Bang for Your Buck

JULIE GALLAGHER

Dollar stores are engaged in a tug of war with traditional grocers for shoppers' wallet share.

With expanded consumable selections and enhanced customer service, members of the small-format value channel have become a viable destination for fill-in grocery trips.

Traditional retailers, in turn, are fighting for lower-income shopper loyalty with 10 for $10 discounts and promotions on their value-tier store brands.

Despite their efforts, dollar stores are encroaching on traditional supermarkets' territory.

More than one-fifth (23.9%) of primary household shoppers polled last month as part of TNS Retail Forward ShopperScape research reported purchasing food from a dollar store within the past month. Forty-one percent of those consumers said they're shopping the channel more often to help manage costs.

The majority of dollar store consumers (64%) categorized the experience as purchasing food while shopping for general merchandise; 21% described it as a grocery fill-in trip; and 14.6% said it was a grocery stock-up trip.

“The share of sales at dollar stores that's generated by the food side of the business continues to grow,” Sandy Skrovan, senior vice president of TNS, told SN.

Charlotte, N.C.-based Family Dollar attributed part of its net income improvement of 40.7% — to $53.2 million during its fourth quarter, ended Aug. 30 — to consumable sales driven by economic stimulus checks.

In addition to expanding its food selection to 630 shelf-stable, perishable and frozen SKUs in about 90% of its stores, the retailer recently began accepting food stamps and credit cards in an attempt to drive the average basket size above $10. Prices at its 6,600 locations range from 55 cents to more than $5.

“Our customers spend a significant portion of their pocket on food,” Howard Levine, chairman and chief executive officer of Family Dollar, said during the Wachovia Consumer Growth Conference in New York last month. “Smaller storage capacity at home and more limited income result in more frequent [fill-in trips] for basic necessities. We're positioning Family Dollar to capture these frequent trips.”

Though the chain's core consumers are women in their 40s with less than $30,000 in annual income, greater earners are now shopping its stores.

“We are beginning to see some benefit from the trade-down from a slightly higher-income customer,” said Levine. “When we look at traffic and trips, we've increased our share of wallet with customers to the household income level of $40,000 and less for these fill-in trips that we are targeting.”

To maintain these shoppers' loyalty, Family Dollar is focusing on its consistency of brands. It's also positioning quick meal solutions by merchandising complementary components like pasta, sauce and parmesan cheese on endcaps for easy shopping, said Josh Braverman, spokesman for Family Dollar.

Dollar General, Goodlettsville, Tenn., has achieved similarly positive results. During the second quarter, its consumable sales were up almost 14% from the prior year, Richard Dreiling, CEO of Dollar General, told attendees at the Wachovia Conference.

He attributes the chain's success to its strategy of driving shopper frequency with consumables and growing their basket sizes — which average $10 — with general merchandise.

More than one in four of the retailer's SKUs are priced below $1. Two-liter bottles of Dollar General private-label Clover Valley soda are among them. Overall its prices are 12% to 15% below traditional food retailers, and between 3% and 5% below Wal-Mart, said Dreiling. It recently began sourcing more upscale products.

“We took a 4-foot set of spices and increased the offering by 40%, so now we have a very inexpensive value end, and what I would call a medium tier that didn't exist before,” said Dreiling. “Now our spice sales are accelerating at a very rapid rate as that planogram rolls out. Those opportunities are all through the store for us.”

In recent months Dollar General has joined other members of the channel in focusing on its value price messaging, Nicci Novario, a TNS consultant, told SN.

In addition to changing its tag line to “Save Time. Save Money. Everyday!” the chain has increased in-store signage and installed an in-store television network featuring commercials for different CPG products.

Likewise, Dollar Tree, Chesapeake, Va., is promoting the availability of its consumables with in-store signage and window messaging that features 20 food products under the words “Look what $20 will buy you.” Everything in the store is priced at $1.

Dollar stores are also giving food top billing on their circulars.

“They're highly focused on consumables, with the first two or three pages featuring nothing but food,” said Novario.

As gas prices stabilize, advertisements like these are changing the way consumers shop.

“By expanding their food selections, dollar stores are successfully fragmenting shoppers' purchase behavior and attracting increased spending,” said Jon Hauptman, partner at Willard Bishop, Barrington, Ill. “In today's challenging economy, more shoppers are willing to shop a couple of different stores in a very disciplined way in order to bring out the most value available.”

While dollar stores' objective is usually the grocery fill-in trip, retailers like Giant Eagle hope to be all things to all food shoppers.

The Pittsburgh-based chain is successfully competing with alternative formats by highlighting items in Topco's Valu Time line, said Skrovan.

The economy-tier private label — which includes 330 products ranging from cookies to juices, cereals and snacks — is positioned as being priced 60% lower than its national-brand counterparts. Items in the line are supported by a double-your-money-back guarantee.

“These value-oriented lines often allow retailers to provide value on a price-per-unit measure that is often every bit as strong as dollar stores, limited-assortment retailers or Wal-Mart,” said Hauptman.

Kroger, Cincinnati, is also fighting for the loyalty of extremely budget-conscious consumers by highlighting items in its Value Line, which comprises basics that shoppers will use almost every day. “When you buy Kroger Value for the basics you need, you can save money for the things you want,” according to the retailer.

The chain also periodically hosts 10 for $10 sales on dozens of items.

“We've been offering this deal for a few years now, as part of our effort to help customers stretch their dollar,” said Meghan Glynn, spokeswoman for Kroger.

Last month, Kroger may have had dollar store shoppers in mind when it hosted a 10 for $10 sale comprising dozens of SKUs, including Hunt's Snack Pack Pudding; Gatorade Sports Drinks; Pepperidge Farms Goldfish Crackers, 6.5-8 ounces; and Kroger Tender Twist Bread. The deals were featured across the first few pages of the retailer's weekly circular.

“Promotions like these put the dollar price point in the shopper's mind,” said Skrovan. “So if I can go to the supermarket and get something for a dollar, then I don't have to go to the dollar store necessarily.”

Traditional food retailers could enhance the effectiveness of their dollar promotions by targeting fewer items, advised Hauptman.

“Five for $5 on a big sign is a lot more appealing than 10 for $10,” he said.