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DOLLAR STORES FIND NEW TURF

Once shunned, they’re now on landlords’ ‘A’ list

BY ANNA ROBATON

Dollar stores used to be something of a retail stepchild, associated with dowdy strip centers in run-down communities inhabited by people who could afford little better. Not anymore.

Stronger sales in recent years and explosive growth among the leading chains (which boast lots of cash, little debt and soaring stock prices) have combined to make the sector one of the best-performing and fastest-growing in retailing.

“Suddenly, dollar stores are going mainstream,” said Candace Corlett, a principal at New York City-based WSL Strategic Retail, which conducted a survey this year that found that 53 percent of Americans with household income in excess of $100,000 a year shop dollar stores.

Mainstream, and then some. In 1994 the fledgling 99 Cents Only Stores chain raised some eyebrows when it entered the tony Beverly Hills, Calif., shopping scene with a freestanding store on Wilshire Boulevard. The results have surprised even company executives.

Last year the 19,000-square-foot store outperformed all others in the chain, generating sales of $9.9 million. The parking lot is jammed with BMWs and Mercedes, and even celebrities have been sighted there, stocking up on everything from toothpaste to bottled water, all priced at no more than 99 cents.

“Even rich people like bargains,” said Eric Schiffer, president of the City of Commerce, Calif.-based chain. “We always knew we did well in blue-collar areas, but we never thought we’d do better in middle-to-upper-income areas.”

To be sure, not all dollar stores are frequented by the rich and famous. But the success of 99 Cents Only in the Beverly Hills market illustrates just how far dollar stores have come in a short time.

Dollar stores still cater mostly to shoppers in the low-to-middle-income range. But their appeal among those consumers and more-affluent Americans is widening as the stores shed their dingy image, revamp their offerings to include more basic necessities and name brands and tap into the demand for value and convenience. With stores that are generally no larger than 20,000 square feet, the chains have become an alternative for consumers fatigued by the hassles of shopping bigger-box discounters, mass-merchandise chains and ever-larger supermarkets.

“They are opening more stores than any other class of retail trade,” said Corlett, “and they are opening them in locations that fit the shoppers’ pattern,” either at the far ends of shopping centers or at freestanding sites — spots that allow shoppers to get in and out quickly.

Their breathless expansion has also given them a much greater presence in suburban shopping centers and urban markets, a far cry from their beginnings after World War II, when they sprang up in poor, rural Southern towns lacking grocery and variety stores.

Today dollar stores are a diverse group that includes Dollar General and Family Dollar Stores, longtime players that target low-to-middle-income people and sell their goods at various price points, but typically no more than $10. There are also one-price chains 99 Cents Only and Dollar Tree, which tend to attract a greater share of higher earners, including shoppers who view the experience as a treasure hunt.

“They are opening in more middle-income neighborhoods or places that draw from lower- and upper-middle-income neighborhoods,” said Corlett. “It’s a society that is so frenzied that to be able to go into a small store, get great prices and accomplish a lot of errands is very appealing.”

A study published in May by Columbus, Ohio-based consulting firm Retail Forward found that 36 percent of U.S. households shop small-format value retailers, which include dollar stores and one-price chains, on a monthly basis. That’s up from 26 percent of such households in 1997.

The study also found that the top 10 small-format value retailers, as measured by 2002 sales, opened nearly 1,800 stores last year and now have at least 16,000 stores combined, up from 10,000 five years ago. The two biggest chains in the category, Dollar General and Family Dollar, are opening more than a store a day on average, according to the study.

That aggressive expansion helped small-format value retailers grow same-store sales at an average yearly rate of 5.4 percent between 1997 and 2002, the study said. Last year the leading dollar-store chains, not including one-price chains, grew same-store sales by an average 6.3 percent, outperforming conventional discount stores and supercenters, which had a 2.8 percent increase in same-store sales, Retail Forward reported.

“The [dollar store] model has worked and allowed them to use internally generated funds to pay for their expansion,” said Wedbush Morgan Securities analyst Joan L. Storms.

Over the past five years, dollar stores have expanded beyond their roots in the South, moving as far north as Connecticut and as far west as Arizona. But experts say they have plenty of room to grow by filling in existing markets and entering new ones, particularly on the West Coast and in the upper Midwest and Northeast. According to Retail Forward, the chains could add an additional 15,000 stores over the next decade without risk of oversaturation.

“There is some good future growth,” said Storms. “There has to be a convenience alternative to the Wal-Marts and big supermarkets of the world.”

Fortunately for shopping center landlords, the expansion of dollar stores has helped fill the vacancies created by retail consolidation and the push by drug chains and supermarkets to open increasingly larger stores.

“One of the trends has been for in-line drugstores to go freestanding,” said Scott D. MacDonald, president of New York City-based New Plan Excel Realty Trust, which has about 150 dollar stores at its centers. “Fortunately for us and our colleagues in the industry, that trend has coincided with the expansion of dollar stores.”

The growth has been especially good news for owners of second- and third-tier centers, where these chains have flocked in search of the cheap rents that help them hold down costs.

Dollar General has not only entered new markets, but has widened its merchandise offerings to include food items such as milk, eggs and bread.

“We are not necessarily looking for that prime real estate, because it doesn’t allow us to keep our prices low,” said Andrea Turner, a spokeswoman for Goodlettsville, Tenn.-based Dollar General, which has grown its store count at a rate of nearly 15 percent a year over the past five years. As of October, Dollar General had 6,653 stores. (The chain expects to have opened a total of 650 units by the time its fiscal year ends, in January.)

“Those second-generation centers are often in great condition, and they are close to our customer,” said Turner. She adds that the chain seeks to locate its stores, which average 6,750 square feet, within three to five miles of communities that have the types of consumers who shop its stores. (Its core customer is a female head of a four-person household who earns less than $30,000 per year.)

Traditionally, Dollar General has opened stores in rural areas, but the chain has expanded its presence in suburban markets in recent years. It has also boosted sales by expanding its selection of snack and food items: milk, bread, eggs and frozen foods.

In the first quarter, the chain’s average ticket was $8.42, but stores with coolers generated an average ticket of $13.41, says Turner.

Charlotte, N.C.-based Family Dollar has also tinkered successfully with its merchandise mix. The chain has begun carrying more name-brand basics, from Tide detergent to Crest toothpaste to Coke, in an effort to appeal to budget-conscious consumers. Name-brand products now account for about 30 percent of the chain’s merchandise mix, says executive vice president George Mahoney.

The chain, whose stores range in size from 7,500 to 9,500 square feet, is also putting a greater emphasis on big urban markets, from Chicago to Denver. That strategy has helped it tap into dense areas while avoiding too much direct competition from big-box discounters, Mahoney says.

During the five-year period ended in fiscal 2002, Family Dollar opened more than 1,500 stores. As of November the chain had 5,066 stores, including 475 opened during its 2003 fiscal year, which ended in August. Mahoney says long-term plans call for more than 10,000 stores in the United States.

“We can go into small towns of less than 10,000 people and not have competition from big-box discounters, or go into large urban markets like Chicago and do well in a storefront location,” he said.

“Where we don’t go is in the more affluent suburban centers or mall locations,” Mahoney said, noting that such locations would drive up costs and are too removed from Family Dollar’s low-to-middle-income customers.

99 Cents Only, on the other hand, is making a direct appeal to affluent shoppers. Not only has it increased its presence in the mid-to-upper-income markets, but it has also added goods intended to woo the well-to-do.

Last year its stores began carrying gourmet foods, from shiitake mushrooms to imported chocolate. Observers say the chain, which opened its first store in 1982, has also helped raise the bar in terms of the shopping experience at dollar stores. On average, its stores measure 20,000 square feet, among the biggest in the dollar store sector, and generate $5 million in yearly sales.

“Our idea was, why can’t you have a discount store look like a beautiful market?” said Schiffer. The chain had 176 stores as of Nov. 1. “Our stores are the antithesis of what someone would expect a [deep] discount store to look like,” he said. He adds that they are bright, clean, well merchandized and stocked with products that consumers use on a daily basis.

Schiffer and other dollar store executives say their stores have become destinations, helping generate traffic for other retailers, including supermarkets.

“Most people only drive a couple miles to go to the market,” Schiffer said. “But our store is a destination for shoppers. Those people will then go to the supermarket that is in the same center.”

Perhaps. But supermarkets, conventional discounters and drug chains are watching dollar chains closely — very closely.

“They are a very serious threat for household products, over-the-counter medications, skin and hair care products and more and more packaged food and seasonal goods,” said Corlett.

Discount doesn’t have to mean dowdy, 99 Cents Only executives say. In an appeal to more-affluent shoppers, the chain offers fancy items and bigger stores.

Some discounters have responded by adding sections offering goods priced at a dollar or 99 cents. And in some cases, supermarkets, especially those whose leases give them the exclusive right to carry food, have sought to block dollar stores from opening in the same centers or have insisted that they scale back the amount of food they carry.

“There is a bit of a battle in centers between grocery stores that have a food exclusive and dollar stores that want to add more food,” said New Plan’s MacDonald.

The outcome of that battle remains to be seen. And so does the staying power of dollar stores when the economy improves and consumers are less value conscious.

Dollar store executives stiffen at such a notion. They say their stores will always appeal to consumers with more-modest incomes and that better economic times mean stronger sales of higher-margin discretionary items, from sheets and towels to greeting cards. In addition, they say, higher-income shoppers are getting hooked on the combination of value and convenience that dollar stores offer.

In Mahoney’s words, “We do well in tough economic times, but we’d rather operate in a better economy.”

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