Under pressure
The big three U.S. dollar store chains — Dollar General Corp., Family Dollar Stores Inc. and Dollar Tree Inc. — thrived during the Great Recession while many other retailers struggled just to survive. Although year-to-year sales growth has slowed a bit post-recession and some quarters have been more challenging than others, performance remains generally positive.
Goodlettsville, Tenn.-based Dollar General reported a 9.2 percent rise in net sales for fiscal 2013 compared to fiscal 2012. Meanwhile, Family Dollar, Matthews, N.C., said it realized an 11.4 percent increase for 2013, and Chesapeake, Va.-based Dollar Tree reported that sales rose 6.1 percent. All three chains reported comparable-store sales growth for fiscal 2013 as well.
Moreover, each chain believes the market has room for significantly more dollar store locations. New store openings, therefore, remain a strong focus.
In 2013, Dollar General opened 650 stores and intends to add 700 more in 2014, Richard Dreiling, the company’s chairman and CEO, said in a March 13 earnings call for the fourth quarter of fiscal 2013. In an Oct. 9, 2013, fourth-quarter fiscal 2013 earnings call, Howard Levine, Family Dollar’s executive chairman and CEO, said the company opened 500 stores in 2013 and aims to add 525 in 2014. And Dollar Tree opened 343 stores in 2013, CEO Bob Sasser noted during the company’s Feb. 26 fourth-quarter fiscal 2013 earnings call, and aims to expand by 375 stores in 2014.
Still, the situation isn’t as rosy as it might seem.
“All three chains have been challenged as their lower-income customers have faced high unemployment levels, higher payroll taxes and reductions in government assistance,” says Carol Spieckerman, president of retail consultancy newmarketbuilders. “Unfortunately, Family Dollar embarked upon several resource-intensive initiatives as these dynamics converged, including adding thousands of new items and implementing major fixture and layout changes. Hopefully, the impact to its bottom line will be short-lived.”
Emphasis on consumables, store brands
With their particular shoppers taking longer than the general population to “feel more comfortable spending,” however, Dollar General and Family Dollar have been doing more than just adding store locations to spur growth, says Ann Natunewicz, vice president of Colliers International’s Retail Services Group, San Francisco. Both have taken steps to make consumables a higher percentage of their product mix.
“The impact, of course, when you are stocking more consumables is your margins drop,” she says. “And retailers, in general, are under a lot of pressure with gross margins and trying to find efficiencies in the supply chain.”
But the addition of more private label items to the mix gives retailers a chance to recapture some of that lost margin, Natunewicz notes.
Family Dollar adds store brand SKUs
And in 2013, Family Dollar did just that, launching almost 500 new private brand SKUs, Michael Bloom, the company’s president and chief operating officer until January of this year, said during the Oct. 9 earnings call. He noted that total private brand sales rose 10 percent in 2013, while sales for private brand consumables jumped 20 percent.
Tammy DeBoer, senior vice president, food and private brands for Family Dollar, notes that the company’s private brand assortment is relevant to its specific customers and delivers everyday value to them. Some of the retailer’s own brands Store Brands editors spotted in a recent store visit include Family Dollar (air fresheners, dusting cloths and more), Family Gourmet (food products), Family Values (food storage bags, hangers and more), Family Chef (storage containers, kitchen utensils and more) and Kidgets (baby diapers, wipes and more).
“As we develop items, our goal is to match or improve upon the leading national brands,” she says. “Quality in product and packaging has been a tremendous area of focus. … Private brands play an enormous role in our business, and many of our customers depend on them to provide for their families.”
Two exciting new additions to the store brand assortment, DeBoer says, are the Family Dollar Laundry Pacs item, which “looks great on shelf and compares to Tide Pods,” but comes in a smaller count that meshes with customers’ value and convenience needs; and a revamped line of Family Gourmet peanuts.
“We improved the quality of these items and also updated the packaging,” she explains of the peanuts. “These items are delicious and look great on shelf.”
Also working in Family Dollar’s favor is a focus on driving efficiencies and simplifying processes, Spieckerman says, especially through its pallet delivery program.
“Family Dollar’s decisions to curtail excessive and hard-to-execute promotional programs and return to an EDLP model are also steps in the right direction,” she says.
Dollar General aims for SKU productivity
SKU “productivity,” meanwhile, continues to be a focal point for Dollar General, with Dreiling mentioning during the earnings call the elimination of more than 300 SKUs in 2013; 300 more were identified for elimination or already eliminated in 2014. He pointed to the opportunity to do more with fewer SKUs while expanding in categories that make sense. And store brands likely will be part of any category expansion.
“We still have a lot of opportunity in our private label, our foreign sourcing and our shrink,” he said.
Dollar General also has the advantage of having a “very strong management team,” notes Deborah Weinswig, chief customer officer for Waltham, Mass.-based Profitect.
“They have been very innovative in their private label program and have really cleaned up the packaging and the taste of the products,” she says. “They have attracted a more affluent consumer during the most recent macroeconomic downturn and they have been able to tweak their margins by location based on zone pricing.”
Some of Dollar General’s private brands Store Brands editors spotted during a recent visit include Clover Valley (food and beverages) DG Health (OTC products and more), DG Home (toilet tissue, paper towels and more), iMagine (kids’ art supplies and more), DG Office (office supplies), EverPet Basics (pet food/treats, accessories and more), Comfort Bay (sheets, pillows and more), and True Living (kitchen towels, bakeware and more). We also noticed basics such as paper towels offered under what appears to be a tiered store brand structure: Smart & Simple (value), DG Home (national brand equivalent) and DG Home Premium Prints (premium).
As Dave D’Arezzo, Dollar General’s chief merchandising officer and executive vice president, explains, the company’s private brands combine high quality with a low price to serve as a value solution to customers.
“Through the constant evaluation of [our] private brands mix, we continually improve and expand offerings to deliver on our value promise,” he says.
All of Dollar General’s private brand products also come with a 100 percent satisfaction guarantee, D’Arezzo adds. If a customer is not fully satisfied with one of the products, he or she can return the product and get a full refund.
“This offer allows our customers a risk-free opportunity to try new products without the worry of not being fully satisfied,” he says, “and to introduce the value proposition to customers who may be unfamiliar with our private brands.”
Although D’Arezzo says it is difficult to single out favorites among Dollar General’s newest store brand offerings, he does mention a few.
“Some of my favorite new items are those we’ve had great customer response and reception to,” he notes, “including our new Clover Valley frozen pizzas and vegetables, coffee K-Cup [packs equivalents], and chocolate fudge brownie fiber bars.”
Outside the strictly private brand side, Spieckerman notes that Dollar General has done well in “rolltainer” improvements that improve efficiency and reduce labor, and in keeping to its EDLP strategy — even as Family Dollar escalated activity here.
“In the end, Dollar General offered message consistency and clarity to its customers,” she says. “Its introduction of higher-priced items in HBA was one misstep that it has gone on to correct.”
Dollar Tree at a disadvantage?
Both Dollar General and Family Dollar recently added tobacco to the assortment as an attempt, in part, to increase trip frequency. They also have ramped up capabilities significantly on the refrigerated and frozen food side in recent years — although Store Brands editors noticed little in the way of private brand product development here during our visits. Overall, Natunewicz believes they might have a leg up on Dollar Tree when it comes to being situated for continued growth.
“Family Dollar and Dollar General are probably positioned better than Dollar Tree, in my opinion, because of that focus on the discretionary customer,” she says, “and also their willingness to experiment with different-sized stores.”
Moreover, the fact that Dollar Tree is the only true “dollar store” among the three, with U.S. pricing being set at $1 or less per item, also could prove to be a challenge as inflation rises, Natunewicz says.
“Even with capital investments and being smart about your supply chain, there’s only so long you can keep [the price] there and still offer that breadth of product mix and be kind of a one-stop shop,” she explains. “The question is: Does it matter? If Dollar Tree starts putting out things that are $1.50 or $2.00, do they have enough brand loyalty for people to look beyond that? I don’t think people will suddenly stop shopping there if the habit’s already engrained.”
A continued emphasis on private brands perhaps could help keep costs down and margins up for the time being. And Dollar Tree certainly appears to have the largest number of own brands and own-brand items among the three chains. During a recent visit to a Dollar Tree store, Store Brands’ editors spotted literally dozens of private brands — including six different brands covering body lotions alone. A very small sampling of the own brands we spotted includes Garden Collection (gardening supplies and more), Home Collection (pot holders, kitchen towels and more), Party! (party supplies), jot (pens, office supplies and more), The Home Store (cleaning supplies and more), and Assured (personal care products).
Unlike Dollar General and Family Dollar, Dollar Tree uses different store brands within different food categories (e.g., Coastal Bay Confections for own-brand non-chocolate candy and Landmark Confections for chocolate candy). But private label food products are limited to select food subcategories; most food offerings are offered under manufacturers’ value brands.
Continued growth also could come via planned expansion of its Deal$ store format and Dollar Tree Canada locations (where the price is $1.25 per item instead of $1.00). And as Sasser noted during the Feb. 26 earnings call, Dollar Tree Direct — the company’s e-commerce arm — also is expanding fast. During 2013, Dollar Tree saw a 20 percent increase in site traffic, and the company now offers more than 3,800 items online (via both Dollar Tree Direct and Deal$ Direct).
“Of the three, Dollar Tree is far more focused on e-commerce and site-to-store,” Spieckerman says, “and its multi-format model makes it far more agile in the end.”
Competitive threats
Going forward, the big three dollar store chains also will be need to address threats outside the dollar store sector if they are to continue to prosper and grow. They will need to “keep prices sharp and product assortments compelling,” for example, if they are to compete with the nimble and ever-changing Amazon, Spieckerman point out.
“In general, dollar stores have been less vulnerable to Amazon than other retailers since Amazon hasn’t attacked lower-price-point items or specifically set its sights on beating dollar stores at their own game,” she says. “That could change in the blink of an eye, of course, just as it did when Amazon went after fashion, office products, food and other categories.”
Already, the e-commerce behemoth has “doubled down on convenience” via expansion and acceleration of customer shipping and delivery options, Spieckerman notes.
“This indirectly impacts any retailer that relies heavily on convenience as an advantage,” she says, “including the leading dollar chains.”
Other competition comes from discounters such as Batavia, Ill.-based ALDI Inc., which boasts destination-type private brand offerings, and even Bentonville, Ark.-based Walmart, which is accelerating the rollout of its small formats, Spieckerman explains.
“Amazon may not be going after dollar stores directly, but Walmart clearly is,” she says, “and when Walmart focuses on a goal, there will be fallout.”
Still, many low-income shoppers currently prefer dollar stores for their fill-in shopping trips, Spieckerman notes, and it will take Walmart quite some time to achieve significant scale with its small formats to meet such trips.
“I would call fill-in trips a must-win for all three chains,” she stresses.
Looking ahead, both Family Dollar and Dollar General probably will need to rethink their e-commerce strategy — or lack thereof — too.
“Despite their still-growing physical locations, Dollar General, and particularly Family Dollar, are largely ignoring site-to-store connectivity and omni-channel opportunities,” Spieckerman says. “Why aren’t they talking more about it when one of the main reasons Walmart is ramping up its store formats is to connect the locations to e-commerce? Dollar General and Family Dollar seem to be relying on a crowd-out strategy and winning through their physical scale, but it’s myopic to build still more stores as a single-channel strategy.”
On the private brand front, none of the three chains really represents a private brand destination, Spieckerman says, but customers do appreciate the value such brands offer.
“That said, Family Dollar is paying closer attention to quality and to offering a clear value proposition and price separation between its private brands and national brands,” she says. “The need for simplicity and clarity can’t be overestimated in the dollar channel — it makes all the difference in basket size.”