By  on February 26, 2010

NEW YORK — Walgreens’ acquisition of Duane Reade last week further narrows an already compressed chain drugstore industry.

That opens up the door for another channel to grab not only more shoppers, but suppliers who have fewer and fewer merchants to sell. Dollar stores, buoyed by swelling consumer and vendor acceptance, are embracing that opportunity.

Newly published research from WSL Strategic Retail finds that 58 percent of consumers polled in the firm’s “How America Shops: The Pulse of Shopping Life” survey have shopped the dollar channel within the past three months.

“The growth of dollar stores, both in dollar sales and new store openings (as well as refurbishments), reflects the trading down of American consumers. They are quickly taking share from drug and food outlets, as well as from discounters such as Wal-Mart and Target,” said industry consultant Allan Mottus. “Price points in dollar stores are not confined to a dollar, and most beauty firms, except for P&G, have not developed a strategy for this growth category.Following the Great Depression, ‘five-and-dime’ stores also took share. In fact, dollar stores are inflation-adjusted five-and-dimes poised for a breakout.”

A visit to a new Dollar General in Cranford, N.J., illustrates how consumers view dollar stores, or as they are more accurately called, value stores, since prices stretch well beyond a buck at many. The store here was formerly a Drug Fair of New Jersey. “It seems still like a drugstore, just without a pharmacy,” explained one customer who came to see what the store was all about. She found it clean, stocked with brands she recognized and, surprisingly, not always cheaper on all items than Target. “But I will still use it for needs,” the shopper said.

Among the big powers in the dollar business are Family Dollar, Dollar General, 99 Cent Only Stores and Dollar Tree. But, there are also myriad mom-and-pop dollar store operations such as a one-store business in Skillman, N.J., called Dollars and Sense, which, like many dollar stores, sells beauty items such as nail polish and lip gloss. There are also companies such as Five Below specializing in value products that include some limited cosmetics and bath products.

Dollar stores appear to be getting into beauty because former drugstore executives have taken the helm at dollar chains. For example, Richard W. Dreiling, the current chief executive officer and chairman of the board at Dollar General, was a former Duane Reade president and ceo. And, Dollar General’s Todd Vasos, currently the chain’s division president and chief merchandising officer, was formerly the executive vice president and chief operating officer of Longs Drugs, based in Walnut Creek, Calif. Not surprisingly, Dollar General even has two former drugstore executives on its board of directors: David B. Rickard, formerly of CVS, and Warren Bryan, formerly of Longs.

According to estimates, the leading dollar stores represent beauty sales of more than $1.8 billion. While most retailers are mustering paltry — if any — sales gains, dollar chains are enjoying robust growth. Dollar General reported net income of $75.6 million for its 13-week third quarter ended Oct. 30, compared with a net loss of $7.3 million, or 2 cents a diluted share, in the comparable 2008 quarter. Sales for the 2009 quarter increased 12.7 percent to $2.93 billion. Same-store sales increased 9.2 percent, with customer traffic and average transaction amounts contributing to the sales increase. Dollar Tree Inc. reported that its fourth-quarter profits rose 28 percent, as sales climbed at the discount retailer. For the three months ended Jan. 30, the dollar store chain earned $135 million, up from a profit of $105.2 million during the same period last year. Sales climbed 12 percent to $1.56 billion, up from $1.39 billion last year. According to WSL research, shoppers are in dollar stores often, with 25 percent of respondents in the stores each week and 75 percent visiting at least once a month. Three-fourths of those polled believe dollar stores are cheaper than Wal-Mart and 44 percent believe the channel helps them make it from paycheck to paycheck.

The channel is indeed poised for an explosion in beauty. Within L’Oréal USA, for example, SoftSheen-Carson acknowledged there are opportunities to drive growth in dollar stores. Products in smaller sizes are key, as they present a more affordable option, said Angela Guy, senior vice president, general manager, SoftSheen-Carson. Hitting dollar stores exclusively are Dark and Lovely’s new 6-oz. maintenance items, which extend to Moisture Seal Shampoo, Moisture Seal Instant Conditioner and Moisture Seal Daily Oil Moisturizer. Each will sell for about $3. Full-size versions retail for around $4.99. Some industry sources point abroad to where Maybelline has a hot commodity called MNY, one that could fit snugly into the value realm. Dollar store retailers report Aziza and L.A. Colors as brands directly aimed at their channel, but most stores often get inventory of Revlon and other major beauty brands, too.

Shoppers gravitate toward cleaning products, paper goods, candy, greeting cards and laundry products at dollars stores, noted the WSL report. However, further exposure to the channel with a mushrooming array of beauty items could propel sales in the beauty category as well. “We see it as holding great opportunity for us,” said one manufacturer who asked not to be named until formal announcements are made.

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