Stores Give Customers More for Their Dollars
Dollar stores are looking to attract consumers who may not have previously considered shopping in one of their stores.
Chains and independents are spending money on remodels and training employees to raise the level of customer service. Store operators see this as a necessity to attract and retain high-income shoppers. More than one-third of the consumers shopping in the channel have annual household incomes above $50,000, according to Retail Forward.
Major chains such as Dollar Tree are opening larger stores that, according to a Gannett News Service report, “often resemble CVS’s newer stores in their layout, bright lighting, careful organization and wide selection.”
Product selection has become increasingly important with a number of dollar stores expanding their inventory of food products, particularly in the frozen and refrigerated departments, to drive more frequent store visits.
One of the challenges dollar stores are currently facing is the rise in oil prices. Not only do higher prices at the pump reduce the amount of money the core dollar store consumer has to spend but increases in petroleum prices put upward pressure on the costs of goods.
Edward Conte, who owns The $1 Limit in White Plains, New York, said he is seeing more stores selling items for more than a dollar. “Everything anyone sells is connected to oil — the packaging, the plastics, everything,” he said.
Discussion Question: What do you see as the primary challenges facing dollar stores and how do you see the channel evolving in years to come?
I don’t think anyone expects dollar stores to upgrade their personnel to offer better service. That’s the unfulfilled dream of every low-end retailer; that their minimum wage personnel will somehow magically be transformed and move a step up in class.
The biggest challenge I see for dollar stores is a shrinking dollar due to inflation.
Dollar stores are an excellent place for low-income, cost-conscious families to shop because they can keep their limited shelf space stocked with the necessities without breaking the bank.
As these customers become more affluent and have more living space, I think they become willing to tie up their cash in a six months’ supply of paper towels, by gravitating toward warehouse clubs for their bargains.
Just a point or two. I once had a conversation with Herbert Haft, who many of you know was the first to do discounting in drug stores.
This point was that the people best at shopping and saving money aren’t “poor people” but people with money.
So there is room for dollar stores to move up, but not in terms of the way they think about the business currently.
Sort of like how Kmart created “Designer Depot” in the late 1970s to compete with TJ Maxx, but their stores were just Kmarts — pipe racks and stuff — in effect, and weren’t able to compete with TJ Maxx, which philosophically wasn’t born from a “dime store” mentality.
Family Dollar and Dollar Tree aren’t likely to lead the foray into an upper-scale market.
Plus, my third point is that in a way dollar stores are merely the recasting of the old variety store (Kresge, McCrory, Woolworths, etc.).
The dollar stores I’ve visited recently seem to be undermining their appeal (in my opinion) by having a variety of price points — as much as $10. Of course, I realize the five-and-dimes priced higher than a dime, too.
The proliferation appears to be less from growing numbers of Family Dollar and Dollar General locations than from a great number of independent outlets. It’s a format that’s easy to copy. Of course, there will be a shake-out soon — reminiscent of when everybody was opening a video rental store.
The move to fresh food is key to any further growth for the channel. The higher-income people they’re attracting are using the stores as a fill-in strategy to save on full-blown shopping expeditions, something most of us don’t have the time for anymore. It takes some ingenuity to find products that meet the price criteria (too much price drift will eventually drive away core consumers), but a quick visit to the PLMA show is all you need to see how hard the food industry is working to come up with products that meet the price point.
I like the entire concept of the stores, and the newer chains are attractive, fun places to shop. And the non-continuous segment of the industry, like Big Lots, are actually a blast to shop.
Another growth strategy that might be effective is finding different locations. I’ve noticed that some of the chains in the West are now locating in rather attractive settings, usually strip malls on major routes. That really improves the convenience factor, which presumably offsets the somewhat higher rents. From my observations, these newer chains also seem to be doing a lot better in-store traffic and average ring. Perhaps it’s time for some of the more established Eastern and Midwestern chains to experiment with this strategy.
I’m most interested in what Dollar General is doing with its Market stores. I know the managers of these stores are enthusiastic about their performance, but the base is still way too small to figure out if it’s a winning strategy. It’s sort of the dollar industry’s version of Wal-Mart’s neighborhood market stores, and it will be interesting to watch the concept’s evolution.
One of the problems Dollar General faces, more so than Family Dollar, is sloppy stores, poorly maintained – especially compared to true dollar stores like Dollar Tree, 99c Stores, Deals, etc.
I think it is interesting, too, that some independent hardware stores are adding dollar items to their inventory as a way to build store traffic and get more repeat visits. Some of these stores report outstanding results because the constantly changing inventory mix attracts customers. And their locations are convenient and generally in better locations than dollar units located primarily in low-income, second-use locations.
The greatest obstacle I see for Dollar Stores to attract upper income customers is their store location. The store locations I have observed are in lower income areas. Low store rent is an important element in this format’s business model. Higher income shoppers generally do not drive to lower income areas to shop except for special purchases. For the Dollar format to replace the old five & dime, they will need to place stores in middle income areas.
Two best things dollar stores could do: (1) merge and (2) stop building new locations. The industry is way too competitive, and further investment isn’t likely to be productive. There’s a good reason both Dollar General and Family Dollar stock are three-fourths the price they were 5 years ago. This category can’t be rewarding with the excess number of players and locations. And what good is innovation if it can and will be copied by anyone in 5 minutes?
There is a store in the mixed use mall attached to the Place du Justice in Montreal which embodies the best of the dollar format. Assortments are carefully managed. While there is some breadth within a segment, there is almost no overlap. They have one kitchen spatula, for example, not six. The store is clean, densely stocked but not crammed, well enough lit, and there are sufficient check outs.
Most of the merchandise is private label, with a layer of branded closeouts. The assortment cycles: the kitchen spatula isn’t there all year round, it’s replaced by a set of kitchen spoons. The pricing is not limited to the equivalent of a US dollar…but everything shrieks “value,” which is what the format is about.
The future of this format is in a focus on the elements valued by the core customer, not in going after higher disposable income customers. Densely merchandised shelves are a requirement. Extremely efficient assortment planning is a requirement. Sophisticated labor projection and labor planning is a requirement. Minimum standards for cleanliness and store appearance are a requirement.
Look…McDonald’s did this decades ago. It CAN be reduced to a formula, with carefully designed processes, supported by technology, and then strictly adhered to through business performance monitoring.
Dollar stores want to attract high-income shoppers. Hmmmmmm – an oxymoron if there ever was one.
Here’s the trap as I see it. In the effort to reach the above goal the likelihood is that you’ll destroy the whole appeal of a dollar store. Fancy counters, more highly trained staff, new lighting, etc. look like good things to do but that’s not what a dollar store is. Gosh – one of these days they’ll do inventory!
Harold’s restaurant in Cave Creek, AZ is in desperate need of new booths (if you sit down hard the whole booth moves); chairs (you’ve got to hunt for one with all four legs); and table cloths (they’re old torn vinyl cloths you hope no one ever sends to a lab – they actually have their own DNA) This place is packed because of the above.
We have a condo on the beach in Rocky Point, Mexico. There is a wonderful strip we call Shacks Fifth Avenue with fabulous artisans selling everything you can think of. AND it’s on an old dirt road with few places to park. With more Americans discovering the place, they’ve decided to PAVE the road and put up actual stores! Now that’s super for the folks that live there…except that business will probably drop. And what do we call the strip now? There’s also a new restaurant where they take credit cards and give you a vibrating thing that tells you your table’s ready. That’s just not right.
The point is you should always know the REAL appeal of your business and in the effort to increase business and be like someone else, be careful you don’t destroy it.
The Dollar Channel has exploded over the past several years, and has also evolved from a segment catering to low income, pay by cash only with the average basket ring below $10 to a focus on more upscale, diverse offerings with a much wider selection and higher SKU count. Their operating cost structure under the original model will change with their expanded assortments, and it will be interesting to see if they can enhance the basket ring to offset the operating cost to maintain net store profits. The (3) key elements that this strategy must overcome is improved handling of shrink, staffing the stores with more professional, higher paid managers and employees, and product selection diversity while staying true to the dollar price point format that made them attractive. Operating overhead WILL GO UP, so driving share and basket ring per transaction must be their #1 priority. A classic case of the chicken and the egg.
Dollar needs to keep refreshing their product and offer service, service, service. Each time I have been in the store, I have had to wait for 1 or 2 cashiers to take care of all of the customers. Until they correct this issue, they will not be able to keep their customers, let alone attract new ones. Their customer base demands value, but they also have a time factor to consider.
It was my “prediction” from the start that as Dollar Stores began to mature the need would arise for an infrastructure of support to effectively manage inventory, space and people. In essence, what began as “Everything for a Buck” has become “Everything Inexpensively.”
From staff training to product assortment planning and shelf strategies, this channel will continue to go through significant change. Perhaps the realization that the average shopper in a dollar store environment is not low-income, but above national income averages, suggests that the shopping experience must meet their expectations. I’m not suggesting that they cannot continue to focus on the ‘treasure seekers’ interests, but I do believe that a disciplined approach will separate winners from losers. We are already seeing market saturation in certain areas and the need for differentiation within the channel. I can imagine retailers seeking outside assistance with staff training, space management and retail pricing rather than building an internal hierarchy.
Time will tell…and customer demand will quickly identify where the “dollars” will go.