Difficult economic times for fixed-income consumers are finding their way to the performance of the retailers that serve them.
This month marks the third anniversary of the gasoline price increases that signaled the beginning of additional financial pressure on the lower-income consumer, noted Joan Storms, an analyst covering dollar stores for Wedbush Morgan Securities, Los Angeles. "It affected dollar stores across the board," Storms told SN. "Just look at a comparable-store sales spreadsheet, and you can see it."
Times have only gotten tougher. With gasoline more recently closer to $3 a gallon than $2, as well as rising levels of personal debt, increased unemployment and events like the Iraq War and Hurricane Katrina, the typical dollar-store customer has been especially affected. The trend is reflected in slowing same-store sales figures at dollar stores. Recent remarks from top executives of the three largest publicly traded dollar stores tell the story.
- Bob Sasser, president and chief executive officer of Dollar Tree Stores, Chesapeake, Va.: "The middle-income to lower-income people have really borne a much larger burden from the rapid increase in gasoline prices. That means they're buying what they need first, and if they have anything left over they're buying what they want."
- David Tehle, chief financial officer, Dollar General, Goodlettsville, Tenn.: "Fixed-income consumers have been dramatically impacted by high gasoline and fuel prices, rising personal debt, the war in Iraq; and now many of them are facing the effects of Hurricane Katrina. These factors continue to affect our consumers' discretionary spending."
- James Kelly, chief financial officer, Family Dollar Stores, Matthews, N.C.: "Fiscal 2005 was one of the most challenging years that I've experienced at Family Dollar. Our customers were punished by rising energy costs and a decline in real wages, both of which further pressured their already limited pocketbook."
As they fight to avoid falling into the same economic hardship as their consumers, dollar stores have increasingly turned to food as a traffic and sales generator. Hatched mainly in the three years since economic conditions turned worse for low-income consumers, food is already accounting for between 15% and 40% of revenues for these retailers, according to analyst estimates. Food is also helping dollar stores become stronger competitors against mass merchants and supermarkets, both for traffic and for attention from vendors, observers said. This may spark higher-income consumers to "trade down" to dollar stores.
"Dollar stores have done some pretty creative things to drive traffic in a tough environment," said Storms.
With annual sales of $7.7 billion and more than 7,700 stores, Dollar General is the largest of the publicly traded dollar stores and, according to observers, the most advanced in strategies for selling food. The company has largely completed the rollout of coolers to its existing stores and more recently has focused on the development of Dollar General Market, a 15,000-square-foot box that offers around twice the square footage of a traditional dollar store and features food -- including meat and produce -- prominently. As of last month, Dollar General operated 32 Dollar General Market stores.
Although Dollar General has not released figures illustrating the performance of Dollar General Market, and still refers to the concept as a "test," reviews from the company and industry observers are largely positive.
David Bishop, principal at Willard Bishop Consulting, Barrington, Ill., told SN that Dollar General Market has seen average transactions nearly double compared with traditional Dollar General stores.
Given the company's ability to roll out initiatives quickly -- coolers were done in a year, and a new supply chain initiative is scheduled to reach 2,300 stores this year alone -- Dollar General Market is poised to become a powerful force in food retail, Bishop predicted.
"When Dollar General figures this out -- and it's a question of when, not if -- their ability to turn around and implement it will be far superior to supermarkets because they're so good at executing their plans," Bishop said. "They will continue to test this over the next 12 months, but as soon as it clicks, this is one of those things where they will be retrofitting 500 stores a year or rolling out Dollar General Markets at a rate of 300 or 400 a year."
Because they offer prices lower than even mass merchants like Wal-Mart, dollar stores in general are well positioned to take a bite from the supermarket and mass channels if they get their food offering right, Bishop added. That will be a matter of improved presentation, good locations and appeal to different demographics -- precisely what Dollar General is examining in its Dollar General Market test -- as well as perception of product quality through the introduction of brand names.
"Dollar General and Family Dollar know they are fill-in trips, so all they're looking to do is become more of a fill-in. It's like death by a thousand lashes," Bishop said. "They won't steal a whole trip. But they will start to steal parts of the basket from supermarkets and mass players."
Dollar General, which for its last fiscal year turned the highest comps -- 3.2% -- of the three publicly traded dollar-store players, derives as much as 40% of its revenues from food, Bishop estimated. And with stores in 27 states, it still has plenty of room to grow.
Family Dollar Adds Coolers
Family Dollar -- which observers said tends to trail Dollar General in strategies by 12 to 18 months -- is still in the process of introducing food offerings at its stores. The company installed coolers at 1,000 of its 5,900 stores during the fiscal year ended Aug. 27 and has plans to install another 2,500 this year. Its customers have been hit hard by economic conditions, with same-store sales of 2.3% for the year that ended Aug. 27.
According to Levine, chairman and chief executive officer, Family Dollar has seen higher traffic and transaction sizes in stores with coolers, though he declined to cite specific figures in a conference call last month. Stores that have coolers are presenting food offerings with higher-margin items merchandised in a "treasure hunt" program, he added.
"As conditions have fallen out of favor with Family Dollar's consumer base, they've looked at food to get a larger share of their customer's overall spend," said Bishop.
Dollar Tree differs from Family Dollar and Dollar General in that it offers a single price point -- $1 -- for its goods, which may limit the amount of higher-ticket food items it can offer, such as meat. But with almost 2,900 stores in 48 states, the chain is gaining leverage with manufacturers to make packages that conform to their price point, analysts said.
"You might find a brand-name product that's 12 ounces and sells in a supermarket for $2. You might find that same item at 8 ounces at Dollar Tree for a dollar," said Storms.
Dollar Tree plans to add coolers to around 200 of its stores this year.
Dollar Tree's effort to get custom packages from manufacturers illustrates the potential of food in the dollar channel, Bishop said. The stores offer points of distribution and growth opportunities that will be hard for vendors to ignore.
"It wasn't so long ago that dollar stores were working with national brands just to buy their excess inventory, overruns and discontinued products -- but they've reached such a scale they're no longer eligible for those products," Bishop said. "So now they're going for custom packs, exclusive products and stable supply. They're more of a contract buyer than an opportunistic one."
Dollar General
Most recent fiscal year ended: Jan. 28, 2005
Revenues: $7.66 billion
Net income: $344.2 million
Profit margin: 4.5%
Same-store sales for full year: 3.2%
Food sales as a % of revenues: 20% to 35% (est.)
For the first half of its current fiscal year, Dollar General posted a 12.8% sales gain, including same-store sales increases of 4.4%, but comparable sales figures for August (up 0.9%) and September (up 2.5%) reflect increasing pressure on discretionary income from core customers impacted by high fuel costs, rising debt and unemployment.
Dollar Tree
Most recent fiscal year ended: Jan. 29, 2005
Revenues: $3.1 billion
Net income: $186 million
Profit margin: 6%
Same-store sales for full year: 0.5%
Food sales as a % of revenues: 15% (est.)
Through the second quarter of its fiscal year, overall sales at Dollar Tree increased 9.2%, but comparable-store sales fell by 1.2%.
Family Dollar
Most recent fiscal year ended: Aug. 27, 2005
Revenues: $5.8 billion
Net income: $217.5 million
Profit margin: 3.75%
Same-store sales: 2.3%
Food sales as a % of revenues: 15% (est.)
Howard Levine, Family Dollar's chairman and chief executive officer, termed fiscal 2005 "a challenging year for our customer and our company." By more than doubling the rollout of coolers, the company expects to achieve fiscal 2006 same-store sales in the 2% to 4% range.
