Dollar stores slowing down? Don’t count on it

dollar treeby Dan Rafter

Dollar General plans to open 650 more stores throughout 2015, according to the latest retail research from Marcus & Millichap. That’s second among U.S. retailers only to sandwich seller Subway.

With the addition of the 650 locations, Dollar General should end 2015 with more than 10,900 stores across the United States.

That’s a hint of how strong dollar stores are today. Another? Dollar Tree, the big competitor to Dollar General, is the middle of acquiring Family Dollar. Once it does, Dollar Tree will become the largest discount retailer in the country.

If Dollar Tree completes its purchase, the company would boast more than $18 million in annual sales and operate 13,000 stores in the United States and Canada.

These numbers don’t surprise Bill French, senior managing director of retail services with the Indianapolis office of DTZ. French has brokered his share of deals involving dollar stores. He says the stores are more popular today because of the changes they have made.

The stores now offer a wider variety of merchandise, giving consumers reasons to shop them multiple times a week. And the stores themselves are brighter and cleaner.

“The operators of these stores are providing a better shopping environment than they did five, 10 or 15 years ago,” French said. “There was a time when Family Dollars and Dollar Generals were folksy-type stores. They only appealed to a very, very cost-conscious customer base. I’ve watched these stores go through their changes. They’ve really upgraded their game.”

The big improvement? Dollar General, Family Dollar and Dollar Tree today stock their shelves with competitively priced grocery products that might bring loyal customers into their stores once or twice a week, French said.

“That’s so much better than when customers would come in maybe once or twice a month,” French said. “They’ve created more of a food mix, which has really enhanced traffic in the stores, has increased the frequency of the visits made by consumers.”

Joe Herron, senior vice president in the Rosemont, Ill., office of Lee & Associates, says that dollar stores remind him of discount grocery chain ALDI.

“You see ALDI stores all over,” he said. “They’re in more expensive suburbs like Barrington. They’re in Chicago in neighborhoods like Lincoln Park. They’re also in the suburbs that are less wealthy. They appeal to both ends of the economic spectrum. Dollar stores are the same thing.”

Dollar stores serve a variety of customers. There are families who are struggling with their finances and pick up paper towels, basic food items and cleaning supplies at dollar stores because these products won’t break their tight budgets.

But these stores also attract wealthier customers who enjoy finding bargains. They bring in the occasional customer who wants to pick up cheap party favors for a child’s birthday party or inexpensive candy to hand out to trick-or-treaters on Halloween night.

“These stores have really helped themselves by expanding their product offerings,” Herron said. “Once upon a time, you didn’t know what you would find in these stores. You would get Happy Birthday or Happy New Year hats and maybe some eggs. Now you can count on what you are going to see.”

A bright future?

Herron said that dollar stores continued to grow during even the worst days of the recession, taking advantage of cheap rents by backfilling empty storefronts across the United States. For many months, dollar stores seemed to be the only retailers expanding, Herron said.

In the process, dollar stores stole many of the customers who went to retailers such as Target to buy household items or basic groceries.

Sure, shoppers won’t go to Dollar Tree for steak. But they will go there for canned goods, pop and dish-washing soap.

Because of this mix of products, and their affordable prices, dollar stores should continue to grow even as the economy improves, Herron said.

“They are here to stay,” Herron said.

This doesn’t mean, though, that retailers like Dollar Tree and Dollar General will continue to add stores at the same rate or grow their revenues as quickly. As the economy does improve, some shoppers might leave dollar stores behind.

But many won’t.

“I am totally sold on the dollar store,” French said. “The model allows them to penetrate a number of very small markets on the rural side. But it also allows them to penetrate dense markets such as the Chicagos of the world. You are now seeing retailers like Target looking at opening smaller stores, 15,000 to 20,000 square feet, to compete with the dollar stores and drug stores out there cutting into their customer base.”

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