Why Dollar Stores are Growing So Fast, With Thousands of New Store Openings

Picture of a Dollar General store
 

By Tricia McKinnon

Amidst cries of a retail apocalypse over the past decade dollar stores have been particularly resilient. There are now more dollar stores in the U.S. than McDonald’s and Starbucks locations combined. 2018 marked Dollar General’s 29th consecutive year of same store sales growth, a record even Walmart would be envious of.

Add to that, Dollar General plans to open 1,000 stores in 2020 after opening nearly 1,000 stores in 2019. And it’s not just Dollar General that is opening a large number of stores. Dollar Tree, Family Dollar and Five Below have also opened hundreds of stores. 

 
Chart of the number of store openings
 


The growth of discount stores is not only taking place in the U.S. but around the world. In Japan 100 Yen Shops are popular. German discount grocery chains like Aldi and Lidl are expanding and the UK also has pound store chains.

Why are dollar stores defying the odds? A careful look at these companies show a carefully crafted set of strategies that has led to great success in a challenging retail environment.

1. Find the white space.  Dollar stores typically locate their stores in lower income areas and rural towns. Many of these stores are situated within communities with a population of less than 20,000 people. Dollar stores also focus on areas with limited competition to increase their chances of success. For example, Dollar General tries to locate stores in areas that do not have a large retailer or grocery stores within 15 to 20 miles. 

The areas where dollar stores have flourished are often known as “food deserts”, markets where consumers are many miles away from a grocery store or a big box chain such has Walmart but they still need a place to buy household items and food at affordable prices.  Over time this strategy has allowed dollar stores to gain a larger share within the grocery industry. In 2018 sales of groceries at Dollar Tree and Dollar General combined were approximately $24 billion nearly eclipsing Whole Food’s sales of $15 billion.  

The growth of dollar stores shows the importance of considering markets that others are ignoring.  While everyone may be talking about how lucrative it is to target and acquire high income millennials often less competitive markets exist with huge potential. 

This is a strategy Jack Dorsey followed when he founded Square. Before Square there was an entire market of small businesses that did not accept debit or credit card payments because it was too expensive to do so.  Square decided to offer a cheaper way for small businesses to accept credit and debit card payments on their smart phones or tablets by using a Square reader. Focusing on the white space allowed Square to carve out a niche for itself. 

2. Leverage changing shopping habits and target low income consumers. Although consumer confidence in the U.S. is at a high the great recession has had a long-lasting impact on our shopping habits.  Consumers are thriftier now. Consumers reigned in their spending habits during the last recession and continue to spend more carefully now. Add to this an economic recovery where wages have not increased at the same pace means that consumers have less money to spend. This is the case with middle income households as well.

Commenting on this phenomenon Todd Vasos Dollar General’s CEO said: “the middle-class continues to go away, unfortunately, to the lower end of the economic scale versus the higher end,” “So as this economy continues to chug along and creates more of our core customer, I think there’s going to be more and more opportunities for us to get in and build more stores.” Vasos has also said: “saving now is more chic than ever.” 

There is also less of a stigma associated with shopping at discount stores as consumers in higher income brackets frequented these stores during the last recession and kept on shopping in them despite the economic recovery. Many consumers, whether it is for fashion or general merchandise items, actually prefer to shop high low and everyone loves a good deal. 

Commenting on this GlobalData Retail's Neil Saunders has said: "we have seen some signs of a small increase in the number of middle-income consumer groups shopping at Dollar General since the start of the year, largely thanks to more pressure on household budgets from higher gas and energy prices."

Source: Forturne

Source: Forturne

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3. Attract customers with low prices. Do dollar stores employ savvy pricing or misleading pricing? The truth is that not all items sold in dollar stores are the cheapest. Many products sold at dollar stores are given a low price but are in non-standard smaller packaging.  This can make it seem as if a customer is getting a deal when the unit price is actually higher than what exists at another store.   

Many “dollar” stores also carry items that cost well above one dollar. Dollar General and Family Dollar sell items that cost up to $10. This type of pricing and marketing plays right into the hands of consumers with tight budgets that are looking to save as much as they can.  Robert Ohmes, an Analyst from Bank of America has said: “when you have more challenging times, value-oriented retailers generally outperform the rest of retail.” “Depending on the type of recession, it does outperform.”

Dollar stores have worked hard to market themselves as the cheapest deal in town even as the cost of goods creep upwards. In a message to Gary Philbin, Dollar Tree’s CEO, Jeffrey Smith CEO of Starboard Value, a hedge fund with holdings in Dollar Tree, wrote: "Dollar Tree has kept its prices at $1.00 since its founding thirty years ago, despite the fact that $1.00 in 1986 is worth approximately $2.30 today, due to inflation." "However, the value that Dollar Tree has offered its customers has deteriorated because of the need to fit everything into a $1.00 price point. Products today are smaller or of lower quality than they were five, ten, and certainly thirty years ago."

No doubt, the everything is a dollar image is an effective way to get shoppers in the door and then customers are left wondering how they ended up spending $20.

4. Move into grocery to drive growth.  From Amazon to Walmart general merchandise retailers know that selling groceries is critical to success. Jeff Bezos even said that for Amazon to become a $200 billion retailer it has to figure out how to sell food. Expenditures on food is the third largest expense in the U.S. after housing and transportation.  If a retailer can sell groceries then it can count on a steady flow of traffic into its stores on a weekly basis. That is why drugstores like Shoppers Drug Mart in Canada sell fresh food items.  

Over time the amount of groceries sold at dollar stores has steadily increased. In 2014 only 23% of shoppers regularly shopped for groceries at dollar stores. By 2019 that percentage more than doubled to 52%, more than half of all shoppers.  That means consumers shop more regularly for groceries at a store like Dollar Tree than they do at Costco or Target. This signals a material shift in shopping habits.

 
Chart of the number of people that shop for groceries by store type
 

As dollar stores quickly expanded across the U.S. they created communities where dollar stores thrived but full service groceries fail to exist. Julia McCarthy, Senior Policy Associate at the Center for Science in the Public Interest has said: "when you have so many dollar stores in one neighborhood, there's no incentive for a full-service grocery store to come in." This lack of competition has only bolstered the success of dollar stores. Many communities protest that once a dollar store enters their neighbourhood they take out the competition with their low prices leaving a lack of options for where consumers can purchase healthy food.  

The Institute for Local Self-Reliance writes: “although dollar stores sometimes fill a need in places that lack basic retail services, there’s growing evidence that these stores are not merely a by product of economic distress. They’re a cause of it.” “In small towns and urban neighborhoods alike, dollar stores are leading full-service grocery stores to close. And their strategy of saturating communities with multiple outlets is making it impossible for new grocers and other local businesses to take root and grow.”

Dollar General now sells perishable items in approximately 3,500 of its 16,000 locations. Not only does grocery increase traffic it impacts the bottom line.  Dollar General has found that when it adds refrigerators to sell food sales increase by 10% to 15% within year one.

Tricia McKinnonTrends, Strategy & Growth2 Comments