Trends and Insights

A look Inside

Retailers in the dollar store channel are looking for good quality, low cost, basic household goods and merchandise with high appeal and frequent turns. Carrying both soft and hard goods, these stores have significant shelf space in categories like paper products, detergents, household cleaners, health and beauty aids, foods and beverages. While not all of the products sold in this channel are priced at one dollar, multiple quantity price offerings at various price points, such as 4/$1 and 3/$1, are common.

The three largest retailers in this channel are Dollar General, Family Dollar and Dollar Tree. Annual sales for these retailers, fueled primarily by store expansion, range from a high of $7.3 billion for Dollar General to $2.7 billion for Dollar Tree While that may seem small in comparison to annual sales levels for the major U.S grocery, mass and drug retailers, it is significant nonetheless.

Traditional Retailers retaliate

The effects of merchandising activities and deflationary pricing have created more cost conscious consumers in both low and high-income population segments. To compensate, traditional retailers have started to include dollar-store sections or dollar-store merchandising activities to capture some of the channel's sales. For example Wal-Mart has a dollar-only section format in about 20 stores, and has had some discussions about rolling out their own free-standing dollar store format. In addition, Kroger announced in July 2003 that they are testing their own dollar store aisle in a few markets. Other low-priced retail formats, such as Supervalu's Sav-A-Lot or  Aldi's, are also posing a threat to this channel. Target just announced plans to test dollar sections in 125 stores. Finally, a number of retailers—in channels like grocery, mass-merchandiser and drug—are running dollar-store promotions to capitalize on this retail trend.

Target Practice has expanded

Understanding the key demographic segments that drive a channel's shopper base is critical to growth-for both retailers and suppliers. With this knowledge, retailers and suppliers can look for the categories, brands and items that have the best demographic fit against the shoppers who visit their stores. Under-developed demographic segments provide insight into sales opportunities.
 

As expected, households residing in rural areas exhibit high development, accounting for 27% of dollar store channel sales, which is 78% greater than expected given the percentage of households in that segment. Other important demographics include lower educated females, African American households, low-income, large and blue-collar households [See chart 3].

On the flip side, the households who exhibit under-development include acculturated Asians, upper-income households, households without a female head, households where the head occupation is in a managerial/professional job, one-member households and college-educated females.

While the channel is over-developed among low and middle-income households, since 2000, the channel has experienced strong increases in household penetration across all income groups [See chart 4].

Match Game

Combining the right mix of products with the right consumers is smart merchandising. In order to identify those categories that have the best demographic fit against the demographics of heavy dollar store channel shoppers, ACNielsen ran correlations within defined mega-categories. While no strong correlations emerged due to the low-income household skew, a close match with a number of basic household staples was evident. Categories such as sugar and sweeteners, flour, fresh meat, feminine hygiene, deli-packaged meats, woman's fragrances, first aid, frozen meal starters, automotives. Shortening and oil, deodorants and diet aids deserve more than just adequate shelf space and merchandising support.

Equally important to matching demographics and categories is understanding differences in demographic composition of heavy shoppers across channels and within key demographic drivers. Interestingly, big box formats (mass, grocery, club and supercenters) perform well among large households (showing an average 60/40% dollar spending split among large and small households) while dollar stores perform equally well among large and small households (54% vs. 46%). As the number of small households increase, driven primarily by aging baby boomers, the retail landscape will be impacted giving smaller formats an opportunity for further expansion [See chart 5]

Movers and shakers

A look at the big sellers, rapid growers and fast movers provides a virtual aisle-by-aisle road map for success. Based on dollar sales, the top ten selling mega-categories include:

% change vs. year ago 

1. Candy                                      22%

2. paper products                           23%

3. Detergents                                24%                              

4. Stationery and school supplies       12%

5. Wrapping materials and bags         9%

6. Household cleaners                     12%

7. snacks                                     21%

8. Laundry supplies                        17%

9. Batteries and flashlights              13%

10.personal soap and bath               14%

Across all categories tracked by ACNielsen, a healthy 22% growth rate was achieved. While the biggest categories in terms of dollar sales were primarily in the cleaning supply and paper product categories, seven of the top 10 fastest growing items were food and beverage categories. Unprepared meat and seafood tops the list, with an overwhelming growth rate of 333% compared to year-ago sales. Other triple-digit growers include: canning and freezing supplies (330%), frozen pizza and snacks (157%), sewing notions (129%), butter and margarine (122%) and flour (118%). Milk (84%), greeting cards and party needs (84%), dairy snacks, dips and spreads (81%) and wine (59%) complete the list, all posting impressive increases.

A formidable challenge

Dollar stores represent a formidable challenge for other retail channels. The small, low-cost no frills format allows them to compete on both convenience and price. At more than 15,000 stores and growing, coupled with the large number of households shopping in the channel, dollar stores cannot be overlooked. Households who shop the channel are more likely to shop in convenience/gas and supercenters, but channel expansion will no doubt impact other channels.
 

The channel, however, is not for all brands-and certainly not those with a premium priced position. The dollar price point focus by some retailers does limit category and brand opportunities. In addition, more "dollar-store-like" promotions in traditional retail channels may limit the impact of dollar stores. And will these retailers be as successful as they move into larger markets?

For now, there is no indication of a slow down in store growth within this channel. This channel offers convenience and low price points that are appealing given the hectic pace of life and value-conscious consumer trends that are evident. Manufactures should capitalize on this opportunity and maximize volume sales.