GETTING FRESH 2005

Renee Lucas

Dollar stores are starting to cool off in order to heat up fresh-food sales.

Coolers, both wall units and floor bins, are being rolled into many dollar stores across the country to make room for fresh produce, milk and deli meats. Retailers are hoping that fresh foods will result in more frequent customer visits and, ultimately, higher sales.

Better known for trinkets, seasonal merchandise and household goods, chains like 99 Cents Only, Family Dollar and Dollar General have gained popularity among lower- to middle-income shoppers looking for bargains.

"We get people that come in looking for treasures," said Henry Miller, spokesman for 99 Cents Only, Commerce, Calif. "They come in maybe once a week, and now find the produce and fresh food and the deli and the frozen and the fresh milk, and they come back more often."

The self-proclaimed "oldest one-price retailer in the country," 99 Cents Only operates more than 220 stores in California, Nevada, Texas and Arizona. Since the company offers only products that retail for 99 cents, the fresh-food assortment is limited and varies.

"It depends on what we can get and market for 99 cents," Miller said.

During the past year, 99 Cents Only stores began offering various sizes of deli items, milk, fresh fruits and vegetables and frozen foods, in addition to top-selling grocery items.

"We get the return visits sooner," Miller said. "People expect [fresh food], so they come back. A lot of the discount stores only sell trinkets. You buy a trinket, and you might not need one for six months or a year. If you're buying fresh foods, people make more visits."

Food sales for 99 Cents Only are up. However, it may be too early to tell how much of the increase stems from fresh foods.

"Really perishable stuff like produce is fairly new for 99 Cents Only. So it's hard to say what their comps are like," said Meredith Adler, managing director, Lehman Brothers, New York.

Based on sales trends, adding fresh food will be good for dollar stores because there is greater demand for food than traditional merchandise. Adler said food sales have been rising for stores serving the lower-income bracket, while sales of nonfood have been weak.

Dollar stores -- both one-price retailers and stores like Family Dollar and Dollar General, which sell items ranging from $1 to $20 -- are entering the fresh-food market for a handful of reasons, said David Bishop, director, Willard Bishop Consulting, Barrington, Ill.

"The opportunity fresh food presents to these dollar retailers is growth," Bishop said. "Growth in a new category can help configure comp-store sales through increasing transaction sizes and building overall customer accounts."

Two months ago, Family Dollar introduced coolers holding milk, eggs, cheese and assorted frozen foods to selected stores. It expects that by the end of its fiscal year in August, 500 of its 5,500 stores will offer fresh foods.

Since the store's purpose is convenience, it makes sense to carry popular consumables, said George Mahoney, executive vice president, Family Dollar, Matthews, N.C.

"We've always carried [nonperishable] food, and have always had a soft-drink cooler in the store. So it's not completely new for us," Mahoney said. "But it is an exciting venture for us to expand."

Nevertheless, the fresh-food test remains a work in progress for dollar stores. Not surprisingly, they're taking a low-key approach to promotion.

99 Cents Only relies on word of mouth, and counts on shoppers discovering the food on store visits, Miller said.

Family Dollar has no major advertising initiatives planned. "We're an everyday-low-price retailer, so we do not advertise except on a very limited basis," Mahoney said.

"The customers coming into the stores will see the coolers, and we'll have some exterior signage," he said.

A spokeswoman for Dollar General declined SN's request for an interview, noting the company was not willing to comment until more stores make a commitment to the fresh-food business.

Just 15 of Dollar General's more than 7,300 stores are market stores, featuring an assortment of fresh produce, refrigerated and frozen foods, as well as traditional nonfood assortments.

The format is "so little of what the company does," spokeswoman Tawn Earnest told SN.

The first store opened in Nashville, outside the company's headquarters in Goodlettsville, Tenn.

David Perdue Jr., Dollar General's chairman and chief executive officer, recently told an industry group that the market stores target women. Perdue made the comments at the National Retail Federation's annual meeting in January. In a conference call with analysts this month, Perdue said he's encouraged by the early results of the market store format.

"We've never called ourselves a destination retailer; the research doesn't support it," he told analysts. "The DG Market, and this is early, in the first year, but we are beginning to see evidence that many consumers are seeing us as a primary destination, meaning we are the reason they left home or stopped by from the office or whatever."

Dollar stores are realizing there's a steep learning curve involved in fresh-food merchandising. Knowing how to handle fresh foods requires a different type of commitment on the retailers' part.

"This is part of the challenge because they're getting into a new form of distribution," Bishop said. "Dollar General and Family Dollar historically didn't have refrigerated trucks.

"When they're making this transition into this new business quickly, they incur a lot of capital expenditures around refrigeration -- in facilities with warehouses and with transportation," he said.

Some are contracting out local vendors to avoid adding cooling units to their distribution centers.

Early on, analysts pinned 99 Cents Only as having problems managing cold items. Running out of fresh product was an issue for some of the stores, and a source of irritation for customers, one industry observer noted. The company has taken steps to improve consistency and presentation, he said.

"But it seems to me they have work to do in terms of executing and managing the cold chain, and maintaining the overall gross margin on that product because they're throwing half of that away," Adler said. "They're very committed to all of [the food], but they've had much more success in the packaged stuff."

99 Cents Only is committed to fresh foods, and intends to work out the distribution challenges, Miller said. "We get [the food], it comes in, and it goes out so fast that it's not a problem," he said.

For Family Dollar, Mahoney said the company has not made any changes to any of its eight distribution centers because the fresh foods are delivered locally. During test runs in select stores, Family Dollar formed relationships with various vendors that are now delivering the goods.

"We will not be shipping from our eight distribution centers because we don't have the refrigeration capacity," Mahoney said. "So it will be direct delivery by vendors from the stores of those particular product lines."