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Todd
Hale
SVP, Homescan Client Service
ACNielsen
These are uncertain times. While macro economic conditions
are slowly improving, the outlook on job growth remains sluggish
and consumer confidence continues to fluctuate. Not surprisingly,
the fastest growing retail channel is the dollar store outlet.
Offering a wide assortment of basic household goods at very
low price points, these no-frills retailers are grabbing the
attention of consumers and retailers alike. And when the likes
of Wal-Mart take notice, most others do too.
Store growth within the dollar store channel is unsurpassed
by any other retail channel. Retailers within the dollar store
channel are moving from their rural and small town American
roots into both urban and suburban America. Since 2000, the
five major U.S. players in the channel—Dollar General,
Family Dollar, Dollar Tree, Fred’s and 99 Cents Only—have
added over 4,445 stores (an increase of 44%). In addition,
Family Dollar is planning to open a whopping 585 stores by
August of this year, and Dollar General is looking to add
675 new stores—including 20 larger Dollar General Market
stores. The magnitude of this store growth will most certainly
impact shopping trips in a number of retail channels [See
chart 1].
For comparison, dollar stores in Canada have also exhibited
growth, albeit not on the same scale as the U.S. According
to ACNielsen Canada, since 2001, penetration rates have climbed
five percentage points to 77% in 2003. While dollar store
penetration rates in Canada are higher than in the U.S. (64%),
spending and frequency are lower. The average U.S. dollar
store basket ring is US$11.35 compared with CDN$9.20 in Canada
and 13 U.S. trips compared to 9.7 in Canada.
A look inside
Retailers in the dollar store channel are looking for good
quality, low cost, basic household goods and merchandise with
high appeal and frequent turns. Carrying both soft and hard
goods, these stores have significant shelf space in categories
like paper products, detergents, household cleaners, health
and beauty aids, foods and beverages. While not all of the
products sold in this channel are priced at one dollar, multiple
quantity price offerings at various price points, such as
4/$1 and 3/$1, are common.
The three largest retailers in this channel are Dollar General,
Family Dollar and Dollar Tree. Annual sales for these retailers,
fueled primarily by store expansion, range from a high of
$7.3 billion for Dollar General to $2.7 billion for Dollar
Tree. While that may seem small in comparison to annual sales
levels for the major U.S. grocery, mass and drug retailers,
it is
significant nonetheless.
Traditional Retailers Retaliate
The effects of merchandising activities and deflationary pricing
have created more cost-conscious consumers in both low- and
high-income population segments. To compensate, traditional
retailers have started to include dollar-store sections or
dollar-store merchandising activities to capture some of the
channel’s sales. For example, Wal-Mart has a dollar-only
section format in about 20 stores, and has had some discussions
about rolling out their own free-standing dollar store format.
In addition, Kroger announced in July 2003 that they are testing
their own dollar store aisle in a few markets. Other low-priced
retail formats, such as Supervalu’s Sav-A-Lot or Aldi’s,
are also posing a threat to this channel. Target just announced
plans to test dollar sections in 125 stores. Finally, a number
of retailers—in channels like grocery, mass-merchandiser
and drug—are running dollar-store promotions to capitalize
on this retail trend.
Target Practice Has Expanded
Understanding the key demographic segments that drive a channel’s
shopper base is critical to growth—for both retailers
and suppliers. With this knowledge, retailers and suppliers
can look for the categories, brands and items that have the
best demographic fit against the shoppers who visit their
stores. Under-developed demographic segments provide insight
into sales opportunities.
As expected, households residing in rural areas exhibit high
development, accounting for 27% of dollar store channel sales,
which is 78% greater than expected given the percentage of
households in that segment. Other important demographics include
lower educated females, African American households, low-income,
large and blue-collar households [See chart 3].
On the flip side, the households who exhibit under-development
include acculturated Asians, upper-income households, households
without a female head, households where the head occupation
is in a managerial/professional job, one-member households
and college-educated females.
While the channel is over-developed among low and middle-income
households, since 2000, the channel has experienced strong
increases in household penetration across all income groups
[See chart 4].
Match Game
Combining the right mix of products with the right consumers
is smart merchandising. In order to identify those categories
that have the best demographic fit against the demographics
of heavy dollar store channel shoppers, ACNielsen ran correlations
within defined mega-categories. While no strong correlations
emerged due to the low-income household skew, a close match
with a number of basic household staples was evident. Categories
such as sugar and sweeteners, flour, fresh meat, feminine
hygiene, deli-packaged meats, woman’s fragrances, first
aid, frozen meal starters, automotives, shortening and oil,
deodorants and diet aids deserve more than just adequate shelf
space and merchandising support.
Equally important
to matching demographics and categories is understanding differences
in demographic composition of heavy shoppers across channels
and within key demographic drivers. Interestingly, big box
formats (mass, grocery, club and supercenters) perform well
among large households (showing an average 60/40% dollar spending
split among large and small households) while dollar stores
perform equally well among large and small households (54%
vs. 46%). As the number of small households increase, driven
primarily by aging baby boomers, the retail landscape will
be impacted giving smaller formats an opportunity for further
expansion [See chart 5].
Movers
and Shakers
A look at the big sellers, rapid growers and fast movers
provides a virtual aisle-by-aisle road map for success. Based
on dollar sales, the top ten selling mega-categories include:
Across all categories
tracked by ACNielsen, a healthy 22% growth rate was achieved.
While the biggest categories in terms of dollar sales were
primarily in the cleaning supply and paper product categories,
seven of the top 10 fastest growing items were food and beverage
categories. Unprepared meat and seafood tops the list, with
an overwhelming growth rate of 333% compared to year-ago sales.
Other triple-digit growers include: canning and freezing supplies
(330%), frozen pizza and snacks (157%), sewing notions (129%),
butter and margarine (122%) and flour (118%). Milk (84%),
greeting cards and party needs (84%), dairy snacks, dips and
spreads (81%) and wine (59%) complete the list, all posting
impressive increases.
A Formidable Challenge
Dollar stores represent a formidable challenge for other retail
channels. The small, low-cost/no-frills format allows them
to compete on both convenience and price. At more than 15,000
stores and growing, coupled with the large number of households
shopping in the channel, dollar stores cannot be overlooked.
Households who shop the channel are more likely to shop in
convenience/gas and supercenters, but channel expansion will
no doubt impact other channels.
The channel, however, is not for all brands—and certainly
not those with a premium priced position. The dollar price
point focus by some retailers does limit category and brand
opportunities. In addition, more “dollar-store–like”
promotions in traditional retail channels may limit the impact
of dollar stores. And will these retailers be as successful
as they move into larger markets?
For now, there is no indication of a slow down in store growth
within this channel. This channel offers convenience and low
price points that are appealing given the hectic pace of life
and value-conscious consumer trends that are evident. Manufacturers
should capitalize on this opportunity and maximize volume
sales.
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