Rebound Won’t Slow Down Dollar Store Growth

Discussion
Jan 04, 2011
George Anderson

By George Anderson

The theory that the Great Recession has changed American
consumers forever, creating a perpetually frugal shopping population almost
regardless of income level, is going to be put to the test as the economy continues
to rebound. Perhaps the greatest laboratory for this test will be the dollar
store channel, which has experienced rapid growth in recent years.

Certainly,
there are many who expect the channel to thrive. Laura Champine, a retail analyst
at Cowen & Co., is among those who see dollar stores growing
despite a rebound in luxury categories in recent months.

“We didn’t expect to be promoting the stocks of the discounters at this
stage of the recovery,” Ms. Champine told Time magazine. “This
reflects the high unemployment levels and a value-focused consumer. Usually,
we’d be recommending the growth-oriented retailers, not the bottom feeders.”

Dollar
store chains are certainly bullish on their own prospects. Dollar General,
the nation’s largest chain in the channel, announced yesterday that it would
open 625 new stores this year including locations in three states, Connecticut,
Nevada and New Hampshire, where it has not previously had a presence. The company,
which also plans to remodel 550 other locations, expects to add 6,000 store-level
jobs in 2011 as it expands.

The chain has grown by increasing its emphasis
on everyday staples such as grocery items and household products.

Dollar General,
which currently operates more than 9,000 stores, said in August it was looking
to add beer and wine to its product selection with a goal of selling the alcoholic
beverages in at least half the locations it operates. The chain sought to boost
toy sales in its stores over the recent holiday selling season by offering
a 10 percent discount on bulk toy purchases of $250 or more.

These strategies may have brought in higher income shoppers, but will they remain loyal to the channel?

“For the second year in a row, 95 percent of our trade-down customers are saying that, regardless of what happens to the economy, they’re going to continue to shop with us,” said Rick Dreiling, CEO/chairman of Dollar General Corp.

Competitors in the
dollar channel are also growing.

Family Dollar Stores, the second largest chain
in the channel with roughly 6,800 stores, saw comparable store sales grow 6.1
percent for the quarter ending August 28. Total sales were up eight percent
for the period.

Dollar Tree, with just over 4,000 stores, bought its way into
the Canadian market with the acquisition last year of Dollar Giant and its
85 stores.

Discussion Questions: Do you subscribe to the “new normal” theory
that says consumers have been permanently changed by the Great Recession?
What do you think of the prospects for dollar stores as the economy continues
to improve?

Please practice The RetailWire Golden Rule when submitting your comments.

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17 Comments on "Rebound Won’t Slow Down Dollar Store Growth"


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J. Peter Deeb
Guest
10 years 4 months ago

I believe we have a new normal in several areas including the continued growth of this channel. Shoppers who never entered these stores were pleasantly surprised by the quality of the products and will continue to shop this channel. There are many items that can be purchased at a great value and now have proven performance. The other area of new normal will be store brand sales. Consumers have learned some valuable economic lessons the past two years.

Dan Berthiaume
Guest
Dan Berthiaume
10 years 4 months ago

Like any trend, dollar store popularity will inevitably cool at some point. However, I do believe there is a “new normal” where consumers take pride in hunting for the best possible bargains, rather than feel embarrassed as they might have in the past. To some extent traditional retailers and brands have helped create this new normal by drastically lowering prices and making once-premium brand names available in discount and mid-level department stores.

Paula Rosenblum
Guest
10 years 4 months ago

The best analogy I can think of to this story is the rise of TJ Maxx and Marshalls during the last great recession (or maybe that was two recessions ago, I lose count!).

Those chains exploded during the Reagan recession, and continued to maintain a valid business model, although Marshalls lost its way and ended up getting acquired. As long as the dollar stores keep their business models intact, they should continue to do reasonably well…just not meteorically so.

Richard J. George, Ph.D.
Guest
10 years 4 months ago
While customers may be suffering from “frugality fatigue” they will continue to pursue value. However, my definition of value is not simply quality divided by price. The definition that will be operative going forward is benefits received divided by burdens endured. In other words what do you get and what do you have to give up? Dollar stores increased emphasis on refrigerated foods and beverages makes them a natural competitor to convenience stores, offering convenience store items without convenience store pricing. In addition, dollar stores will continue to take center of store sales from traditional supermarkets. Also, Walmart and Target will continue to find dollar stores locating in relative proximity to their stores. Dollar store formats are probably the one channel that continues to prosper in light of these two giants. Dollar stores represent “ankle biters” to Walmart and Target. Finally, keep in mind, that as the economy improves, some people will still need to save money on items found in dollar stores. However, everyone likes to save money. Continued innovation by dollar stores will… Read more »
Kevin Graff
Guest
10 years 4 months ago

I’m pretty sure that if you look back through old media reports from recessions in the past you would find ‘profound insight’ that consumers would be forever changed and more frugal. Of course, that never came to pass in the past so I have a hard time believing it will happen this time. People are aspirational by nature, and when able, will strive for something better.

Current sales evidence supports my view: Porsche Canada just had its best sales quarter ever. Luxury retail posted good sales growth last year. Most every mid to higher-end retailer I know and work with had a strong Christmas selling season.

What we are faced with is a more aware and knowledgeable shopper. That was driven in part because of the economic downturn, but its also driven by technology and social media.

Bill Emerson
Guest
Bill Emerson
10 years 4 months ago
There’s no question America has become more frugal. With double digit unemployment, some have no choice. More interestingly, the family savings rate has gone from -1% (2008) to around 4%. This is the factor that, in my view, speaks to the question about a “new normal.” Even so, in the ’70s, the savings rate was around 12.5%. This is largely attributed to a generation raised in the Great Depression who had fought in WWII. Has the continuing financial uncertainty affected a generation? That remains to be seen. Will the Boomers, as they begin to enter what used to be called retirement age, continue to be frugal? They watched helplessly as their two biggest assets–401K and home–lost over 40% of their respective value in a few short months and, two years later, have recovered only a fraction of that value. They’re looking forward to massive increases in health care and drops in Social Security benefits. Are they going to be more frugal? Only if they have any sense. Demographically, Gen X is significantly smaller in size… Read more »
Max Goldberg
Guest
10 years 4 months ago

To most Americans, the recession is not over. As such, consumers continue to seek ways to stretch the purchasing power of each dollar spent. Dollar stores are a great way to do this. Expect these stores to continue to have strong sales throughout 2011.

Steve Montgomery
Guest
10 years 4 months ago

The new normal for this channel is yes, some of their current “trade down” customers will continue to shop there when as the economy continues to recover. Part of this is driven by the new frugality in these consumers and the other is that the product mix in these stores is changing. As this channel continues to add products such as beer and wine and secure more consistent sources of product, they will continue to become a stronger competitor to all the channels that sell similar items.

Liz Crawford
Guest
10 years 4 months ago

Whether the Dollar Store trend will continue upward, or onward, will depend in large part on real estate.

While the quality of the products, and certainly the prices are pleasing to new shoppers in the channel, there remains a negative: location. In some cases Dollar Store locations are perceived as not quite as pleasant or safe as other alternatives. Here I don’t necessarily mean the store itself, but the parking lot or strip mall. Shopping experience becomes a bigger consideration as income rises.

Further, Dollar Stores aren’t always as conveniently located for slightly higher income demographics. While trading down may be worth driving a little farther in a recession, it may not be as worthwhile after the recession has abated. Then the price-value of time increases, and convenience becomes more valuable.

Ed Rosenbaum
Guest
10 years 4 months ago

There is a new sheriff in town and its name is watch how you spend your money. We learned and continue to learn that when there is a way to purchase the same items for considerably less, we are going in that direction. Do we think Walmart, Target or Kohl’s sales will decrease as the economy turns? Absolutely not. So why would we think sales will decrease in the Dollar Store silo? We are not that far from seeing luxury cars in their parking lots.

Doug Stephens
Guest
Doug Stephens
10 years 4 months ago

The American condition and thus the retail market is continuing to polarize economically. So, whether it’s dollar stores or some other evolving format, someone will cater to the lower end, price-driven commodity goods market.

The word “permanent” is tricky but I think it’s safe to assume that some consumers will carry the emotional baggage of the recession for many years. The net effect will be a more discerning, discreet and deliberate shopper. Ultimately this reality raises the bar for all retailers, including dollar stores.

Mel Kleiman
Guest
10 years 4 months ago

The economy may be getting a little better but for the hourly workforce the prospects are not good. We still have almost 15% unemployment among many minorities and undereducated workers and this number is not going to get any better for a long time.

The economy is not dealing with cyclical change, it is dealing with structural change which will support the continual growth of the low-cost retailer.

Ben Ball
Guest
10 years 4 months ago
We do not have a “new normal.” We never have had. We have only the “same old normal” that has always been with us. Consumers are more than happy to buy the necessities of life in a place that sells them for less. They always have been, regardless of the economy, and they always will be. The examples of T.J.MAXX and Marshalls growing during previous recessions are good ones–but what about the greatest “bottom feeder” success story of all–Walmart? Sam Walton never said that people would shop at Walmart because they were poor or because they were in a recession. He said they would shop at Walmart because it made sense to people–regardless of their economic station in life–to save money on necessities so they could afford a few more of life’s luxuries. And David Glass said (I believe in the ’90s) that the greatest threat to Walmart was the dollar store. All we are seeing is the insight of two of America’s great retail visionaries playing out exactly as they said it would. It’s… Read more »
Daryle Hier
Guest
Daryle Hier
10 years 4 months ago

The artificial economy will be value-conscious for some time. A consumer’s savings is their 401 and since that has blown up and doesn’t look promising anytime soon, a vast majority of people will be very dollar-wise, so yes, the dollar stores will be strong for a long time. Plug in the fact that real estate is still going down (no nest-egg) and unemployment is strangling any real recovery, most consumers will continue to be frugal.

Craig Sundstrom
Guest
10 years 4 months ago

The Old Normal, which lasted for 53 yrs 10 mos and 2 days… there was, of course, never a “normal”: everything changes, is really one of the few constants in life; and one of the other constants is that there are, and always will be, poor–or at least poorer–people…however, much the rising tide (of an improving economy) may float most boats, there are still plenty of others stranded on the mudflats somewhere.

Lee Peterson
Guest
10 years 4 months ago

Warren Buffett has famously said, “price is what you pay, value is what you get,” which simplifies it all. So, if you really believe you’re getting something better from the Dollar stores, that’ll be your destination going forward. But I believe things are better all around.

As an example on the other side of the Dollar world, I was in three regional malls this past month, one a streetscape mall and the other two more traditional. All were packed and registers were lined up ten deep. Macy’s was packed, Abercrombie was packed! Yeah, it was Christmas, but I was in those same malls two years ago when no one was there.

So, hopefully, it’s a win-win all around.

Mark Johnson
Guest
Mark Johnson
10 years 4 months ago

I think we lack the historical and empirical data to determine if there is a new, old, or teenage normal. I think Dollar Stores going upscale could be a treat to those who have the time, and are value conscious. I know that there are group of people (me included) that prefer the service of Kroger’s and their “commitment” to engagement and loyalty. I do not shop that often, but the thought of going to 7 different stores has little if no appeal to me.

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