PLAYING THE DOLLAR GAME

LIZA CASABONA / Additional reporting: Dan Alaimo

A dollar item sold may be a customer saved.

Nonfood items merchandised in the value section may stem the tide of shoppers leaving the food channel on a treasure hunt in alternative formats if supermarkets can integrate them effectively into their brand position, according to retailers, suppliers and industry observers interviewed by SN.

"This is a way to sell the customer more and keep them out of the other channels if we can sell them something here that they would normally get there. It also helps bring in more general merchandise-oriented items for us," said Kim Baker, general merchandise and health and beauty care category manager, Brown & Cole, Bellingham, Wash.

"The benefits for a supermarket lie in strengthening its overall value to its current customer base. Simply put: slowing the migration or erosion of dollars to alternate formats that offer either lower price points or stronger value from the consumer point of view," said David Bishop, director, Willard Bishop Consulting, Barrington, Ill.

From 1993 to 2003, the store count in the dollar channel increased more than fourfold, from 3,652 stores to 15,703, according to data from ACNielsen, Schaumburg, Ill. As of December 2003, dollar stores have added over 4,445 units since December 2000 -- a 44% increase -- while supermarket and drug store numbers for the same time period declined, the research company reported. The frequency advantage ascribed to supermarket retailers has gradually been eroded, and more consumers move outside the food channel to make purchases. In response, dollar stores are starting to look at upping the amount of food they carry.

Among the key players in the dollar store universe are Dollar General, Goodlettsville, Tenn.; Family Dollar, Charlotte, N.C.; Dollar Tree, Chesapeake, Va.; 99 Cent Only, Commerce, Calif.; and Fred's, Memphis, Tenn.

Executives from the General Merchandise Distributors Council, Colorado Springs, Colo., dubbed the value channel the "fourth estate of retailing" in a recent presentation. The value channel has earned a spot with food, drug and mass as a key area of the mass market retailing industry, said Roy White, vice president, education, GMDC Educational Foundation, New York.

For supermarkets, however, observers cautioned that the key to dollar sections lies in not cannibalizing other sales and keeping the bigger picture of the retailer image in focus. Brown & Cole shares the Wal-Mart customer, making the dollar department a good fit for its stores, Baker said. That's important for retailers to focus on so dollar sections don't cannibalize sales from other departments.

Baker said she purposely doesn't cut many health and beauty care items into the Dollar Zone because she doesn't want to trade down from regular HBC items. The chain has seen erosion of seasonal items because it brings in seasonal dollar merchandise, she said.

"For supermarkets to look at dollar sections is probably a great thing. The only issue I would raise is how does that get integrated into the image that a store wants to present to its customer base?" the GMDC's White said.

Trading customers down from higher ticket purchases or diluting the company image may be dangerous for a retailer. Yet as some industry observers pointed out, there are areas where sales are already being lost that a dollar section might help.

"There are some cases where, quite honestly, it's already happening," said Frank Simmons, director of nonfoods, Merchants Distributors, a subsidiary of Alex Lee, Hickory, N.C., when SN asked about trading customers down. "You get the sale where you can get the sale."

For more retailers, getting that extra sale could hinge on reclaiming customers wooed by the treasure hunt appeal of the deep-discount value players, the pure-play dollar stores, and other discounted formats.

Brown & Cole has merchandised a Dollar Zone department within a department in high-traffic areas in its stores since November 2002. The section focuses on seasonal items, party supplies, toys, giftware, housewares and other categories in sections that usually range between 80 and 90 linear feet, said Baker.

Chains of all sizes and types across the country have tested or rolled out dollar sections. The list includes Wal-Mart, Target, Kroger, Hy-Vee, A&P, Pratt Foods, K-VA-T, Stop & Shop and many others.

Wal-Mart, Bentonville, Ark., is currently running a "quiet 20-store test" in supercenters across the country of its Pennies-n-Cents dollar section, said spokeswoman Suzanne Haney. In addition, the retailer has tried dollar sections in its regular stores. In some cases, it has pulled the experiment, observers noted.

"Right now, this is just a test that we're doing. As with any test, we sit back quietly and watch for our customers' reaction. We're just giving them choice, something different and out of the norm for shopping," Haney said.

The Pennies-n-Cents concept was first launched in July 2002 in Baltimore, under a different name. The sections are placed in the front of supercenters where other services like salons, banks and Build a Bear stores are featured. The sections range in size from 448 to 1,000 square feet. Currently, Haney said, tests are running in Missouri, Arkansas, Kansas, Kentucky, Alabama, Oklahoma, Georgia, North Carolina, Mississippi, Utah, Texas and Maryland.

Meanwhile, Target Corp., Minneapolis, told an analyst meeting last month that it plans to extend its 1-Spot dollar sections to all 1,249 stores in September, according to media reports. The 1-Spot dollar section is now being tested in 125 stores, near the main entrances. Items include food, housewares and toys selling for $1.

"We are very excited about its performance and potential," said Gregg Steinhafel, president, Target Stores. "We just got such a favorable response from our [customers]. They like the treasure hunt kind of experience," spokeswoman Cathy Wright was quoted as saying.

"Given that there's increased economic pressures today -- rising gas prices and potential inflationary pressures in food, for instance -- more and more consumers are looking at finding ways to stretch their dollar," Bishop pointed out.

For supermarkets, a move into the dollar channel can provide a value position if integrated properly into the overall store position. Supermarkets have always had a stake in value-priced merchandise, pointed out Jon Wendel, vice president, general merchandise, Hy-Vee, West Des Moines, Iowa.

"We all know that this segment of the industry has grown, but what we have found is that we have hundreds -- if not thousands -- of items that we carry all the time in a supermarket that are retailed for a dollar."

Hy-Vee runs a Dollar Days promotion in-store, but leaves it up to individual stores to decide whether to put in a section. Many stores are choosing to put in large Dollar Days sections, Wendel said.

"We are testing some dollar sections," noted Hy-Vee Chairman Ron Pearson in a recent interview with SN. "You have to be committed in your procurement to be in that business."

Hy-Vee plans to add some dollar sections to give customers the message that they can get "the same kind of values as in a dollar store. It has to be the same kind of excitement. That's why they go to those stores," he said.

Merchants Distributors added a dollar set to its offerings for independent grocers this year to help them compete with other supermarkets and dollar stores, said Simmons. "They've already got the consumer in the store. So hopefully we can keep them in the supermarket, vs. taking another trip to one of the competitors. That's our main purpose."

The wholesaler offers about 68 feet of dollar merchandise to independents. This includes four feet of HBC, four feet of hair care, eight feet of kitchen plastic, and a range of categories that include toys, books, baby items, phone accessories, school supplies and hardware.

Merchants Distributors studied the area for about a year with a few tests, Simmons said, but rolled out the current set at its merchandising show in April.

What keeps consumers coming to a value section, retailers and observers said, is the impression that they could stumble across an exciting new deal.

"It's like a treasure hunt in the grocery store. We've found the key to the dollar department is to keep new products in it, and to try to find really good deals," said Baker.

That approach is not dissimilar from the approach used in the dollar/value channel.

"One of the things you hear people talk about is the treasure hunt experience. The treasure hunt experience is partially created by the fact that value retailers rotate about 20% to 30% of their SKU [stockkeeping unit] assortment on a fairly frequent basis," said Bishop.

One of the challenges with creating a treasure hunt atmosphere, Baker said, is the labor required to reset a section. Brown & Cole resets its dollar section every time the stores receive a freight load, somewhere between every 10 days and every three weeks, she said.