ALMIGHTY DOLLAR 2004-09-20 (1)

LUCIA MOSES

Mack McLamb hasn't seen dollar stores take a huge bite out of grocery sales at his nine-store chain -- at least not yet. However, it hasn't stopped Carlie C's IGA, Dunn, N.C., from testing dollar sections in its own stores as the number of dollar formats in its area increases.

"If it is a fad, it is a long-term fad," acknowledged McLamb, a vice president there.

Dollar stores may not threaten traditional supermarkets' food sales as much as supercenters do, but as hungry as dollar stores are for a bigger share of the food budget, supermarkets may be dismissing them at their own risk.

After years of cleaning up on low-cost paper products and household cleaners, dollar stores increasingly are adding shelf-stable and frozen foods, said Sandy Skrovan, vice president of Retail Forward, Columbus, Ohio, who recently authored a report that predicted the dollar store format would grow sales an average of 6.2% annually through 2008. The momentum will come in part from geographic expansion. "The stores are rolling out fast and furious," she added.

It's another headache for traditional retailers, already pounded by supercenters and club stores. "I've been competing with Wal-Mart Supercenters for several years now," sighed Ronnie Baker, owner of Baker Foods, which operates six Piggly Wiggly stores in central Alabama, "and now add Dollar General and Fred's to that. Everybody's wanting that food dollar."

Baker is correct: Sales in seven of the 10 fastest-growing, dollar store categories are food and beverages, according to ACNielsen, Schaumburg, Ill. Additionally, Willard Bishop Consulting, Barrington, Ill., found that up to 80% of dollar stores' offerings are grocery and consumable items, often sold for $1 to $2.

At Dollar General, which is leading this movement, consumables account for 66% of average store sales, up from about 50% a few years ago. Family Dollar Stores, Matthews, N.C., the No. 2 chain behind Dollar General, also is selling more shelf-stable food offerings, which account for about 15% of sales, spokesman George Mahoney said.

"Center Store is definitely what's being impacted the greatest by this channel," said Jeff Friedlaender, vice president of Meyers Research Center, a New York-based consumer research firm.

For dollar stores, food serves as a hedge when their core, low-income shoppers cut back on discretionary spending. The hope is that food will get people to visit the stores more often, and while they're there, pick up other, more profitable items. For Dollar General, the experiment seems to be working: The addition of coolers has prompted customers buying a cooler item to spend more, and those bigger rings include higher-margin, nonfood items. While coolers may be helping the stores attract a higher-spending shopper, that's not really the point, said Emma Jo Kauffman, spokeswoman for the Goodlettsville, Tenn.-based chain.

"What we would like is not so much a change in customer, but for our stores to be more of a destination," she stated.

There was once a time when dollar stores were derided for their uneven quality and assortment. Today, however, the big chains are bringing more consistency and national brands to their product selection. In turn, their growing clout has led manufacturers to create package sizes that meet the stores' price point specifications -- just as they did with club stores in the 1990s.

"I think many of these vendors want to understand the low- to middle-income consumer, just as we do," said Mahoney of Family Dollar, where 35% of the consumables bear a national brand. At a new Family Dollar store in New York, SN found familiar brands everywhere: Palmolive dishwashing soap, Tide detergent and Heinz ketchup. The trend isn't limited to big players. At Always A Dollar, food accounts for about 15% of sales, up from zero eight years ago. Here, Uncle Ben's and Lipton are among the brands, said Pat Korte, owner of the store, based in Oak River, Minn., which is 30 miles from Minneapolis.

"It's been really tremendous for us because we can really compete with the food people," he said. "I know we're taking from them."

While low- to middle-income customers remain the core shoppers, name-brand foods and other merchandise are attracting more high-income earners who come to treasure hunt. Supermarkets have long used price promotions to communicate a low-price image, but more recently, they've outwardly mimicked the dollar store appeal by installing their own dollar sections. The concept is still in test mode, with the sections varying in terms of size, item selection and position in the store. Some examples:

Hy-Vee, West Des Moines, Iowa, has been installing eight- to 24-foot-long dollar sections in general merchandise aisles. Some food, such as candy, rounds out the household item assortment, which is rotated frequently to keep shoppers' interest. Items usually are priced at $1 each or three for $1. The goal is to create excitement while drawing people to the nonfood aisle. "We try to find unique things that seem to get people's attention in the dollar stores," company spokeswoman Ruth Mitchell said. "[There's] something about the allure of the figure of a dollar, and getting a bargain on something."

Cub Foods, Stillwater, Minn., positions its dollar sections, measuring 48 to 96 feet, in the back of the store, near dry goods like pet food and detergent, to draw shoppers deep into the store, said Dale Monson, director of grocery and liquor for the company's Cub West division.

Carlie C's integrates dollar items in their respective categories: household products with household products, food with food, and so on. "It's much easier to merchandise the store when you put all the stuff in the same area," McLamb explained. The chain did so even while recognizing it might cannibalize its own sales more because "it was going to be easier for our shoppers when we put like stuff with like stuff. We viewed it as a customer service thing," he said.

Are dollar sections growing incremental sales, or just cannibalizing their categories? While some said they've taken steps to discourage shoppers from substituting a dollar item for a more expensive product, others admitted it's probably happening. Cub makes sure brands in its dollar section, which is supplied by corporate parent Supervalu and an unidentified dollar store distributor, aren't duplicated elsewhere in the store.

"I don't see trading down in this instance," observed Monson.

Baker of Baker Foods, who has dollar sets in some of his stores, said he's probably cannibalizing his sales somewhat, but added that it's preferable to a dollar store getting the sale.

Less easy to discern is the impact dollar stores have on store image. Some retailers put their dollar sections in the back of the store, lest they detract from their quality statement. Moreover, dollar sections don't address the ease of shopping in dollar stores, which often measure 7,000 square feet or smaller. "Convenience is important, regardless of income level," Mahoney said. "Also, the everyday low pricing. All levels of consumers want good value for their spending."

Baker acknowledged that for shoppers looking for a nonperishable item, "they actually could eliminate a trip to the grocery store."

Then there's the fun factor. "A lot of people really enjoy shopping in dollar stores," Friedlaender stated. "I think that's something supermarkets could do, but I don't think they're going to fulfill the convenience. You're not going to get in and out as quick as you would in a dollar store."

Retail Forward's Skrovan said supermarkets should resist the temptation to compete with dollar stores by selling $1 items that aren't that profitable anyway. To preserve Center Store's market share, they should focus on stocking unique products and offering services like kiosks and "smart carts" that let shoppers scan as they shop, in keeping with their value-added model.

"Seventy percent of households still consider the supermarket their primary place to buy groceries," she said. "That 70% is theirs to retain or theirs to lose."

For the near term, dollar stores seem well positioned to hold on to and grow food sales.

Retail Forward's Index of Future Spending indicated Sept. 2 that with job gains slowed, gas prices still high, and short-term interest rates rising, shoppers would rein in spending. That caution could help formats that target the bargain hunter. As Dollar General continues to expand its grocery offerings, it'll be better positioned to vie for the food-stamp dollars that otherwise would be spent in supermarkets. With chains expanding beyond their rural strongholds, more people are trying the format, and assortments are improving. As the economy swings, so, it's likely, will dollar stores.