The Almighty Dollar Store

A Nation of Bargain Hunters Helps These Discount Chains Thrive

By Ann Zimmerman
Staff Reporter of The Wall Street Journal

Liz Akop doesn't need to pinch pennies by shopping at a dollar store. She just happens to like it.

"You can get great deals here on holiday decorations, party favors, cooking utensils," says Ms. Akop, a 42-year-old, stay-at-home mom. "Every time I come, I never leave without dropping $30 to $40."

Dollar stores, retailers that offer ultracheap prices on a limited selection of soaps, snacks and other domestic products, are booming across the country, and not just because of the financial strains caused by the U.S.'s uneven economic recovery. While they still rely on low-income households for the majority of sales, some dollar-store companies are appealing to consumers from all income levels who want discount prices for everyday household goods. Their success is yet another sign that the U.S. has become a nation of bargain hunters.

Two Types of Shopping

According to a recent study from Boston Consulting Group, consumers are dividing shopping into two categories: big-ticket items such as cars and televisions, on which they are willing to splurge; and everyday items, such as canned food and over-the-counter health remedies, for which they won't pay more than discount prices. As a result, a quarter of Americans with household incomes in excess of $100,000 shopped at a dollar store at least once in the past six months, according to Retail Forward, a marketing and consulting firm.

Dollar General, the largest dollar-store chain in the U.S., says households with annual incomes of more than $50,000 represent its fastest-growing market. The number of such households who shopped at its stores between 2001 and 2004 increased 27%.

"Poor people need low prices. Wealthy people love low prices," says Todd Hale, a senior vice president at market-information company ACNielsen.

The lure of the decades-old dollar stores is putting pressure on major retailers who are also grappling with the effect of higher gas prices and stagnant wages. Retailers including Target, Albertsons and Kroger have responded to the dollar-store phenomenon by installing aisles in stores devoted to items costing $1. "As we did our research, it became very clear to us that it was a consumer trend that we could not ignore," says Albertsons CEO Larry Johnston.

Dollar Stores, usually located in strip malls, have few frills. Most feature linoleum-tile flooring, fluorescent lighting and metal shelves. Historically, dollar stores were the dumping ground for a hodgepodge of leftover merchandise. Some chains have recently expanded into more exotic goods, including frozen shrimp and brand-name underwear. Some chains sell everything for a dollar or less, while others sell products for as much as $10. Items are almost always priced in whole numbers for the sake of simplicity.

The number of dollar stores in the U.S. has tripled over the past decade to 16,000, and industry experts say there's room for more. Dollar General, which owns 7,100 stores, plans to open 695 new stores by the end of this year after opening 587 outlets in 2003. Over the past five years, the annual average U.S. sales growth for each of the three biggest dollar stores-Dollar General, Family Dollar Stores and Dollar Tree Stores-was higher than that of Wal-Mart Stores.

The core market for dollar stores remains families with incomes under $30,000. The poorest Americans, many of whom don't own a car, are attracted to the stores' neighborhood locations, as well as the low prices.

Sandra Holt, 63, has shopped at Dollar General in Dallas since she was laid off last summer. Ms. Holt says the prices are sometimes better than Wal-Mart's and she also likes not being tempted by a larger selection of products she can no longer afford.

But by expanding into the suburbs, dollar stores have been able to attract a new range of shoppers: well-off customers schooled in online comparison shopping and bargain hunting. "I may be able to afford a $4 greeting card, but why should I pay that if I don't have to?" says Esther Donald, a lawyer.

Buying Power

As a result, dollar stores are gaining clout among the premium consumer-products and food manufacturers who once ignored them. Procter & Gamble, for example, created for dollar stores a special 18-ounce bottle of Dawn dish soap that sells for $1. Kraft Foods sells a 12-ounce box of macaroni and cheese through dollar stores.

Dollar General has slightly departed from its no-frills strategy in recent years to attract higher-income customers. The chain is beginning to carry popular makes of clothes, such as Jerzees, a sporting-goods brand owned by Russell. "It's our way of adding a little cream to the top, to keep the shopping experience exciting," says Stonie O'Briant, Dollar General's merchandising chief.

Dollar General is also selling fresh food, including milk, eggs, lunch meat and even frozen shrimp. Customers who buy fresh food tend to spend more per visit, Dollar General has found-about $13 compared with an average of $8.49.

Established retailers are looking for ways to fight back. Wal-Mart has tested a bargain-basement section in its stores called Pennies-n-Cents. The company says it has no immediate plans to launch the concept and won't say why. Wal-Mart's chain of grocery stores called Neighborhood Markets, built as smaller alternatives to its traditional supercenters, may pose tougher competition for dollar stores because they are also inexpensive and convenient. The company has so far only built about 75.

Lee Scott, Wal-Mart's chief executive, says dollar stores are gaining market share, but he contends they're not taking it from his company. "They've helped Wal-Mart by reminding us to stay true to our roots and not overlook the customer who most needs to save money," he says.