Phill Foster

May 5th, 2005

May 5th--Doron Valero, president of Equity One Inc., knew he had a problem. Two shopping centers in his portfolio were losing Kmarts while Winn-Dixie was pulling out of two others, leaving 50,000-square-foot gaps at each center.

“I can tell you that when that anchor drops on you, it has a significant effect,” says Valero.

But rather then trying to find a replacement big box, Valero chose another route. He took those gaps, divided them into three parcels and gave each center to Dollar Tree. With its high traffic, Collar Tree helped bring in other tenants, like Marshalls, Bed Bath & Beyond and, at one property, even another dollar store chain: Family Dollar. And while dollar stores usually ask for below-market rents… they still pay more in rent then a supermarket or Kmart, which pay between $4 and $5 per square foot.

“When you have a dark store, a successful dollar store can bring a lot of traffic,” says Valero. “Especially when we lost Winn-Dixie, and put in a Dollar Tree; it did well because there stores have a lot of food nowadays.”

That attitude is a marked change from the past when dollar stores were shunned by REITs because of the perception that the low-budget stores were dingy and didn’t draw the target demographic for the center. But now with cross-shopping more pervasive then ever, dollar marts have lost that stigma. And developers have begun to notice the high traffic and sales volumes and started incorporating the sector into there properties. Not even higher gas prices have stopped them as the big chains, such as Dollar General and Family Dollar, have adopted new initiatives to cope.

Traditionally, dollar outlets were to be found in rural, freestanding locations with double or triple-net leases, says Chad Chadwick, a senior adviser as Sperry Van Ness. However, their aggressive expansion is placing them in shopping centers across the country. Being a major source of foot traffic and open seven days a week, dollar stores can act like a mini-anchor drawing in the other tenants.

“Because we are in redevelopment [of shopping centers], we’ve always seen them as a good complement to bring in,” says Michael Mugel, CEO if Red Mountain Retail Group, a Santa Ana, California-based developer and owner of shopping centers. “They really help to bring back to life, a property with second-generational space.”

With about 65 shopping center properties in seven states, including California and Arizona, Mugel estimates that about a third of his properties have a dollar store.

The dollar store is also now more accepted among all income groups as they moved into more suburban and urban areas. “We are finding that they are being shopped by all income classifications, even though they are often skewed to lower and middle-class income shoppers, “ says Todd Hale, senior vice president of consumer insight at ACNielsen. Nearly one-third of us shop there on a monthly basis, according to a Retail Forward ShopperScape survey. About 50 percent of households making over $70,000 have shopped there at one time.

“Everybody loves a deal,” says Mugel. “You can buy a lot with $20 at a dollar store.” In Southern California, dollar stores, such as 99 Cents only, can be found in all areas, even close to ritzy neighborhoods like Beverly Hills.

The appeal of dollar stores is becoming greater as higher gas prices squeeze many segments of the population…

In response, Family Dollar rolled out its urban initiative, with about 60 percent to 65 percent of new stores opening in urban areas. This is a different approach from the company’s traditional rural/small-town base. “We have higher sales and greater density of customer base here then you have in a small town or rural area,” says Mahoney.

The strategy has been successful in achieving higher year-over-year sales. Comparable sales at Family Dollar grew 4.5 percent in the past quarter and the company expects to reverse its pattern of failing profits by summer...

However, Wal-Mart cannot match the convenience of the dollar stores. “Seeing what you want from the front door and getting in and out very quickly is a key factor to out appeal,” says Mahoney. That aspect of the dollar mart’s appeal is only expected to grow as the American population ages and becomes less mobile possibly not wishing to navigate Wal-Mart’s labyrinthine layout.

“Because there are so many and because they’ve grown so rapidly, it’s tough for anyone to compete with them,” says Karl Bjornson, a senior manager and retail operations specialist with the Kurt Salmon Associates speaking of the dollar outlets.

It’s an industry that is growing larger. The channel adds five a week. It is also extremely profitable. Selling relatively cheap merchandise in bulk, gross margins are around 40 percent due to high mark-ups. That amount of profit allows for great reinvestment.

ACNielson estimates that the dollar store channel, currently with almost 30,000 units could easily add another 15,000. Retail Forward projects market saturation is still 10 years away. “I think they have proven themselves to be a lasting business,” says Valero.

Excerpts from an article from Retail Traffic.

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