Discount Stores Can Have It Both Ways

So far, summer hasn't been kind to the hard-hit retail industry. Excluding sales of cars and gasoline, retail sales were down 0.2% in June, the fourth monthly decline in a row.

It seems there's only one place Americans have been shopping in record numbers: the local dollar store. According to the Nielsen Co., the average household made 13 trips to a dollar store in 2008, compared with 11 in 2001.

A store whose very name promises low prices clearly has some advantages during a recession. But major chains have also made important changes to increase sales momentum. The stereotypical image of a dollar store used to be a haphazardly arranged, bare-bones shop filled with no-name overstocks. Now, they're upgrading and positioning themselves as affordable convenience stores, a strategy that has attracted more shoppers despite the brutal retail environment.

The lesson for small business? It pays to tweak your image along with the times. The key is to maintain your core identity while modifying your product lineup to lure newcomers.

Consider one of the largest chains, Family Dollar Stores (Stock Quote: FDO), which has 6,600 locations across the country. The company recently reported an impressive 36% rise in quarterly profits compared with a year earlier. How did Family Dollar Stores pull that off? By overhauling its stores to emphasize convenience items such as food and paper towels--the sorts of household necessities shoppers restock on a regular basis. The company is also adding more name brand foods to the mix, such as Kraft salad dressing.

Dollar General, with 8,400 stores, has also had a great year, with same-store sales increasing 13% in the first quarter. To keep the momentum going, the company announced plans to open 450 more stores and remodel or relocate 400 others. Like Family Dollar, it has been adding well-known consumer brands -- including cereal from Kellogg's (Stock Quote: K) and General Mills (Stock Quote: GIS) and Fisher-Price toys -- to its retail mix.

99 Cents Only, a 271-store chain based primarily in California, saw first-quarter same-store sales increase 7%. It has lured in more sophisticated shoppers by introducing organic food, including items like bagged spinach. (One successful strategy has been to locate stores near affluent areas, such as its highest revenue-producing location near Beverly Hills.) The company plans to open at least 10 more stores this year, and probably double that number in 2010.