CHICAGO -- Dollar stores are becoming an increasingly potent channel of competition for traditional supermarket operators because of their low operating costs, widespread consumer acceptance, and growing focus on consumables.
In a standing-room-only presentation, titled "Dollar Stores: Supermarket Competition or Complement," during the Food Marketing Institute Show here last month, Tom Rubel, president, Retail Forward, Columbus, Ohio, said the dollar store category -- in which he included other single-price general merchandise operators and closeout stores -- would grow at the rate of 5% per year for the next five years, attaining sales of $48 billion by 2007.
"These guys are sucking up a lot of volume," he said. "They have very low capital costs and very low operating expenses, and that makes it very hard to compete against them, especially for supermarkets because they're used to operating with very high cost structures."
Dollar stores often open in spaces smaller than 15,000 square feet in secondary retail locations -- urban, suburban or rural -- with a limited number of stockkeeping units and few in-store services.
The segment has grown 5.1% since 1997, vs. 3.6% for supercenters and 0.5% for supermarkets, according to Rubel. Same-store sales in dollar stores were up 6.3% last year, vs. 2.8% for mass merchants and 0.4% for supermarkets. About 36% of U.S. households visit a dollar store at least once a month. The stores generate an average ticket of $8.50, and tally $140 in annual sales per square foot.
In addition, dollar stores increasingly are offering more typical supermarket products. Consumables accounted for 42% of dollar store sales in 1998, but more than 60% in 2002, he said. Greeting cards, cleaning products and paper goods are among the leading consumable categories attracting dollar store shoppers.
"They are adding consumables to drive traffic," he said, noting that many dollar store chains are refitting their stores with new fixtures and wider aisles to better showcase their consumable offerings.
Dollar stores also are working closely with manufacturers to develop new packaging, products and product formulations especially for their shoppers.
"Most of the big ones are working with suppliers to get more private brands in their stores," he said. "It's a fairly significant phenomenon."
Like Wal-Mart Stores, Bentonville, Ark., dollar stores are striving to be the lowest-price player in the marketplace and are turning to manufacturers to help them achieve that goal, Rubel said.
Because of their flexibility in site selection and their relatively low operating costs, dollar stores also can expand very quickly, he pointed out. In the United States, growth thus far has largely been confined to the Southeast, but the major chains are quickly looking to new geographic regions.
"The West is wide open, as is Mexico," said Rubel. "There's lots of geographic runway left for this format."
Rapid growth, however, could also be the format's Achilles' heel, he said, because the companies need to develop the infrastructure and systems to support the larger operations they are envisioning.
"That would be one of the risks, that they would overstretch their infrastructure to the degree that it would keep them from executing in a quality way," Rubel said.
The industry has been undergoing some consolidation in the last few years -- the top 10 players generated less than 30% of the sector's sales in 1996, but more than 45% in 2002. That has contributed to a 71% growth in store count for the top 10 dollar store chains.
"They have a very strong model for the customer, and one that's especially appealing during a down economy," Rubel said.