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Content Guy’s Note: Each Monday, we are featuring an article previewing some aspect of the annual Food Marketing Institute (FMI) show, scheduled for May 4-6 in Chicago.

Dollar Stores. It used to be that they occupied the cheap seats of American retailing, marginalized presences in an industry that thrived on larger, more theatrical presences.

No more. Today, there are few retailing sectors that are generating as much attention from Wall Street, consumers, competitors, and suppliers. Dollar stores and other small format value retailers are generating impressive sales increases with a compelling price/value/convenience model, and growing consumer appeal is laying the groundwork for another five years of solid sales growth.

Among the features of this year’s FMI show will be a rotating series of Close-ups, held on the exhibit floor, that will highlight specific areas of interest to attendees. On Sunday, May 4, at 12 noon, Retail Forward’s Tom Rubel will review the growth of dollar stores, explain their strategies, and forecast their immediate and long-term future.

To get a preview of what will be discussed in the session, we conducted an exclusive e-interview with Rubel:

MNB: To what extend is the growth of the dollar store format a function of the current economy? Is there something else at work here?

Tom Rubel: Dollar stores and other small format value retailers offer consumers a compelling price/value/convenience model regardless of economic conditions. If you look at the format’s (and leading player’s) sales growth history – it really began picking up steam during the boom years of the late ‘90s. And Retail Forward’s consumer database indicates that dollar stores have been gaining market penetration at a steady pace over the past decade, as leading players rolled out more stores to reach more of the nation’s population. Weak economic conditions over the past few years have, in large part, served to exacerbate what was already a solid growth trend – by attracting more value-conscious, bargain-hunting consumers into the stores and introducing more shoppers to the concept, who now are likely to retain the dollar store in their shopping set after discovering the strong value proposition it offers.

MNB: What are the characteristics that consumers find most appealing in the dollar stores? Least appealing?

Tom Rubel: Again, it’s largely the price/value/convenience relationship at play. Low-income households and older households on a fixed income typically find the low price points appealing. Older shoppers/senior citizens and other convenience-oriented shoppers appreciate the convenient format alternative (in terms of location, parking, size) to big box retailers. And everyone loves a bargain! Dollar stores and other small format value retailers offer the thrill of the treasure hunt for bargain shoppers. These patrons don’t necessarily need to shop the format for price, but love the adventure of what they might find at a bargain price. Put all these pieces together and it’s a pretty compelling format.

MNB: How would you characterize the relationship between most of the dollar store chains and the major manufacturers?

Tom Rubel: From a supplier perspective, small format value retailing is proving to be a viable and high-growth channel that is taking consumers and market share away from competitive formats. According to our shopper database, 32% of US households make a monthly trip to a small format value retailer today versus 26% in 1995. For suppliers, the channel represents an increasing number of doors in which to place products, an increasing number of eyes (consumers) to see those products, and an additional point of contact with today’s shoppers. Manufacturers are responding in kind and are working with channel players to get their products on the shelves, and are even developing special sizes and packaging for the channel, similar to what they did with club stores a few decades ago.

MNB: Do you perceive the dollar store format as growing in food to the extent that they become real threat to supermarkets? How about c-stores?

Tom Rubel: We need to keep the size of the market opportunity in perspective. With a market size of $40 billion in 2002, the small format value retailing sector is not even close to approaching the size and scale that other established food, drug, and mass channels represent today – e.g., the $400+ billion supermarket industry or the 125,000-unit c-store industry. But the sector does warrant consideration from a competitive perspective, particularly given the growing number of stores (the two market leaders are opening stores at a pace of more than one a day), attractive price points, and increasing consumer interest being generated by the sector.

While not a threat to the overall health of supermarkets and c-stores, the dollar store format is big enough to chip away at selected consumable categories, like household cleaning supplies, paper products, pet supplies, personal care products, and greeting cards. For example, according to Retail Forward’s annual consumer survey findings, today 8% of US households choose dollar stores or other small format value retailers as their preferred store format for household cleaning supplies, up from just 3% in 1995.

But the shift in mix toward more consumables categories is something that supermarkets and c-stores should take note of. It gives these channels all the more reason to differentiate their offers on non-price measures (e.g., fresh foods, micro-merchandising, partnerships, technology) as a means to sustain shopper traffic and defend against further market share incursions.

MNB: Will most of the format’s growth come from its geographic expansion, since there are places in this country where it is under-represented? Or will they be backfilling in markets where they already have a presence?

Tom Rubel: Big growth opportunities remain in untapped geography as well as same store sales growth from a relatively low sales per square foot base. Given the number of small markets, rural areas, and urban and suburban pockets untapped or under-penetrated, market saturation is still a ways off. Currently, the greatest concentration of stores is in the Southeast where several key players (e.g., Dollar General, Family Dollar) began operations and are still headquartered today. In large part, the location strategy has been one of clustering stores in markets in an effort to maximize operating efficiencies – management, distribution, brand awareness, et. al. – before entering new trading areas. So, we will continue to see backfilling in existing markets to gain these scalar economies. But the biggest new store expansion opportunities lie west of the Mississippi and in New England, largely untapped to date by the leading dollar store players. Additionally, leading players are undertaking several initiatives – remodeling/upgrading of stores, brand building campaigns, and the shift in mix toward more consumables – to increase traffic and build same store sales in existing locations.

MNB: Does it strike you as ironic that as we begin the 21st century, a format getting a lot of attention is one that recalls the heyday of Woolworth’s and its ilk as much as anything?

Tom Rubel: It is somewhat ironic, but not really surprising, as all retail formats have a lifecycle: introduction, growth, maturity, and decline. Unfortunately, some concepts – like conventional variety store players Woolworth and McCrory – fall on the path of maturity and decline. Other players are able to reinvent themselves, breathe new life into the format, to push their way back up the retail lifecycle. Today’s new generation of players – Dollar General, Family Dollar, Dollar Tree, Big Lots, 99¢ Only, etc. – have been able to respond to a changing economy and changing consumer with a compelling price/value/convenience model and format that appeals to a broader base of consumers than in the past. And they are embracing technology to drive efficiencies, improve performance, and aid companies in managing bigger businesses.

MNB: Finally, why does Wal-Mart reportedly see the dollar store format as such a threat? Does this suggest that there is some flaw in the Wal-Mart business model that these stores can exploit? Or is it just the strength of the dollar store model?

Tom Rubel: I don’t think Wal-Mart views the dollar store format so much as a threat as it does an opportunity. Wal-Mart continues to test the outer boundaries of what consumers are willing to allow Wal-Mart to be and it is constantly seeking new ways to grow. It has a proven track record of testing a new concept until it gets is right (witness Sam’s Club and Wal-Mart Supercenter) and then moves in rapid fashion to roll it out. Today it is forging ahead in gasoline. It is testing a candy concept, used car sales, a copying service, and a dollar concept. Given the current success and rapid growth of the dollar store format, it would not be surprising to see Wal-Mart experiment with freestanding dollar stores as well.
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