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.

Add in another national competitor, Dollar Tree (Stock Quote: DLTR), and you have a veritable dollar store explosion. What's kept all these chains in business is their savvy emphasis on value (hence all those "dollar" names), while they've subtly upgraded their offerings. Cheapo T-shirts and knickknacks have gotten pushed aside in favor of sandwich meat, bread, milk and laundry detergent. Name brand items are getting prime billing at the front of the store.

This also means that the average price per item has gone up. Indeed, Nielsen found that about three-quarters of the products in a dollar store sold for more than a dollar. But prices are still low enough to attract penny-pinching Americans in search of a bargain.

While dollar stores have traditionally appealed to lower-income shoppers, managers say they're seeing more middle- and upper-income customers stop in as they try to pare down family spending. Executives see the current economic situation as an opportunity to broaden their base.

And they're pulling if off because they've figured out how to walk a delicate line: staying true to their bargain-basement image while simultaneously appealing to more demanding customers. They've adjusted their product mix just enough to attract a wider variety of shoppers without bringing up prices enough to turn off their regulars.

We all know that you've got to emphasize value in this market. Unless you're in a very specialized, money-is-no-object industry (lucky you!), customers want to feel they're getting a good deal. And while a certain number of people will accept bare-bones service to get that deal, others expect certain minimum standards in selection and atmosphere.

If you can make a case for value while also meeting customer needs, you may navigate the rough retail waters as well as Family Dollar and Dollar General. You might even be able to raise prices -- as they have -- while maintaining your reputation as a discounter. Not a bad trick.

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