The real estate slump offers opportunities for dollar store expansion
The credit crunch and the housing slowdown may have slowed new real estate development, and a rash of retail bankruptcies are sending many shopping center owners into a panic, but there's at least one sector of the retail world for whom the economy has not been a complete disaster.
Value discounters such as Dollar General have signaled their intention to expand every bit as quickly this year as they did when the economy was roaring — only now, their choice of locations and their leverage with developers are increasing. In fact, say some observers, the weak real estate market is providing the dollar store niche with the opportunity to penetrate deeper into the mainstream and better position itself against competing channels of trade.
“[The dollar store segment] is one of the few retail categories where you are not seeing too much of a slowdown in terms of store growth,” Joseph Feldman, a retail analyst for Telsey Advisory Group, New York, told SN. “Retail to a large extent is a market-share game, so to that end they can find themselves increasingly well positioned to access their target customer. And over time, once the economy stabilizes and bounces back to moderate growth, they will be well positioned.”
Representatives of the three major small-box discounters in the food business — Dollar General, Dollar Tree and Family Dollar — declined to comment specifically for this article. But recent remarks from executives during investor conference calls have forecast a busy year of growth for all three, which likewise are reporting sales trends running counter to those of most retailers.
Dollar Tree, Chesapeake, Va., last month revealed that it plans to open 210 new Dollar Tree stores during the current fiscal year, and 25 new stores under its Deal$ banner, in addition to 90 store relocations. Dollar General, Goodlettsville, Tenn., is planning 450 new stores and 400 renovations this year. Family Dollar, Matthews, N.C., is forecasting a 2% increase in total square footage this year, which is a slight decrease in new store activity from the previous fiscal year, but officials intend to upgrade the quality of the portfolio as well.
“What the current real estate market does is give us a lot of opportunities to upgrade,” R. James Kelly, president and chief operating officer, Family Dollar, told investors in January. “So we are looking at opportunities to reduce rent. We are looking at opportunities to perhaps upgrade the quality of the space, given today's lowering rent market.”
It wasn't long ago that developers considered dollar stores to be less than desirable shopping center tenants. According to Stanley Eichelbaum, a retail real estate consultant and president of Marketing Developments, Fort Lauderdale, Fla., some retailers felt their brand cachet would be compromised when a dollar store located in the same center, and their low-cost structure and insistence upon paying below-market rates made renting to them difficult.
“But that's been changing,” Eichelbaum said. “Today there are a lot more landlords that will tolerate them. They have evolved into the mainstream, in part because of the dire need from landlords for occupancy. You're seeing them integrated into almost every kind of space.”
And where small discounters traditionally flocked to less expensive inline space in neighborhood shopping centers, some have found more success when locating on freestanding pads, many built from the ground up. These locations — in addition to driving more revenue than inline sites — also demonstrated that a dollar store's appeal often extends beyond price, sources said.
“The appeal for dollar stores isn't just pricing, but convenience,” Gary Ralston, president of Florida Retail Development, Orlando, told SN.
Ironically, Ralston added, dollar stores discovered the benefits of freestanding spaces only after being chased there by anchor tenants like supermarkets whose “exclusive use restrictions” in their leases prohibited dollar stores from expanding to food. In an article published last year in the Florida Real Estate Journal, Ralston noted that drug stores pioneered the freestanding site for similar reasons a decade before, and that some of the executives leading dollar store expansion today cut their teeth in the drug store business.
Freestanding sites generate superior sales by allowing shoppers to get in and out of stores quickly, according to Clarke Coole, vice president of development at Butler Development Group, Atlanta, which has built more than 100 freestanding stores for Dollar General. “It was an increase in expense, absolutely, but a lot of the stores we built were in tertiary markets, and they were able to develop them at reasonable prices vs. what they would pay to be in a prime spot in the center of Atlanta.”
An example of dollar stores' nimbleness and their ability to benefit from a troubled commercial real estate market can be found at sites where Dollar Tree has converted dark Blockbuster Video stores, said Dave Marcotte, director of retail insights with Management Ventures, Cambridge, Mass.
“They are perfect for them, because they are essentially the right size, with the right traffic coming in and out, and the stores I've seen are clean and pretty nice,” Marcotte told SN. “Nobody is going to confuse a Dollar Tree and a Wegmans, but these are nice stores.”
Discounters' traditional emphasis on low costs is another aid in expansion, Marcotte added.
“These are not expensive stores to build, they're not expensive to fill, they're not expensive to run and they're not expensive to close,” he pointed out. “So whereas a lot of retailers will put more thought into where to locate the stores because there is so much risk involved, there's not that element with the dollar stores. For Best Buy, going from zero to store opening [costs] $8 million. For a dollar store it's nothing. And they can close them as fast as they open them.”
While dollar stores' primary customers remain those who are economically challenged, the elements of the stores — convenience and value — have become buzzwords for retailers of all stripes, observers noted. With small discounters like Aldi leading the way, they expect food stores will increasingly adapt those elements to their own stores.
“We are not in a six-month downturn — we are in a correction, in which value will become a bigger part of the mentality for everyone.” Eichelbaum contended. “The search for value will be an important part of every store's position.”
MORE BANG FOR THE BUCK
|RETAILER||CURRENT STORES||PLANNED NEW STORE GROWTH THIS YEAR||NOTES|
|Family Dollar Matthews, N.C.||6,617 stores in 44 states (as of Nov. 28, 2008)||About 200||Family Dollar also plans about 75 closures. Company is focusing capital spending on a technology initiative designed to enhance customer service and improve productivity.|
|Dolla Tree Chesapeake, Va.||3,591 in 48 states (as of Jan. 30)||235||Dollar Tree's growth plans include 210 stores under the Dollar Tree single-price-point banner and 25 Deal$ stores offering multiple price points.|
|Dollar General Goodlettsville, Tenn.||8,362 in 35 states (as of Jan. 30)||450||Dollar General also intends to remodel or relocate 400 stores this year. The company operated 57 larger Dollar General Market stores as of February.|