Consumers Put Money Into Gas Tanks, Not Dollar Stores

Discussion
Oct 03, 2005
George Anderson

By George Anderson


Dollar stores are not bringing in the dollars the way they had been. The high price of fuel and stepped up competition from other channels has put the brakes on same-store sales. Two years ago, same-store sales were up 4.1 percent, Patrick McKeever, an analyst with Sun Trust Robinson Humphrey, told The Wall Street Journal. In the first half of this year, the increase was 0.4 percent.


Retail Forward sees total sales for the industry coming from existing and new stores continuing to grow in upcoming years but at a slower pace than in the past. The market research firm pegs dollar store sales growing at a 5.4 percent annual rate over the next five years. That’s down from the 6.2 percent clip of the past five years.


Sandy Skrovan, vice president of Retail Forward, said growth is slowing in part because of the number of stores that have shot up in recent years. Citigroup estimates there are 17,000 dollar stores operating today; 50 percent more than in 2001.


“I wouldn’t yet characterize the (industry) as mature – but probably at the peak of its growth cycle and on the cusp of maturity,” said Ms. Skrovan.


Of more immediate concern to dollar store operators is the economy, energy prices in particular. The high cost of gas and a jump of up to 52 percent in natural gas prices to heat homes has had and will continue to have an impact on the low-income core consumer of the channel.


On a conference call in August, David Perdue, chairman and chief executive of Dollar General, said, “We expect our core customer’s discretionary spending to continue to be pressured by high gasoline prices and unemployment.”


At the same time, consumers are putting more money into energy costs and looking for ways to cut down on expenses by combining trips to stores, for example, competitors of dollar stores are finding success through imitation. Ten for $10 sections and other variations on the dollar store theme are common in many mass merchandisers, supermarkets and drug stores today.


Moderator’s Comment: Do dollar stores need to wait it out until the economy improves and their business comes back or has a weakness in the dollar store
model been exposed that needs correcting right now if the channel wishes to avoid the fate of the old five and dimes?


One of the factors that has hurt dollar stores is the format’s inability to raise prices. As we recently read somewhere, a dollar store is no longer a dollar
store if it starts selling everything for more than a buck.

George Anderson – Moderator

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15 Comments on "Consumers Put Money Into Gas Tanks, Not Dollar Stores"


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Santiago Vega
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Santiago Vega
15 years 5 months ago
How much leverage in the buying process can you get from a $1 dollar retail-price item? Clearly not enough when you consider the inevitable higher commodity, energy, packaging and transportation costs that all suppliers are and will continue to face as years go by. And considering that any $1 dollar item must still hold enough appeal (quality, presentation and function) to attract consumers. Even if dollar stores can get better leverage (i.e. cut costs) from their buying process, the end result will still be the same – less than fair quality product. I’m specifically talking about non-consumables. As any retailer, it’s not only the price component of your products that you are judged upon, but also what you choose to stock your shelves with. Good luck trying to get a customer to buy a non everyday consumable from you if you disappointed him/her with a product that has no reason of being or that broke as soon as you took it out of its ordinary plastic packaging. If dollar stores continue to be enamored with… Read more »
Dell Holden
Guest
Dell Holden
15 years 5 months ago
In my humble opinion, much depends upon the relationship between supplier and store. Not to beat a dead horse but the supplier (whether mfg., broker or distributor), has to share a common goal with the retailer: the success of the store. It isn’t like the $1 price point moved on anyone. You are right about the big box and other formats attempting to appeal to the consumer and the impact it could have on total sales in the channel. Isn’t that their plan? This channel is about VOLUME and that is where the profit margins are found. Adding on a “set” fee and the rising shipping expenditures minimizes the margins for dollar stores. It boils down to the suppliers who work with the dollar stores and have assisted them on the way up. I hear suppliers getting away from smaller accounts as they grow all the time – basically abandoning those customers who helped them get to their current level. Many suppliers are on 10-20% commissions and unwillingly to waiver with any sliding scale to… Read more »
Al McClain
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Al McClain
15 years 5 months ago
There are at least two misconceptions running through this discussion. The first is that dollar stores price everything at $1 or less – many of them don’t. Two of the industry leaders, Family Dollar (most items under $10) and Fred’s, seem to offer value pricing more than anything else and both sell items well over ten bucks. The other is that dollar stores are a new phenomenon. Fred’s opened in 1947, and Dollar General and Family Dollar opened in the 1950’s. The new kid on the block is Dollar Tree, which opened in 1986. Point being that this is a time tested approach. People love bargains, and I believe all of these chains are growing store count at a significant pace, and many of them are adding services such as pharmacies, and refrigerated and frozen foods. Regarding the economy, and gas prices, of course they hurt these chains worse than the upscale merchants. Walk into a dollar store and you can tell that their typical customer is cash strapped. The rise in gas prices has… Read more »
Bernice Hurst
Guest
15 years 5 months ago

Buying junk for $1, or £1 as the UK offer is, is no bargain. Junk is junk and not worth having just because it’s cheap. I’ve never seen anything of acceptable (to me) quality on either side of the Atlantic and certainly don’t go along with Rick’s argument that trying to save money should make dollar stores an ideal new adventure for the middle classes. I do, however, agree with those who point out that competition and the lack of differentiation, as well as the convenience of buying cheap in Wal-Mart or wherever, is a better option for those wanting/needing to save money. The gas spend argument may not be too sound but the ability for one-stop shopping is fairly valid.

Dell Holden
Guest
Dell Holden
15 years 5 months ago
I believe it is more than one thing causing concern from analysts. The perpetuation of “dollar” or discount aisles in various retail channels, a shift from the Top 5 Dollar stores being more inline with mass merchandisers operations, past issues on quality of merchandise (what do you want for a Dollar?) and preconceived notions, such as who the stores were servicing on an income level. As with any retail channel, there is a cyclical nature that plays out, however, value is consistent here with dollar stores. The burden is on the retailers themselves in the buying process and, with the rising cost of fuel on the transportation end, it has slowed the independents in continuing to purchase a “better” quality product for their stores. There have already been shifts in formats where dollar stores are now offering trend items, private label, and freezer programs – looking to remain competitive with bringing in national brands, whether closeouts or not. National Brands are looking at the channel and how to approach it without compromise to their existing… Read more »
Santiago Vega
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Santiago Vega
15 years 5 months ago

The problem with dollar stores is its current management. Either they lost focus in the middle of their race to expand their store count, or they still think it’s the early 1990’s.

The appeal of the dollar store concept is no longer that you can buy anything or most things for one dollar, and I don’t think customers actually expect that anymore. The appeal of a dollar store is its presence and proximity to every small (and neglected by big box retailers and grocers) neighborhood whose inhabitants still need bread, milk and soap everyday, as their need and desire for discretionary non-consumables.

Forget about $1 items, and start concentrating on bringing some newness and increased quality to $5, $10 and $20 dollar products in “discretionary” categories, while continuing to reel in customers with their everyday need for consumables. Families’ quality of life have increased dramatically over the last decade. It’s time that dollar stores start acknowledging the changes.

Dell Holden
Guest
Dell Holden
15 years 5 months ago
Getting away from a single price point loses the niche that these operations have carved out. Not to mention the loyal following. Deep discount is volume and the numbers are impressive. The changes need to come on the operation and supply side. The recent soft sales can be directly related to rising costs in fuel hindering the influx of new product, which for many stores creates the continued interest from loyal and frequent shoppers. Same store sales remain consistent on everyday consumables. I am not sure why anyone would throw a $41 billion market under a bus. The big 5 in the channel already rival store counts on major players from mass to grocery. I believe it is premature to start heading for the hills. The consumer is going to respond to selection just as much as to the price. Retailers with better leverage in the buying process will see faster return on sales then those struggling to maintain margins during this economic climate. It goes the same for all retailers, regardless of the channel,… Read more »
Art Williams
Guest
Art Williams
15 years 5 months ago

I can’t buy the argument that high gas and energy prices are hurting this segment but would rather think that it should help it. I think the whole marketing concept is flawed and will have a relatively short life in its present form. But then I never could understand how they could get anyone to buy some of the junk that they sell. And I agree that trying to maintain the “everyone under a dollar” is a no-win proposition as prices continue to rise. If you maintain these prices, it will dictate that you must find ever cheaper and junkier merchandise to sell. What a thrilling concept! I agree with Warren. If you are a stockholder of one of these chains, I can’t think of a better time to sell.

Rick Moss
Guest
15 years 5 months ago

Sorry, I’m not buying this premise at all. Saying that a tightening economy is hurting dollar store sales is like an umbrella vendor saying that no one is buying because it’s raining too hard. The pressure on consumers’ pocketbooks, in theory, should be causing more middle class shoppers to check out dollar stores…that is, if the format has the appeal it claims to. Dollar stores should be cleaning up in an environment when people are looking to trim their household budgets. They should be pumping up their marketing and getting the word out that savings are to be had, not making excuses.

Mark Lilien
Guest
15 years 5 months ago

The biggest structural negative is the absurd proliferation of players, since the obstacles to entry are nonexistent. The near-term will be bad, because poor people are getting hit by energy prices, and will suffer even more this winter. As long as certain currencies stay weak, particularly China, there will be decent value for dollar items. The smartest strategy would be a merger of the best-capitalized players ASAP, with renewed focus on sourcing and logistics cost reduction, combined with a very high hurdle rate for new locations. Continuing store growth helps sales and wrecks profits.

Dean Cruse
Guest
Dean Cruse
15 years 5 months ago

I think the biggest problem with this segment is that it grew too fast – there are too many dollar stores out there offering similar product. In addition to the over-stored environment, the differentiation is just not there, especially with other channels offering dollar aisles and similar formats. With lower-income consumers spending more on gasoline and other fundamental goods, expect dollar stores to continue to feel the squeeze. The smart operators will use this time to slow down new store additions and weed out under-performing stores.

Warren Thayer
Guest
15 years 5 months ago

I’ve said here before that dollar stores are past their prime, and will likely be extinct in 10 years. They’re just kind of a Johnny One-Note, no real excitement, a nice novelty for awhile. The private labels and off-brands are by and large disastrously poor quality. My sense is that shoppers are tiring of them already. If you want cheap stuff, go to Wal-Mart, for crying out loud. I often hear that dollar stores offer a “treasure” hunt. If your idea of “treasure” is $1 watches that don’t work, and $1 plastic religious shrines with the paint mis-applied, well… I mean, where can they go, marketing-wise? They can’t afford to raise their quality. They’ve painted themselves into a corner. If you own the stock, now’s the time to sell.

Mark Hunter
Guest
Mark Hunter
15 years 5 months ago

At this time, we’re all concerned with gasoline prices, yet the second shoe will fall with the increased cost for heating homes this winter. These factors will slow the increase in dollar sales but only short-term. There’s still a lot of growth left in the channel.

Ben Ball
Guest
15 years 5 months ago
I can’t believe it. I think I’m about to agree with Rick Moss! I’m with Rick in not buying the whole “gas prices are limiting sales” premise. Plausible scapegoats for dollar store performance abound, but a hurting economy is not one of them. In the first place, it’s hard to put 3.6% GDP quarterly growth, 2MM new jobs in the last 12 months and unemployment rates at recent term lows while both the population and our number of “guest workers” are growing in the absolute down as a “hurting economy” — no matter what the headlines say. In the second place, Rick’s point about dollar stores being the natural retail beneficiary of hard times is spot on. Here’s another theory though. What if the dollar stores do not really represent the “cheapest alternative for staples” to low income consumers? What if they really are the “treasure hunt” for “rewards for a buck”? Or as in my wife’s case — the place she goes when we are at the cabin in WNC to see what she… Read more »
Michael Richmond, Ph.D.
Guest
Michael Richmond, Ph.D.
15 years 5 months ago

5.4% is not bad growth considering other retail venues. I think the $ assortments in main stream have cut in a bit and the clutter makes things hard to find, My biggest concern is the quality of the merchandise – it seems like everything the kids buy there breaks during the first use! Clearly CPG’s see continued growth and will focus on more new offerings and new smaller package formats will also help the Dollar Stores sustain growth.

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