Dollar Stores Face Challenges
By George Anderson
A new study by Retail Forward, Dollar Stores and Other Small Format Value Retailers, says the dollar store channel will continue to grow over the next several years but not anywhere near the clip achieved in the past.
According to the report, small format value retailing, including dollar stores, grew from a $31 billion business five years ago to $42 billion today. During the same period, the top 10 chains went from a 44 percent share of the market to nearly two-thirds of all goods sold.
Aggressive new store expansion by the leading players remains the primary growth driver for this sector,” said Nick McCoy, senior consultant with Retail Forward and co-author of the report in a released statement.
Dollar stores and other small boxes focused on price are finding it more difficult to achieve the type of growth realized in the past. Retail Forward projects sales in the small box value-retailing segment will grow at a rate of 5.4 percent a year through 2009.
Mr. McCoy said higher fuel costs and economic hardships faced by the core consumer of value retailers is having an impact on the channel’s performance. “As these core shoppers’ budgets get stretched to the limit, we’re seeing a reduction in the number of shopping trips and a postponement of discretionary purchases,” he said.
There is a potential silver lining for the channel in this scenario, said Mr. McCoy. “These same economic pressures may lead to more consumers trying the format because everyone loves a bargain and American shoppers increasingly are value-oriented shoppers.”
To attract new consumers and increase the frequency of shopping visits by current customers, Mr. McCoy and Retail Forward sees a continuing and growing emphasis on food. He also believes that dollar stores and other small box value retailers will place greater emphasis on retailer controlled labels, as well.
Moderator’s Comment: What do you see as the challenges and opportunities for dollar stores and other small boxes with a value positioning?
– George Anderson – Moderator
Some simple estimates that we’ve done at ACNielsen suggest that Dollar Stores could more than double in store count if they are able to achieve the same household to store ratio that they have achieved in their strongest market areas. While same-store-sales growth has been an up and down issue for some of the retailers in this format, we do show that this is one of the few retail formats that actually inproves in areas where Wal-Mart is strongest. Wal-Mart does not offer the convenient “in and out” shopping that Dollar stores offer. Plenty of opportunities for retailers in this format to follow along the Wal-Mart expansion path.
Growing shopping frequency and basket ring has been an issue for retailers in the channel. Dollar General’s Market Store format is an excellent example of how retailers in this channel need to adapt to address their frequency and ring problems.
I read this report a couple of days ago, and the most I could get out of it is that Dollar-type stores are reaching saturation, the biggest guys are more dominant in the channel than ever, and the novelty of the format is wearing off. Most of us could have predicted that.
To me, this format was always missing a fundamental retail mission. They began as novelty stores, and now must either continue to make a living that way or transition to something more permanently appealing. The comment in the article about re-energizing the “discovery” or “surprise” shopping element of the channel is testimony to their continued dependence on the novelty aspect, however. Concentrating more on food, as also mentioned in the article, will position them as competitors to Aldi-type stores; a better, more durable call to action.
I believe the novelty of the dollar store idea is waning. Even other retail channels that have tried dollar store formats have reported less than stellar results. What’s missing with this channel is a basic value proposition aside from price. Why will a consumer go to the store? What’s the destination category?
Other small box channels, such as the convenience store segment, have had high traffic categories like gas and cigarettes to pull in consumers, and as margins on those categories have deteriorated, they have made adjustments to their mix to include higher margin items like fresh food. I expect the dollar store channel to begin to look for new categories like food or under perform the rest of the industry.
There are at least 2 measures of performance: profits and sales.
Even if the sales continue to grow beyond inflation, the profits will decline. The rate of store expansion is too high right now compared to market potential. Of course, if the location growth slows down, due to bankruptcy (Amazing Savings) or consolidation, decent returns on investment may be sustainable.