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More Bang for the Buck

I think building a retail franchise is similar to building a skyscraper, Jim Kelly, president and chief operating officer of Family Dollar Stores, told SN in a recent interview. The most significant events are those at the foundation. The vision of our founder, Leon Levine, was a focus on the low-income consumer and their need for value, and we have carried that focus throughout our history. As Family

“I think building a retail franchise is similar to building a skyscraper,” Jim Kelly, president and chief operating officer of Family Dollar Stores, told SN in a recent interview. “The most significant events are those at the foundation. The vision of our founder, Leon Levine, was a focus on the low-income consumer and their need for value, and we have carried that focus throughout our history.”

As Family Dollar reaches its 50th anniversary — concurrent with the worst recession in all of those years — a steady foundation has proven especially vital. Keeping an eye on low-income consumers, and how their needs have evolved over the years, has kept Family Dollar relevant to its core constituency and turned it into an effective competitor for supermarkets. Improving its performance in food sales, along with developing the infrastructure to support that performance, is among the chain's top strategic priorities today, Kelly said.

“We've had to work hard to understand the specifics of what the food assortment should be for our customers, and then we had to face challenges associated with the supply chain, quality control and other aspects of the food business,” Kelly said. “But there remain plenty of opportunities to target additional [food shopping] trips and plenty of opportunities to get the assortment that's most relevant, and plenty of opportunities to present food to appeal to different customers in different stores.”

Focus on the Consumer

Based in Matthews, N.C., Family Dollar operated 6,571 stores in 44 states as of the end of the 2008 fiscal year last Aug. 30. The chain posted sales of nearly $7 billion. Stores are between 7,500 and 9,000 square feet and produce, on average, $1 million in sales per year via transactions averaging $9.70 each. The company operates eight distribution centers.

Stores emphasize value and convenience. Their assortments include a mix of everyday items, apparel, seasonal items and what the company calls “treasure hunt” selections that spark impulse buys and help distinguish Family Dollar from competitors. The company keeps costs low by limiting advertising, centralizing management and buying functions, and being especially opportunistic in real estate.

Attention to its core customer is reflected in the language of its executives, who speak of the shopper in personal and specific terms.

“Understanding our success begins with understanding our core customer,” Howard Levine, chairman and chief executive officer of the company and the son of founder Leon Levine, remarked at a recent investor conference.

“She is a woman in her mid-40s with an established family,” he said. “With less than $30,000 a year, she works hard to balance her budget between fixed expenses and basic necessities, while also allowing for little treats like toys for her kids and accessories for her home.

“She's realistic about her finances, but not just looking for price,” he continued. “She wants a compelling shopping experience that satisfies her needs for convenience and value.”

Family Dollar has gotten to know the customer through institutional memory — and increasingly through investments in data and research, Kelly said. Research, in fact, led Family Dollar to expand its food offerings in recent years. Today, the company said, more than 60% of its revenue is derived from sales of consumables, which include food, household chemicals, cleaning products, health and beauty aids, hardware and automotive supplies, and pet food and pet supplies.

The food offerings at Family Dollar serve a specific mission to drive more frequent visits and also provide shoppers with a convenient alternative to “fill-in” food shopping trips, Kelly said.

“A number of years ago, we began researching our customers in order to gain a better understanding of how they shopped and where they shopped, and one of the outcomes of that research was the identification that their more frequent shopping trips was the grocery store trip. Not the major stock-up of groceries, but those small in-fill trips — ‘I need to get the kids something for breakfast tomorrow’ or ‘I need lunches for school.’ Those fill-in trips are a big part of the lives for our customer, so we began to target those trips.”

Family Dollar began expanding food by testing coolers in its stores in 2004, and then launched an aggressive rollout in 2005. By the end of its last fiscal year, coolers could be found in 5,600 Family Dollar stores.

“They were one of the first retailers to challenge supermarkets head-to-head on the same items with lower pricing,” Burt P. Flickinger III, managing director of Strategic Resource Group, told SN.

The retailer is supporting the food offering with investments in point-of-sale technology, Kelly said. This includes initiatives to accept debit cards, food stamps and credit cards for purchases — a rollout that should be complete within the next year, he said.

Family Dollar will also be adding to its line of private-label foods, which currently comprise about 10% of all consumable items at the stores. These provide another option for a cash-strapped shopper base.

Recession-Resistant

Particularly sensitive to small movements in the economy, Family Dollar's core shoppers felt the current recession at its very beginnings, when comparable-store sales slowed considerably in mid-2007. Company officials say they would prefer to operate in good times but note the retailer has a history of success riding the economic tides.

“We historically have said Family Dollar is recession-resistant: We do better than most during tough economic times,” Kelly said. “What happens during challenging times is that we become more important to more groups of shoppers, including our core shopper, who have curtailed their discretionary spending but are now spending a greater percentage of her pocketbook at our stores.”

At the same time, the economy is sparking new store visits from the “trade-down” shopper also looking for value. This presents an opportunity to retain shoppers when conditions improve, Kelly noted.

“When we operate our stores well the trade-down customer will come in, see many of the brand names they are accustomed to, see a friendly neighborhood store that they might not have expected and will find values greater than they can see elsewhere,” he said. “That shopping experience is by far the most important thing we can do for the trade-down customer today. And where we deliver on that proposition, our retention rates are great.”

Improved store conditions are part of Family Dollar's ongoing “Concept Renewal” initiative, which was launched in 2007. The program provides stores with a more intuitive layout that's easier to shop, new signs and a brighter appearance. In addition, programs to improve employee training and retention are helping service and lowering costs.

The initiatives dovetail with a relatively slow pace of new store openings and an increasing emphasis on renovations of existing stores. Although Family Dollar maintained a breakneck pace of 500 or more new openings a year for several years in a row, plans this year call for around 200 new openings.

“We went from 2,000 stores to 6,000 stores in the bat of an eye,” Kelly said. “What we've chosen to do now is pause and improve our current stores.”

Part of Family Dollar's growth strategy in recent years has been an expansion to inner cities, where the retailer found dense concentrations of potential shoppers who were underserved by traditional retail.

“Strategically we believe urban markets represent a huge opportunity,” Kelly said. “There are challenges above and beyond operating in rural markets, but over the years we have focused more time and resources that allow us to serve that very important and large consumer group. I think it's given us a real competitive advantage.”

For the Future

While Family Dollar's focus on its core shopper has not wavered, its understanding of the shopper is providing still more impetus for growth, according to Kelly. The opportunities range from further developing global sourcing to more strategically merchandising stores, to identifying clusters of shoppers within its core and meeting their needs with more precision.

“I think we have more opportunities in front of us today than we ever have had in our history,” he said.

Currently, merchandise differences between stores are slight — “if you're near the beach you may see more beach balls,” Kelly said — but that will be changing as the company harnesses technology to better merchandise stores for both regional and demographic differences. One example would be customers of urban Family Dollar stores being more likely to shop for pet cats than rural customers who shop for dogs, and stores reflecting that difference in merchandise and positioning.

“We're in the early stages, but we're learning more and more about customers, and we have invested in technologies that will help us better tailor our merchandise,” he said.

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