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Are Dollar Stores Beauty’s Next Big Channel?

With mass beauty sales in a consistent slump, big brands are betting on dollar stores for growth.

The economy is chugging along, and holiday sales in stores and online are off to a robust start, especially for prestige beauty. So why, then, is Five Below — a discount chain that sells everything from candy and fuzzy socks to sheet masks and eye shadow palettes — one of the hottest new storefronts on Fifth Avenue?

The retailer, which specializes in party supplies and novelty items such as DIY glitter sugar scrub kits and scented nail polish, opened its Manhattan flagship — its 746th store in total — in November. It is just one of several chains in the dollar store channel that are rapidly expanding door counts in the U.S.

Five Below intends to open 125 stores by year’s end, said chief executive officer Joel Anderson on the company’s third-quarter earnings call. Dollar General opened 900 doors this year and is projecting 975 store openings in 2019, and Dollar Tree, which in 2015 acquired Family Dollar, plans to open 350 Dollar Tree and 200 Family Dollar stores next year, as well as renovate 1,000 Family Dollar locations.

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As dollar stores expand across the U.S., they are becoming an increasingly significant channel for mass market beauty.

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For beauty brands in the mass market, dollar stores are a compelling channel in which to drive growth — particularly at a time when mass beauty seems to be in a consistent slump. Makeup and nail sales are flat year-over-year and skin-care is up 1 percent, according to Nielsen data tracking the last 52 weeks through Nov. 17.

“The value for brands is that this is one of the only channels growing, both physically and financially,” said Wendy Liebmann, founder of WSL Strategic Retail. “I think this is why many of the big brands are expanding into dollar. Look at all the big retailers — companies are expecting high single-digit growth, and it’s really hard to get even a couple points growth there.”

“They aren’t always sexy, but value stores are an important outlet and one of the fastest-growing in brick-and-mortar retail,” said Bill George, ceo of Freeman Beauty. Freeman, which is known for its facial masks that mostly retail for under $5, sells “a blend of national best-sellers and some unique sizes and assortments” in the dollar store channel. George said he is a “fan” of the dollar store channel, noting that the top brass at some of the biggest chains have strong mass retail backgrounds — Dollar General ceo Todd Vasos is a former executive vice president and chief operating officer at Longs Drug Store, and Family Dollar president and chief operating officer Duncan Mac Naughton was a former executive at Walmart.

 “The value channel is immense and because of L.A. Colors’ stance on value and quality, we’ve enjoyed strong mutual growth with our retail partners,” said Charles Yu, senior vice president of sales for Beauty 21 (the maker of L.A. Colors}.

Allan Lever, president of Canada-based Look Beauty, sells his company’s sheet masks and other skin-care products at Dollarama in Canada, and is eyeing dollar store expansion in the U.S. “At value prices, we do big volumes with them,” said Lever of his Dollarama business.

For Markwins Beauty Brands, competing in the dollar store channel has required additional supply chain resources, said global president Stefano Curti. Markwins distributes one of its key mass makeup brands, Wet ‘n’ Wild, along with a few private label brands, in dollar stores. The extra effort is worth it, said Curti. “It’s a very important channel — over a third of growth in the U.S. [beauty market] comes from mass and club, and when you drill that down, Walmart and Dollar General account for [most of it]. Convenience and value are very important to new generations [of consumers].”

Data shows that consumers are increasingly shopping the dollar channel. In 2017, Dollar General contributed the second-most dollar growth in the mass and club category, according to research from Stifel. Some of this growth is coming from beauty. Also in 2017, 13 percent of consumers polled in NPD’s Women’s Facial Skincare Consumer Report said they shop the dollar channel for skin care, up 9 percent from 2015. A 2 percent increase from 2016 to 2018 was recorded in shoppers buying makeup at dollar stores.

“It’s something we’re seeing growing,” said Larissa Jensen, beauty industry analyst at NPD, of the dollar store channel. “The way the market is going, there’s so much blurring in terms of channels. Consumers are really open now more than ever to try new things and brands and shopping across category regardless of price.”

Dollar stores are no longer attracting only cost-conscious consumers choosing where they shop purely based on economic reasons.

“Consumers have become so much more diverse in preferences,” said Naira Aslanian, project manager for Kline. “One day they might buy at Sephora, another day E.l.f. mascara at a dollar store.”

Beauty shoppers increasingly opting to shop the dollar channel is thanks to improved product selection and upgraded — and convenient — store formats.

“Dollar stores have always been relegated to picking off the lines things that are sub-$5 from a Cover Girl or Revlon,” said Steph Wissink, managing director at Jefferies. “Now the value retailers are getting smarter about having a presence and a scope of options, and doing it in a way that is elegant and experiential.”

Value stores have polished their images and enlarged beauty selections. Merchandise is now fresh stock rather than closeouts of yesteryear. While Five Below caters to a teen-centric consumer, carrying a vast assortment of on-trend novelty items, Dollar General and Family Dollar stock many major mass brands that consumers are used to shopping in drug. These include Olay, Garnier, Cover Girl, Yes To, Pantene, Shea Moisture, L.A. Colors, Wet ’n’ Wild and Maybelline.

Dollar General is going full throttle into beauty with a program to elevate the department now in its second phase. Additional footage, better lighting and upgraded fixtures are all part of the blueprint to draw more attention to the beauty assortment. An exclusive line called Studio Selection, consisting of 36 hair and skin items, bowed in June that includes on-trend micellar water and charcoal cleansing strips all priced under $6. The retailer is even getting in on the wellness movement. Ceo Todd Vasos said on the company’s third-quarter earnings call that the company has installed expanded cooler sections for fresh food in many of its doors, and is doubling down on “healthier food options,” especially under its Good & Smart house label.

The retailer is also experimenting with smaller format stores (under 4,000-square-feet versus 7,000-plus square feet) called DGX, which are being road-tested in urban markets such as the hip Northern Liberties neighborhood in Philadelphia, amidst the cool eateries, yoga studios and coffee shops populating the area.

Not to be left out, Family Dollar also redesigned its beauty department. To show it off, the chain created a television ad where shoppers — with their tresses blowing a la Beyoncé — are surprised they are in a Family Dollar. “You sure this isn’t one of those fancy beauty stores?” asks one shopper as the announcer says “not at these low Family Dollar prices.” The retailer is using influencers such as vlogger Zabrena to tout the sharp prices and extended brands.

While dollar stores are revamping the beauty experiences in their stores — yet still keeping their value-priced propositions intact — drugstores are doing the opposite. Faced with consistently laggard mass beauty category sales as shoppers opt for premium and specialty channels, drugstore retailers are focused on premiumizing their beauty assortments. Walgreens recently acquired a minority stake in Birchbox and is currently rolling out Birchbox boutiques to 11 of its locations. CVS revealed in August its partnership with Glamsquad, which will bring services and prestige products to the retailer’s doors.

“You’ve seen [mass retailers], which used to be venues for discount, elevate,” said Wissink. “As those venues premium-ize, it leaves an opportunity gap for the dollar store.”

It is not only low-income shoppers that are driving growth at dollar stores — the channel now attracts shoppers on the higher end of the income spectrum. For higher-income consumers, any stigma associated with shopping in the dollar channel has lessened since the Great Recession. “People don’t shy away from going to a dollar store anymore,” said Mickey Chadha, vice president at Moody’s, who noted that the average income range of a dollar store shopper is now closer to $60,000 to $70,000 than what it used  to be — $30,000 to $40,000. “Saving money is a lot more fashionable now than it used to be.”

That’s in part thanks to Millennials, who have developed a reputation for frugality. “If I look at the consumer trends, especially with the new generations, what we are observing is that they are a lot more concerned with value and bargain-hunting than generations before,” said Curti. “From a consumption perspective, I see the greatest opportunity in value [and specialty]. With Dollar General tracking to open 1,000 new stores in the next year — it’s like we’ll have a new chain the size of Target being created in the next 12 months.”