Dollar Stores: Getting More Bang From the Buck

Dollar stores won Walmart customers during the recession — and plan to keep them

  • Brian Ulrich

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    This is stuff people need, priced attractively to draw traffic to the stores. Eight years ago, about 60% of Dollar General's product assortment consisted of consumables. And now about 78% of those products are national brands: Tide, Bounty, Crest, Coca-Cola, Cheerios. "National brands give us legitimacy with our trade-down customer," says Mary Winn Gordon, vice president for investor and public relations at Dollar General, a $12 billion company based near Nashville with 9,273 stores in 35 states. "And our core consumer is aspirational and wants to see those brands." Yet Dollar General's fastest-growing customer segment is households making more than $70,000.

    Dollar General has also been a bright spot for private-equity firm KKR, which bought the company in a 2007 leveraged buyout for $7.3 billion. A number of private-equity firms have gotten burned by such buyouts in the past three years, but KKR installed a new management team at Dollar General that took a more scientific approach to analyzing neighborhood demographics so it could optimize new locations. Dollar General also took advantage of the soft real estate market to open 250 new stores in 2008, 500 in 2009 and 600 this year. And all its stores are selling more merchandise. At the end of 2007, Dollar General sold $165 per sq. ft. (0.09 sq m) of real estate. By end of the second quarter of this year, sales jumped to $199 per sq. ft., a 21% increase. The company went public again in November 2009. The stock is up some 33% since the offering.

    Over the past few years, all the dollar stores have become more competitive: they're brighter, more organized and easier to navigate. Dollar General and Family Dollar, for example, have raised signage in newly renovated stores so shoppers can map out their trip with a quick upward glance. They need that kind of guidance, as these low-cost chains can't afford many customer-service reps. The stores have also become less scattershot and more strategic in how they're laid out, moving high-traffic items like paper towels to the back, for instance, to force shoppers to peruse the higher-margin seasonal stuff too.

    These moves are helping dollar stores mint record profits. In early December, Dollar General announced a 68% rise in quarterly profits over the previous year; Family Dollar earned $358 million for the fiscal year that ended in August, a 23% rise. From February 2010 to the end of October, Dollar Tree netted $234.8 million, a 149% increase over the same period four years ago.

    How can stuff that sells for a buck or two earn so much? Just set up shop in lower-rent areas, source some stuff to China and other cheap places, and keep the store size manageable. Dollar Tree stores are 8,580 sq. ft. (797 sq m) on average; Walmart discount stores average 108,000 sq. ft. (10,033 sq m), while the Supercenters are some 185,000 sq. ft. (17,187 sq m). The small-box stores offer a narrower selection of items, holding inventory costs down. The key is item velocity. "We can make good money on an item we sell for a dollar," says Howard Levine, the CEO of Family Dollar, from his office near Charlotte. Potential locations for new distribution centers are tacked on a map on his wall. "You just don't make a lot of it unless you sell a lot of it. We have 6,800 stores. If you sell one item a week in 6,800 stores, no matter what the price point, you've got a lot of velocity there."

    More than the Poor

    Can anything slow these stores down? Dollar stores face the occasional public relations mishap that comes with selling lesser goods. The asphyxiation deaths of two boys prompted a government recall in May of a toy dart gun sold at Family Dollar. At Dollar Tree, I picked up a $1 plastic football for my 2-year-old son. After he carried it around for a couple of days, an air bubble emerged, like some kind of abscess. Afraid it might explode in his face, I tossed it into the trash.

    The more pressing challenge facing these stores, however, is to keep shoppers from trading back up to higher-priced outlets as the economy rebounds. Despite their improvements, dollar stores can still carry a stigma. "We have to disrupt the perception that we don't have quality, we don't have national brands," says Don Hamblen, senior vice president for consumer marketing at Family Dollar. The message seems to be getting through. According to Dollar General's research, for example, 95% of new and existing customers say they'll keep shopping at the store after the economy improves. "We know customers are only saying this," says Winn Gordon. "But cut it by whatever percentage you want to, it's still a pretty darn good number."

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