By Jerry Soverinsky
Across the country, more and more convenience stores are keenly aware of the emergence of dollar stores, which are expanding deliberately and confidently while generating solid performance numbers.
While the size and scale of dollar stores seem at first glance inconsequenÂtial to an industry that grossed more than two-thirds of a trillion dollars last year, planning ahead is not just good strategy; itâ€™s essential for long-term growth.
So while dollar stores may trail far behind your current pace, to the extent that they grab market share, theyâ€™re a legitimate concern. And getting to know what youâ€™re up against will be essential to ensuring youâ€™re fit for the challenge.
Chances are, thereâ€™s probably a dollar store already near you. With the top three chains totaling more than 22,000 locations, Dollar General (10,000+), Family Dollar (7,000+) and Dollar Tree (4,300+) have plotted deliberate growth strategies that saw their comÂbined store count best that of the top three national drug stores last year by nearly 2,000 units, according to retail research firm Colliers International in its white paper, "How Dollar Stores are Growing in a Weak Economy."
The dollar store channel total store count is miniscule compared to conÂvenience stores â€" 22,782 to 148,126, according to the latest NACS/Nielsen Convenience Industry Store Count â€" but itâ€™s significant to note that while nearly two-thirds of convenience stores are run by single-store operators, DolÂlar General, Family Dollar and Dollar Tree stores are all corporate-owned.
"Dollar stores are very different from franchise [and family businesses]," exÂplained Bill Bishop, director of research for the NACS/Coca-Cola Retailing ReÂsearch Council (CCRRC) and president of Barrington, Illinois-based Willard Bishop. "People like Dollar General are thinking seriously about the future. Whereas family-run businesses are not doing that."
Additionally, the dollar store chain leaders are all publicly traded compaÂnies and as such, they are accountable to investors for generating profits. And according to each companyâ€™s most reÂcent SEC filings, they are succeeding:
- Dollar General net sales in 2011 reached $14.8 billion, up 13.6% from 2010, with same-store sales up 6%. In the last five years, sales have increased 279%, from $3.9 billion in 2007.
- Family Dollar net sales in 2011 topped $8.5 billion, up 8.7% from 2010, with same-store sales up 5.5%. In the last five years, sales have increased 25.1%, from $6.8 billion in 2007.
- Dollar Tree net sales in 2011 rose 12.8% to $6.6 billion, with same-store sales up 5.6% in the first quarter alone. The company has reported double-digit year-over-year perÂcentage revenue growth for at least the past five quarters.
While dollar stores focus on value propositions, leading dollar stores are not one-size-fits-all. Indeed, all pursue slightly different operational strateÂgies, enabling them to thrive in distinct environments.
Dollar General stores, according to its most recent 10-K report, "are conÂveniently located in a variety of rural, suburban and urban communitiesâ€¦ with approximately 70% serving comÂmunities with populations of less than 20,000," and some serving areas with fewer than 1,500 households.
The strategy is a winning one, says Colliers, for "these are markets unlikeÂly to land even a small-format Walmart. Dollar General may compete with a loÂcal grocer but itâ€™s often the only game in town," with shoppers making freÂquent weekly trips that average less than 10 minutes each â€" sound familiar, c-store owner?
Family Dollar targets suburban and rural locations, as well as urban "food deserts," the latter which often comÂpete head-to-head with convenience stores. "Urban areas force convenience retailers to focus more on price to comÂbat competition," says Colliers, which means the mom-and-pop convenience store in a food desert is no longer the lone retail option.
Dollar Tree focuses on "strip shopÂping centers anchored by mass merÂchandisers," according to its most recent 10-K report, capitalizing on a shared customer base. As opposed to small-town Dollar General, Dollar Tree stores can be found in a range of locales, including small towns, midÂ-sized cities and metropolitan areas. While shopping trips here are lonÂger-than-average (putting them at a disadvantage compared to c-stores), according to Colliers, the chain has begun broadening its food offerings, a move that offers direct competition to convenience stores.
Most significant for convenience stores is the geographic concentration of dollar stores, which strongly overlap with states containing the highest conÂcentration of c-stores.
Dollar storesâ€™ sales growth relies on a strategy focusing on simplicity.
"One of the advantages of the dollar store is that it has a very clean busiÂness model," explained Bishop. "That model involves shipping product into the store at a certain margin â€" close to 40% in some cases, as well as rock botÂtom costs of running the store."
Everything begins with the store itself, which Dollar General says "inÂvolve a modest, no-frills building, which helps keep our rental and other fixed overhead costs relatively low."
The company leases its properties, which enables it to recognize positive cash flow "generally" during the first year of operations, while paying back capital in less than two years. "Our stringent market analysis, real estate site selection and new store approval processes as well as our new store marÂketing programs help us optimize fiÂnancial returns and minimize the risks of opening unprofitable stores," the company noted in its most recent 10-K report.
Perhaps most important, dollar store inventory is uncomplicated, which alÂlows them to keep costs low.
"Our strategy to maintain a limited number of stock keeping units (SKUs) per category â€¦ helps us maintain strong purchasing power," explained Dollar General in its most recent 10-K report, whose stores average about 10,000 toÂtal SKUs.
For Family Dollar, that number is far less â€" roughly 5,000 to 5,500 SKUs â€" which vary based on a storeâ€™s size, deÂmographic and time of year.
"The limited amount of SKUs in each category is a big advantage [for dollar stores]," said Leroy Kelsey, NACS diÂrector of industry analytics. "And with 24% of those SKUs priced one dollar or less, in terms of a value proposiÂtion, it makes them very competitive. They keep their range narrow to leverÂage economies of scale and have fewer price points to minimize labor for price changes."
Dollar General stores run approxiÂmately 7,200 square feet, while Family Dollar stores range from between 7,500 and 9,500 square feet, with an average of 7,100 square feet of selling space. (AvÂerage convenience store square footage is 2,793 according to NACS State of the Industry data for 2011.)
The small format presents direct competitive challenges to c-stores, whose customers respond to convenience.
"The important thing here to think about is that most shoppers want to go to smaller stores today because they donâ€™t have as much [money] as they used to spend, so theyâ€™re buying for shorter term, and they appreciate the convenience," Bishop said. "So because of that, c-stores, drug and dollar stores are all competing today."
Remember in 2010 when flat was the new up for convenience store retailers? Well for dollar stores, everything has been just up. From 2007 to 2010, DolÂlar Generalâ€™s net sales spiked 37%, and Family Dollarâ€™s rose 15%. While some of that lift can be attributed to expandÂed store counts, much can be explained by consumers simply looking for value. As such, dollar stores began attractÂing more affluent shoppers, expandÂing their customer base while tweakÂing their inventories accordingly. The strategy paid off, as Dollar Generalâ€™s fastest growing customer segment is shoppers who earn more than $70,000 a year. And those consumers donâ€™t apÂpear likely to trade up any time soon.
"For the second year in a row, 95% of our trade-down customers are saying that, regardless of what happens to the economy, theyâ€™re going to continue to shop with us," said Rick Dreiling, CEO and chairman of Dollar General Corp., in a December 2010 Wall Street Journal interview.
The loyalty is easily explained, acÂcording to David Portalatin, executive director of industry analysis for The NPD Group. "Post-recession, a lot of consumer change has occurredâ€¦and many of these changes include a new way of doing things," he said. "So a consumer accustomed to shopping in a dollar store is not likely to change behaviorâ€¦price and value have appeal across the demographic spectrum."
When it comes to product selection, dollar stores have traditionally purÂsued a distinct strategy from c-stores, where tobacco remains king â€" 42% of inside sales, according to NACS State of the Industry (SOI) data for 2011. Dollar stores, by comparison, have been content to stock a high percentÂage of consumable products.
"Seventy-three percent of Dollar General sales come from consumÂables," Kelsey said. "That includes paÂper plates, paper towels and dry foods." But with consumables carrying slim margins, one would think the strategy would be a losing one. Kelsey said itâ€™s just the opposite.
"Thatâ€™s where they compete, and they use their traffic to drive periphÂeral sales, which are their high-margin items," Kelsey said. "So they compete on consumables, but they build baskets on the other items."
Bishop said itâ€™s a strategy that both drug and dollar stores have adopted, recognizing its strong consumer pull. "They do that to increase trip frequenÂcy. To the extent that thereâ€™s an overlap in product offerings, then there is defiÂnitely competition â€¦ So instead of goÂing to a c-store or grocery store, [conÂsumers] go to a dollar store."
In an effort to drive basket size and expand their customer base still further, dollar stores have enhanced their food offerings beyond candy and snacks, their mainstays.
As of last January, Dollar Tree had installed freezers and coolers at 2,220 of its locations, while Dollar General launched Dollar General Market, an expanded store format that highlights food. Located in areas underserved by grocery chains, Dollar General MarÂket stores offer fresh meat, produce and refrigerated foods along with traÂditional Dollar General offerings in an expanded 16,000 square feet of selling space. The company operated 69 MarÂket stores at the end of 2011 and plans to open 40 more this year.
The build up, according to the Wall Street Journal, is "a race to become what Dollar Generalâ€™s CEO, Rick Dreiling, calls â€˜the new general storeâ€™ â€" a place where harried, frugal shoppers can get the most essential things they need at a discount without traipsing through air-plane-hangar-sized supercenters."
Kelsey said that means packed bevÂerages has also come into play, a top-five category for convenience stores that contributed more than 14% of in-store sales last year.
At least for now, though, the dolÂlar storesâ€™ effort in beverage and fresh foods is "significantly underdeveloped," Portalatin said, while only "about 10% of consumers on their last [dollar] store visit bought prepackaged food."
Of more immediate concern is the dollar storesâ€™ entry into tobacco and alÂcohol sales.
When Family Dollar COO Michael Bloom announced plans earlier this year to sell cigarettes and tobacco products at company stores, he was clearly treading into convenience store territory: "Tobacco is about a $90 bilÂlion business that drives very frequent trips," he said. "Our customer research tells us that Family Dollar customers over-index on cigarettes and tobacco products."
The move is one that concerns Kelsey. "Tobacco is 42% of our sales," he said. "But weâ€™re convinced thatâ€™s a declining category and weâ€™re looking for ways to maintain our traffic, whereÂas dollar stores look to capitalize on the high percentage of smokers amongst their existing customer base."
Additionally, Dollar General and Dollar Tree have begun selling beer and wine, yet another high-value item for convenience stores. "Our stores have always been at the intersection of value and convenience," said Dollar General spokesperson Tawn Earneste to the Arkansas News Bureau last fall, when the company received approval to sell beer in Arkansas. "This is a product that we know our customers purchase elsewhere. Itâ€™s an opportunity for us to give them an opportunity to make that purchase in one trip to DG."
Therein lies the challenge for c-store operators, Kelsey said. "While dollar-store store count has been moderate in the last couple of years, the big conÂcern is the expansion of the categories theyâ€™re selling."
While dollar stores are encroaching on c-storesâ€™ traditional staples, recent category additions donâ€™t appear to be major traffic drivers â€" at least for now. "For the most part, weâ€™re not seeing dollar stores in the tobacco business," Portalatin said. "As for alcoholâ€¦itâ€™s still small but growing. On the most recent purchase, less than 3% of dollar store shoppers purchased alcohol."
Those are findings backed up by the NPD Groupâ€™s Convenience Store MoniÂtor (CSM), a monthly consumer trackÂing survey.
"When we talk to consumers about what theyâ€™ve purchased [at dollar stores], the differentiators are candy, gum and sweet snacks" as well as "health and beauty and general merÂchandise," Portalatin said. The latter are "things where the assortment is exÂpected to be more developed than at c-stores. And while there, theyâ€™re picking up other things."
To this point, the dollar store challenge to convenience stores seems far more than inconsequential, with solid perÂformance numbers and a collective eye on opportunities. But some perspective is in order, Portalatin insists, citing the latest CSM data.
"Dollar stores capture just over 1% of convenience shopping occasions," he said, a modest figure (c-stores capture 91% and the remainder is drug stores and big box retail), though a number thatâ€™s up slightly over a year ago, comÂpared to traffic for the total conveÂnience channel, which remained flat.
And while itâ€™s true that dollar stores are churning out efficient retail units and sales numbers, they come up short in several significant areas, points of differentiation where convenience stores generate substantial revenue.
First, notes Kelsey, "Convenience stores offer extended hours, where there is little to no retail competition. Second, 80% of convenience stores sell fuel," which added more than $22,000 of gross profit per store per month last year, according to NACS SOI data for 2011 ($486.9 billion in total industry sales).
But most imporÂtant, he says, is dollar storesâ€™ absence from foodservice (Dollar General Market notwithstanding, where results are not yet maÂture), a category that contributes heavily to convenience storesâ€™ bottom line â€" 16.9% of inside store sales and 29.4% of in-store gross profits last year, according to NACS data.
"Itâ€™s tough for dollar stores to add the labor component [required of foodservice]," Kelsey said. As a result, "I donâ€™t expect too much competition from them for now."
Portalatin agreed. "Theyâ€™re signifiÂcantly underdeveloped in beverage and fresh foodsâ€¦where the barriers to enÂtry are steep. They could do it, but we havenâ€™t seen it."
Judging by these distinctions alone, the dollar store challenge appears relativeÂly benign. While that may be the case for now, Bishop cautions against comÂplacency.
"No one prefers to imagine a worst-case scenario for themselves. So if you have gas and foodservice, you can say you donâ€™t need to worry. But you need to grow by satisfying different shopping ocÂcasions for people going to small stores. To the extent that dollar stores turn out to be a preferred alternative for certain occasions, then it blocks the growth or cuts into the c-store business."
Kelsey said convenience stores have already begun grabbing some of those occasions back from dollar stores, perÂhaps unwittingly, as fuel prices rose. "One of the things weâ€™ve seen in the last six months is growth in our merchanÂdise sales, he said, "non-traditional category growth that cuts into dollar stores â€¦ I suspect shoppers are conÂsolidating occasions and theyâ€™re buyÂing whatever type of fill-in they need to buy. Weâ€™re picking off some of those sales on the fringe because our baskets have gotten bigger."
No doubt those convenience store baskets will continue to grow, espeÂcially as learnings are incorporated into best practices and shared among industry colleagues. While the dollar store may be in the race for the long term, the convenience industry is well equipped to meet the challenge.
Jerry Soverinsky is a Chicago-based freelance writer and a NACS Daily and NACS Magazine contributing writer.