The Greatest Business?

From humble beginnings, the dollar store industry has
grown to become a giant killer

Many people misunderstand the dollar store business, thinking of it as the realm of cheap closeout items. But the truth is far different. Specialty discount stores, as the investment community refers to them, are moving into mainstream retail status.

These stores focus on quality brand-name products, steep discounts and high levels of convenience that are seldom found in general retail. The industry is being driven by a higher emphasis on convenience, increased availability of high profit margin imports and growth in the number of consumers above the age of 55.

At the same time, the target market is widening. According to a recent study by A. C. Nielsen, the number of U. S. households that have visited a discount specialty store continues to increase, with a penetration of 59% in 2001.

All of these factors add up to one fact: the dollar and 99 cent store industry is reaching an ever-broadening customer base. The stores, unlike the big box retail giants, are typically small in size and are located in local neighborhood strip centers, making them quicker and easier to shop in for popular household products. With Wal-Mart now closing small town discount stores in favor of superstores, a void has been created in the neighborhood retailing market. Dollar stores are increasingly stepping into this void.

The specialty discount market is estimated to be a $40 billion industry, and growing at a rate of 6. 9% per year. This growth is more than triple that of department stores.

The large, publicly traded dollar stores such as Dollar Tree, Tuesday Morning, and 99 Cents Only Stores all average about $250 in sales per square foot and have annual store-level returns on investment from 55% to 103%. By any measure, those are excellent operating results.

In addition to high growth and return on investment, the dollar store business benefits from several trends. The first is the emergence of quality imported goods. These products, available in several categories, serve three important functions. First, they tend to carry a higher profit margin. Second, they provide the store much needed diversity and the ability to reach a greater customer base. Third, because of the rapid pace of new introductions, they bring innovation and a “treasure hunt” element to the dollar store much prized by shoppers.

Closely tied to the growth of imports is the emergence of private brands as a means for dollar stores to build customer loyalty and generate higher gross margins. A recent DSN Retailing Today survey highlighted that customers are willing to try private brands if they have confidence in the store offering the private label, with 58% of those surveyed responding positively.

Another supply trend benefiting dollar stores is the increasing availability of national brands. Many of the larger consumer packaging companies, such as Proctor & Gamble, Colgate Palmolive and General Mills have dedicated sales teams servicing the discount and closeout sectors. This represents a dramatic shift from a few years ago when these companies refused to sell to dollar stores. The availability of these brands has raised the image of these stores, which attracts more customers and encourages more national brands to change their selling policies.

On the demand side, customers are increasingly requiring convenience, and in the case of lower priced merchandise this means they are less willing to drive long distances to buy these items. Simply put, customers may not want to drive across down, park in a huge parking lot and navigate a 100,000 sq. ft. superstore to buy the convenience items that dollar stores thrive on. Research has suggested that shopping trips in which less than $25 is spent are considered “quick trips,” and are better suited for the neighborhood dollar store.

Two other demand factors favoring dollar stores have to do with demographics and the economy.

According to the U. S. Census Bureau, incomes for the bottom 40% of families has not increased as rapidly as for the middle class, putting more pressure on families to stretch their shopping dollar.

And as the population ages, consumers are often faced with tightening budgets, making them natural customers of the dollar and 99 cent store.

When you add these economic factors – a growing customer base, 7% annual growth rates, above average sales per sq. ft. , excellent return on investment – to the basic satisfaction of providing customers with real values, it's not hard to see why the dollar store business is one of the most exciting and enjoyable businesses to be in. And as the word continues to spread and customers tell their friends, business should only get better.