|
|
Top Dollar
Dramatic dollar store growth generates interest from other channels.
By Jennifer Korolishin
Dollar stores are a bargain hunter’s paradise, stocked with items ranging from toys to shampoo to window cleaner, all for just $1. Once thought of as purveyors of lower-quality merchandise, dollar stores are now a mainstream phenomenon – one that’s so successful, it’s challenging even the biggest retail players and prompting other channels to get in on the act.
In the last five years, the top 10 dollar store retailers have collectively added more than 7,000 stores. A recent report from the consulting firm Retail Forward, Inc., projects dollar store sales will continue growing at an annual pace of 6.2 percent through 2008.
"The small format value retailing sector is on a rapid expansion trail and market saturation is more than a decade away," says Retail Forward Vice President Sandy Skrovan. "We expect market leaders to continue their rapid growth course, extending their appeal as a convenient, easy-to-shop value alternative to big box stores."
Better product offerings, combined with a slumping economy and rising prices for necessities like housing and gasoline, have influenced the surge in popularity for the dollar store/value channel as many consumers try to stretch their dollars further.
"There was a stigma attached to dollar store merchandise – the ‘you get what you pay for’ mindset that if you’re buying it cheap, the merchandise is of lower quality," says Dell Holden, director of retail relations for the Dollar Store Expo, the channel’s annual trade show. "Today, if it’s a great dollar store operation, it’s going to have a mix of products that includes national brands, private label and closeouts. That mix has spurred the growth of interest in the channel."
A wide range of product categories sell well in the dollar/value format, including basic household items about which many consumers are not brand-conscious, such as trash bags, window cleaner, lunch bags and bug spray. According to Retail Forward, the merchandise mix at Dollar General, one of the channel’s leading chains, was 61.2 percent consumables; 12.5 percent home products; 16.8 percent seasonal; and 9.5 percent clothing in 2003.
"Many consumers look to dollar stores to attain ‘good enough’ products across such categories as greeting cards, paper products and household cleaning supplies," says Skrovan. "Shopping dollar stores and other small format value retailers is now fundamentally a mainstream phenomenon."
In addition to offering everyday items at a low price, dollar stores provide consumers with variety. Quick merchandise turns create the feeling among consumers that there’s always something new, which in turn fuels the channel’s expanding appeal.
"In the early stages of dollar stores, many people thought it was primarily for low income shoppers," says Holden. "Now, it’s hitting on all levels of income. Even those with higher incomes are finding it’s a great treasure hunt. There are psychological factors involved – it’s a sense of discovery and the elation of walking out of the store and feeling like you got a great deal."
Potential for other channels
Observing dollar stores’ success, other retail channels are now emulating the dollar/value trend in an effort to attract customers. Mass merchandising behemoth Wal-Mart is testing a "Pennies-n-Cents" program in 20 stores, while Target stores unveiled a "1 Spot" dollar section last year, in which product lines are rotated every six to eight weeks . Kroger, the country’s largest supermarket company, is testing a dollar merchandise concept in its Denver- and Houston-area stores. Albertson’s now features "10 for $10" deals on fresh foods, dry grocery and general merchandise across all its banners. And, as evidenced by the addition of a dollar aisle to the 2004 NACS Show, convenience stores are experimenting with dollar store merchandise, including the Exxon Mobil, Speedway SuperAmerica, RaceTrak and Miller Oil chains.
"The selling point to the convenience store, in my opinion, is basically the store has to realize that it’s a perceived value for them because their customers are looking for these items," says John Ewald, vice president of operations for Dittman-Adams Company, a West Chester, OH-based distributor. "Say they pay 75 cents for an item from me and they retail it for a dollar, they’re making their quarter on the dollar, which isn’t a bad return."
Dollar store merchandise is attractive to other channels in a number of ways, including helping to create a new destination stop inside an existing store, increasing its shopper base and driving shopping frequency. But price is what attracts customers and gives dollar stores a competitive edge.
"If you put in a dollar program and you don’t have quality product, you’re not going to get repeat sales," says Ewald. "It’s about convincing the customer that it is a quality product. The fact that this item sells for a dollar doesn’t mean that it’s any less. These companies aren’t spending the money on the packaging or advertising, and that’s why they’re so successful. They don’t need to advertise. Price is what’s selling those products."
But, for channels outside the traditional dollar store arena, the decision to offer dollar/value merchandise presents a number of challenges.
"In other channels, I think the critical piece is ensuring the consistency of the goods and getting the right mix of products that complements what they’re already doing," says Holden. "By doing that, not only do they attract a new consumer with the offering, but they’re also appealing to an existing consumer from an added-value standpoint."
Finding the right distributor or wholesaler is the key to dollar/value success. When non-dollar store retailers begin carrying dollar/value merchandise, it can be challenging to identify the appropriate product mix – a concern with which distributors can assist.
"Distribution is a big issue. Some retailers buy on a major volume level, but then you’ve got those smaller chains that can’t meet a certain minimum with their orders," says Holden. "Suppliers are reluctant to break down on cases and SKUs to ship to these multiple locations. That’s where the distributor benefits directly. They’re able to take stock, break it out at the DC and drop ship to the multiple locations."
Smaller-format retailers like convenience stores are also faced with a lack of shelf or floor space in which to experiment with dollar/value merchandise, making it a greater inventory risk.
"Reward comes with risk," says Holden. "I don’t really know how much of a risk it could be to dedicate X amount of linear feet to setting up a program that’s high volume and quick turn. There’s a lot better sell-through on dollar products than mainstay products and there’s a better shelf life."
Despite the challenges dollar store merchandise can present, it’s also a significant opportunity for other channels. According to Retail Forward, 36 percent of all U.S. households regularly shop the format on a monthly basis.
"If retailers are presenting a dollar store offering, they’re going be able to compete with the mass merchandisers because it’s going to attract the consumer," says Holden. "Retailers are always looking at what the next guy’s doing and trying to be innovative. If retailers roll out a dollar/value program and tweak the merchandise as they go along to suit their consumer, they’re going to benefit."
For convenience stores and other channels, finding items that resonate with customers, turn quickly and sell at a profit is critical to success. Often that means purchasing smaller quantities of selected items at first and adjusting those quantities according to sales.
"Retailers’ customers are looking for these types of things, and keeping customers happy is the biggest part of this trend," says Ewald. "It’s almost become somewhat of a necessity to have a small dollar store set in a convenience store. It gives the store an opportunity for an additional ring. It may not be the biggest ring, but the store’s making a decent margin on that ring."
For distributors, Ewald advises making dollar/value programs as turn-key for retailers as possible by presenting a full selection of items that can be merchandised together. It’s important to have a plan for what the dollar store set should look like, how much space is needed and where it should be placed in the store.
"If you go into retail accounts and offer them a $1 dish soap, they’ll put it next to the other ones they carry and you’ll get a little bit of movement on it," says Ewald. "But if you take an area of the store and set it with dollar store items and draw their attention to that section, that’s where you’re going to get better turns out of your products."
While dollar stores now feature items priced at up to $10, Dittman-Adams believes that sticking to a $1 price point for all items in its program contributes to its success; it’s clearer for consumers, especially in a small merchandise set, and it’s easier for stores to administer.
Additionally, Ewald cautions distributors to pay close attention to sizes when buying dollar store merchandise. For example, window cleaner may be available in a 22-24 oz. bottle, or a 32-33 oz. bottle. "Size does matter to retailers," he says. "There’s more perceived value for that dollar with the bigger size of the product."
Holden echoes the sentiment that distributors are critical to program success. "It’s all about getting your product on the shelves, getting a turnaround and having a consistent supply," he says. "That’s where I think the distributor plays a big factor in our channel – ensuring that the retailer can rely on the products coming in regularly and consistently for them to have a successful program."
As for dollar stores’ prospects for continuing success, Holden says, "It’s part of the American consciousness now. I think people value their dollar much more so than in the past. With everything that’s going on in the world, you don’t know from one day to the next what will happen. All of that plays into the success of the channel, and the consumer responds. Everybody wants great value at a great price. That really sums up the dollar store industry."
Jennifer Korolishin is a Philadelphia-based writer and editor with extensive retail and food industry association experience.
 |
|
