For an increasing number of consumers—more than half of all americans, in fact—shopping in dollar stores is making more sense than ever before. No wonder. Once considered dusty, dark and cramped, the more than 30,000 dollar or value doors across the country have undergone a makeover, adding brand names and product categories that are rendering them a bigger threat to discount and drugstores.
An improved beauty selection is part of that overhaul, including brands like Cover Girl, L’Oréal Paris and Sally Hansen. What such brands are discovering is a retail channel growing at a pace faster than Starbucks. Dollar General, for example, one of the sector’s top players, will add 635 stores this year to its 10,500 units and remodel 525 more. That translates into opening, remodeling or relocating three stores per day. Family Dollar, another giant, plans 500 more units in 2013.
The top-three dollar chains—Dollar General, Family Dollar and Dollar Tree—account for 21,000 doors that ring up more than $56 billion a year, while retailers like 99 Cents Only, Deal$, Fred’s Super Dollar, closeout king Big Lots and Five Below comprise the remainder. A new value-store retailer will open next fall in the St. Louis market called Here Today, founded by former Save-A-Lot executives.
There’s no denying the growth opportunities. “We believe we are well-positioned for future growth,” said Dollar General’s chairman and chief executive officer Richard Dreiling last year, noting the firm is forecasting 2013 sales to increase 10 percent to 12 percent.
Industry consultant Allan Mottus points out, “You don’t find drugstores and discount stores promising that.” In fact, Deloitte reports that dollar stores have effectively nabbed market share from discount and drug merchants over the past four years. The dollar channel expanded from 1.5 percent of total consumer product goods sales in 2008 to 1.8 percent three years later. Drugstores declined from 25.2 percent to 24.1 percent and discounters from 49.4 percent to 48.5 percent. That trend is expected to continue. “Shoppers continue to face financial stress. You can’t be a marketer and ignore dollar stores anymore,” says Mottus.
Not many beauty companies are ignoring the signs. Although beauty as a category currently accounts for less than 2 percent of sales, it produces better profit margins than 80 percent of the other goods in the store, say experts. Virtually every mass brand, including L’Oréal, Cover Girl, Maybelline, Sally Hansen, Kiss and Wet ‘n’ Wild, has added dollar stores to their distribution over the past two years. Personal-care brands from Procter & Gamble and Unilever are well represented, too. While many traditional mass brands don’t want to discuss venturing into value stores for fear of irritating the likes of Wal-Mart or Walgreens, store visits reveal the same brands that are sold in nearby mass merchants on full display. For their part, shoppers see no shame in frequenting dollar stores. Judith Engle, for example, buys her TRESemmé hair spray and Nice ’n Easy hair color at her upstate New York Dollar General for the simple reason that it’s convenient. The 60-something retired mother likes to stretch her budget, but also has to drive 20 minutes to a drugstore, an hour to a department store. Engle buys paper towels and other household needs at Dollar General, so “why not mascara,” she reasons. The store near her opened in a shuttered supermarket—the only one in town— so Engle also purchases fill-in groceries. She’s not alone: Dollar chains are banking on the existence of food to inveigle people to buy more full-price, high-margin goods such as beauty and personal care. “Tide and Cheerios are the gateway to beauty [purchases],” says Candace Corlett, president of WSL Strategic Retail, who says the channel’s transformation from “tchotchkes” to well-known brands has established respectability in consumers’ eyes. A 2012 report by The Hartman Group called “Topography: Mapping the New Consumer Pathways” came to a similar conclusion, noting “The allure of the bargain, the thrill of the hunt, an influx of food and beverage products, all account for continued dollar stores’ success even in the face of post-recession economic recovery.”
While the recession drove a lot of shoppers to the channel, attracting penny-pinching shoppers who wanted to buy smaller sizes of their favorite brands, a convergence of several market forces over the past four years has further altered the landscape. Consolidation in the chain drugstore industry opened up myriad opportunities in terms of nabbing top personnel and locations. Stores vacated by the closing of chains such as Drug Fair in New Jersey offered dollar stores new sites in better locations in larger towns and cities. Upscale Cranford, N.J. is a prime example—Dollar General now sits in a former drug chain site.
The shrinking drugstore channel also provided fertile ground for executive recruitment. One of the most high profile is the defection of Mike Bloom, the former executive vice president of merchandising and supply chain at CVS who is now president and ceo of Family Dollar, a position he assumed in 2011.
“With Mike Bloom there, you knew they’d be more interested in beauty,” said Markwins International president Bill George shortly after Bloom’s appointment, and he was right. Last year, according to Family Dollar documents, the retailer added 500 more health and beauty items to its mix. Dollar General’s Richard Dreiling was formerly chairman and ceo of Duane Reade and before that he was executive vice president and chief operating officer at Longs Drug. “You’ve got people from Longs Drug, Duane Reade and CVS running the stores now,” says one beauty executive, “so it isn’t surprising to see beauty get more important.”
Granted, Dollar General has a way to go when it comes to improving the visual presentation in some stores. But progress is being made. Gone are tubular fluorescent lights, dingy floors and crowded shelves. The same is true at Family Dollar, where a new prototype has improved category adjacencies. “You see the influence Mike [Bloom] has had,” says David Pina, the creative director at InStyle, an alternative fragrance company hoping to add a fragrance option in 2014 for dollar stores.
“The stores, such as Family Dollar, are being redesigned and are less cluttered,” agrees Corlett. Fred’s and Five Below are also earning high marks. A Fred’s that opened late in 2012 in Foley, Ala., features lighted shelving, wider aisles and improved signage. “We have conducted extensive qualitative and quantitative research into what our customers and our competitors’ customers want in a shopping experience,” says the retailer in a statement. “We feel Fred’s Super Dollar has the ideal size, product mix and store flow to accommodate customers who are looking for a quick in-and-out shopping trip, or those who want a full-on bargain-hunting shopping experience.”
The phrase “full-on bargain hunting,” is not one mainstream brands necessarily want to hear. And some national brands are sold for less in the value channel. A recent visit to a Family Dollar found Cover Girl Lash Blast Volume Mascara for $6 (suggested manufacturer’s retail price $8.95) and Suave Naturals advertising at 90 cents versus $1.79 at Walgreens.
But most beauty items are sold at the day-in day-out suggested price: Engle’s Nice ’n Easy hair color costs the same at Dollar General as at her drugstore. While a few chains, such as Dollar Tree, adhere to the dollar pricing, the major powers sell items as expensive as $20 and up. The value often is in food, where special sizes or options are created for dollar stores. In addition, while there are closeouts in beauty and grooming, most stock is current.
Marketing experts say that the value shopper can support higher-priced offerings. According to The Hartman Group, 50 percent of shoppers who hit bargain-basement formats earn in excess of $100,000 or more per year.
The sweet spot, however, is those from households making less than $50,000. Of the primary households shopping dollar stores, 66 percent fall into that range, while Bloom said Family Dollar’s prime shopper earns $40,000 a year or less and is often a single mom in a household with kids.
Deloitte Research identifies three buckets of dollar-store shoppers. While there are those that fit the stereotypical image of someone waiting on a paycheck and filling in with small purchases from dollar stores, there’s also what the research company calls “rural, fixed income.” Engle, the upstate retired consumer, falls into that bracket—she uses dollar stores for convenience and value.
Then there are suburban moms, who become born-again dollar consumers, according to Deloitte. That fits the description of Branchburg, N.J., resident Heather Sanchez, who says she heads first to Five Below when her daughter wants fun beauty items. “My shopping habits have changed in the past few years because of the economy and three kids in college,” says Sanchez. “The dollar stores aren’t dirty or full of bad merchandise, so why not at least start there?” And it just might be Sanchez’ college-age offspring who help bolster support for value stores. “Many kids get introduced to dollar stores in college for their ramen noodles,” says Corlett. Millennials, a group not as channel-focused as Baby Boomers, see no shame in shopping budget stores, either. Latinos also skew slightly higher in incidence of shopping the channel. Surprisingly, the Hartman research found almost equal shopping incidence between men and women.
Despite the appeal of the demographics, one marketer who asked not to be named says he plans penetration into the channel with a slightly different offer than what he sells drug and discount stores. “Sure, I worry about what Wal-Mart might think, but we give those partners the à la carte version, while dollar stores are the drive-through,” he explains.
Be that as it may, the success of dollar stores has prompted other channels to react with greater value, especially in beauty. Wal-Mart’s 15,000-square-foot Express format is a development that retail analysts think could compete with Dollar General and Dollar Tree, while Target created a value presentation of $1 items right at store entry a couple of years ago. And if the current sales curve is any indication, expect the competition to become ever-more fierce when it comes to where the buck will finally stop.
Ka-Ching! The Appeal of the Value Channel
Explosive Growth: Dollar stores are proliferating faster than Starbucks—literally. Dollar General is adding 635 stores this year, Family Dollar, 500.
Improved Shopping Experience: Dusty shelves and dark, cramped aisles have given way to stores that are brighter, cleaner, easier to shop and in more convenient locales.
Dollar Is a Misnomer: While some beauty products are discounted, the majority are sold at suggested retail prices. Other categories, such as food, provide the value proposition.
Wide Consumer Base: While the majority of customers have HHI’s of $50,000 a year or less, affluent shoppers are increasingly drawn to the channel as well. Ditto Latinos and men.
Let the Battle Begin: Mass merchandisers like Wal-Mart and Target have taken notice, and are increasingly implementing their own value-driven strategies.
VALUE ADDED: Rounding Up the Major Players in the Dollar-store Channel
2012 Sales: $16 billion
Store Count: 10,500
Headquarters: Goodlettsville, Tenn.
Known for: New formats with fresh layouts, updated fixtures and improved assortments. Aggressive expansion strategy with plans for 11,000 stores by the end of 2013. Seventy percent of stores are in rural markets, but the chain is planning to penetrate more urban areas, including in California.
Dollar Tree Sales
2012 Sales: $7.3 billion
Store Count: 4,671
Headquarters: Chesapeake, Virginia
Known for: Keeping prices to a $1, unlike Dollar General and Family Dollar. Dollar Tree concentrates its beauty assortment on a brand called Colormates.
2012 Sales: $9.3 billion
Store Count: 7,600
Headquarters: Matthews, N.C.
Known for: Upgraded new stores with 500 more health and beauty-care items. New format improves category adjacencies for easier shopping. Recently inked a deal with McLane Company to facilitate convenience foods. Consumables, including beauty, account for 69 percent of total sales versus 65 percent three years ago. Former CVS exec Mike Bloom is expected to increase beauty and grooming selection. Plans 500 new stores in 2013.
2012 Sales (fiscal year): $418.8 million
Store Count: 244
Known for: An exciting format targeted at tweens and teens. Five Below is considered a cool place to shop. Cosmetics has made a comeback in the merchandise mix after taking a back seat to novelties and candy. Now a public company, Five Below is scheduled to open 60 new stores in 2013 with an ultimate goal of 2,000 doors.
Fred’s Super Dollar
2012 Sales (fiscal year): $1.95 billion
Store Count: 713
Headquarters: Memphis, Tenn.
Known for: Close resemblance to a drug chain and for filling in market holes where drug chains have closed. Many stores even have pharmacies. Last year, Fred’s opened a prototype smaller than its typical 16,000-square-foot format to aid in launching into smaller communities. Fred’s has a well-developed ethnic hair-care presentation.
99 Cents Only
2012 Sales: $400 million
Store Count: 315
Headquarters: City of Commerce, Calif.
Known for: Well-heeled clientele known to frequent the stores thanks to locations in or near affluent California towns, including Beverly Hills. 99 Cents Only is often considered the Cadillac of dollar stores.