Family Dollar Hurts Along with Its Shoppers
By George Anderson
Howard Levine, chairman and CEO of Family Dollar Stores, will be the first to tell you that the company’s success is the result of its focus on low-income and value-conscious consumers.
But even as government statistics point out that there are a growing number of consumers living at or below poverty level, the realities of high-energy prices have left those with little even less to spend at stores such as Mr. Levine’s.
Nick McCoy, a senior consultant at Retail Forward, told The Associated Press that Family Dollar is not alone. “All of these chains have had more difficulty achieving same-store sales,” he said. “The economy had a lot to do with it and their core customer was hit hard by higher fuel costs, so they delay nonessential shopping trips.”
The resulting slowdown in sales, combined with higher than expected costs to upgrade stores, has caused Family Dollar to cut back its urban initiative.
Back in 2002, the chain made the decision to focus on urban markets with populations of 200,000 or more. The idea was to build new stores in underserved communities and remodel existing units in those communities.
Unfortunately for Family Dollar, “The program turned out to be more expensive than they anticipated when they first rolled it out,” said Mr. McCoy.
The result has been that Family Dollar has decided to slowdown the initiative.
Anthony Chukumba, an analyst with Morningstar, said Family Dollar had the right idea but simply didn’t execute. He cited problems with meeting zoning requirements and underestimating losses it would sustain due to shrink once stores opened.
“I think Family Dollar still has good concept, offering lower to middle-income consumers compelling values in convenient locations,” he said. “Their business model is definitely not irreparably broken, but they need to take steps to repair some of the mistakes they have made.”
Moderator’s Comment: What is your assessment of the top dollar store chains? Where do you see opportunities for these businesses to grow?
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George Anderson – Moderator
I’m not convinced I accept the concept that rising energy costs have an impact on socio-demographic customer of Family Dollar, because their business model is based on the concept that their stores are considerably closer to the customer than W-M or Target. In most cases, the Family Dollar Store is within walking distance of their customer, or a car ride shorter than the convenience store (CS).
Yet, the CS growth is double digit during rising energy costs because they are proving that consumers will pay more for convenience, than to drive for price on small purchases and convenience prepared foods.
Shrinkage is as big a problem with CS as it is with Family Dollar Stores, and the cost of store labor is equal.
So what may be the opportunities for Family Dollar Stores ?
1. A greater investment in shrink management. Invest in EAS, CCTV, enforcement and prosecution.
2. Product mix. If the consumer is increasing his frequency to the CS, Family Dollar Store should look at the CS product mix. Like W-M and Target, could it be in food items and Direct Store Delivery (DSD)?
3. While Family Dollar Store may have a heavily automated distribution operation, the SG&A cost of Supply Chain is much greater than a CS or a W-M. While Family Dollar is investing in Supply Chain, their Supply Chain concept is rather like Circuit City vs. Best Buy. While Circuit City may consider themselves innovative, Best Buy succeeded in delivering store stock at a cost 40% lower than Circuit City.
4. Store inventory. Consumers going to Family Dollar are end destination customers. They are looking for basic purchases. If the Family Dollar Store is out of stock, the customer must go elsewhere… most likely the CS. If the CS is located within the proximity of Family Dollar store, and the CS sales per SF is increasing double digit, could it be the Family Dollar Store customer finds the product mix and product availability better at the CS?
The 4 items above are relatively easy to correct:
Shrink management
Product mix
Change in Supply Chain Management
Improved store inventory management
Did I read the comments correctly from Mark Lilien of the BrainTrust? He is advocating the hiring of illegal aliens as a franchising strategy?
There’s a time and a place for everything but over saturation becomes a modifier. Who among us believes that shoppers in today’s dollar stores would continue to shop in them if their personal fortunes were to improve? Thus what’s their uniqueness beyond cheap prices for those who rely on cheap prices?
Dollar stores serve an important need with many consumers who have an important need for low-cost merchandise; low-cost merchandise that isn’t otherwise available at corresponding price levels from numerous other “discount-type” merchants with perhaps more shopping ambience. That takes me back to over saturation. Is it possible that there’s are just some many dollar-type stores you can stuff in the shopping environment bag? But now a word of caution: Before you place your bet, reflect upon the possibility that I may be wrong.
The number 1 problem dollar stores have? Too many dollar stores. The stronger chains should merge and stop building locations for several years. Comp sales always get lousy when there are too many locations. And I agree with Santiago Vega: franchising the locations will make the business more profitable. The new proprietors will have lower wage costs, since they’ll hire their families and many will will hire undocumented workers, both of which cost less. Shrink will go down because the owner will be on-site.
Just like any other retailer, dollar stores will have to buy better and procure more efficiently then they do today. So many margins are built into freight, inventory turns, and shrink. The franchise concept is an interesting proposition. Focus on a better business plan and sell the efficiencies. Dollar stores could move in front of big box retailers, before they drive out mom and pop stores, and offer the ability to compete. How American is that?
This is the same old story we here over and over again. Some chain gets this bright idea that the urban combat zones are underserved so they open a bunch of stores. Then they find out that they are getting killed on the high shrink along with the human resource nightmares. Not to mention the ridiculous zoning hoops they must jump through because all the “make work” non-profit groups want a piece of the action. Then they act all dumbfounded like they didn’t see it coming.
There is still money to be made without sticking your neck out in difficult areas. Low income households under $50,000 per year are one of our fastest growing demographic sectors. This has fueled the explosive growth of Aldi and Save-A-Lot. Just picking the right locations will go a long way to improve sales.
If dollar stores were truly offering great values they would be hopping during difficult financial times. When the genre started, they were a huge draw because there seemed to be an adequate supply of close out items with much higher values to entice buyers. Not that this comprised the entire store, but enough to make the shopping trip worthwhile.
I’m not an expert in this field, but it seems apparent to me that they have moved almost entirely into items that are specifically made to be sold for a dollar with decent profit margins built in. Consequently, no great bargains, but large spaces filled with often smaller sized or poorer quality merchandise. Even the least well-off consumers know great bargains when they see them. They aren’t seeing them at the dollar stores.
I don’t like one bit the business that dollar stores are in.
Their margins are razor-thin, they are extremely vulnerable to macroeconomic changes and they can’t compete with big box discounters that are preferred by their target market because of convenience and similar to lower prices. (convenient in the sense that you will find everything you want to buy at a big-box mass discounter such as Wal-Mart, as opposed to the only satisfactory products you can find at dollar stores in general being milk, bread and soap).
I don’t see room for long-term healthy growth keeping with their current business model.
I would turn it into a franchise business, leasing the stores to people that want to become business owners (a sort of re-birth of mom and pop stores: communities and the media would love this) with the leverage that comes from having a nationwide brand name and a large organization running back-office functions to render the individual businesses as efficient as possible.
Flying just below the radar on this topic are two trends also contributing to the publicized woes for the extreme value format. First is the net effect of supply chain improvement initiatives such as VMI, CPFR and Category management combined with recent order fulfillment problems out of China. Result: less inventory of the type this channel needs. Second is the rapid spread of dollar stores and competitive responses from other channels. Result: more supply chain demand. The future looks a bit more complicated than the explosive growth past for these merchants.
The top dollar store operators have evolved their business rapidly and have done a good job of using consumables to increase trip frequency as well as ticket size.
The key strength of dollar stores is their positioning as a hard discounter, i.e., a positioning that will become even more powerful in the years ahead regardless of where we are in the business cycle.
Their opportunities to grow turn on three factors:
>The power of their business model to deliver competitively low prices while generating an adequate profitability. This will be largely determined by assortment decisions and supply chain productivity.
>The ability to maintain and sharpen their market positioning and branding so they’re clearly perceived as a clearly differentiated offer that doesn’t compete directly with other key retail players in the market.
>A category management infrastructure that allows them to fine tune and ultimately optimize both the variety and price components of their offering.
This article is, to be blunt, nonsense.
AP is trying to tell us that a retail category that appeals to the lowest economic sector is hurting because the economy is BAD?
That explanation seems strange on two levels. One is that the economy is doing great (growth is currently running at about 3.6%), and the other is that the lowest-priced categories of retailing should benefit when the economy is down. Doesn’t it seem more likely, then, that the dollar stores are hurting because the economy is doing well?