the-trenches description of uncovering a sweet spot and not letting go. I don’t know that the larger supermarket chains can manage that perspective, vision and flexibility.

Laura Davis-Taylor
Laura Davis-Taylor
8 years ago

I love Tony’s response as well and it seems dead on.

In a past life, I pitched for two of these dollar store brands and the shopper persona we got used to talking about was the $8 until payday consumer. Both brands were laser-focused on going after food fill-ins for people on their last funds that needed feed the family. Both brands were super focused on cooler additions/product movement so that they could steal grocery visits to support this need. But, as Tony points out, zero fresh foods.

So yep, totally agreed that the grocery stores need to focus on fresh, great service and unique offerings. Yet it still makes me sad that the food most accessible to lower-income customers, which is also contributing to the myriad of health challenges seen in our culture today, is what’s fueling this category growth.

James Tenser
James Tenser
8 years ago

I have to commend Tony, too, for zeroing in on his perishables and prepared foods strategies to counter intense price pressure from the dollar store next door. There may be no winning when it comes to packaged foods in smaller-pack sizes, but when you offer a great rotisserie chicken and a strong selection of fresh produce and baked goods, you have a good shot at bringing those shoppers back in.

This also makes me wonder whether Tony O’s competes better on paydays versus the end of the pay cycles, when dwindling budgets may send shoppers toward the dollar store for smaller packs and price points.

Brian Cluster
Brian Cluster
8 years ago

I’ll take an opposing view on this issue and say that dollar channel growth will be limited in the long run. In five years, we will likely see another disruptor, but in the food/grocery online space. More affluent customer shopping is increasingly folding into a subscription service, (Dollar Shave Club and CSAs boxes); this trend may continue and allow more consumers to automate their monthly staple shopping and receive a discount. Could their be a value based monthly subscription service online for these customers that would help families ensure that they are on target with their food budget? If growth projections of ecommerce growth is accurate, all consumer groups and retailers will be impacted.

Focusing on fresh by dollar store operators eliminates the need to make another trip to grocery chain unless the shopper is looking for something not commonly carried at dollar stores. By consolidating trips ,the dollar store operators are increasing their customers’ baskets.

Grocery stores should respond to these dollar store challenges by understanding their customer pain points (budgetary, social, health, fitness) and the reasons for shopping and compare that to their current offerings. This will create several opportunities to create local based marketing programs/speeches/tastings that their customers want and highlight grocery retailer’s expertise and products. Simple examples below:

1) Low income family/health- Crock Pot Meals for Families
2) Millennial/Entertaining- How to create appetizer plates for dinner parties
3) Empty Nesters – Dietician Talk: Simple substitutes in ingredients to improve health

Roy White
Roy White
8 years ago

Now that the merger trauma is over and done with, dollar stores are growing very rapidly, although not always profitably. Food is just another opportunity for them, and they are going to take full advantage of it in terms of pricing, offering food products to lower income demographics that shop their stores, and taking share away from conventional supermarkets which are viewed by many as high priced and not necessarily that conveniently located.

Habib Shah
Habib Shah
8 years ago

Low profile grocery addition is good, however, adding gas into this mix can add more value in the program, like all major big box grocers adding gas into their program. The sooner the better. Key for success is the right person who knows how to play gas. Do not take it lightly. It is crucial. On top of that, Less construction cost, more strategic partnership can secure the bottom line in 2016 and years ahead.