Forget Wal-Mart. What's your dollar store strategy?

They have more stores and faster growth than Wal-Mart -- with eight times as many outlets and a growing appetite for packaged food products. But the dollar-store retail channel remains little understood and even less courted by the food industry.

While dollar stores may not be a major channel for many food companies for years, and may never be a good fit for some brands, they're a growing force for the industry to reckon with, say industry consultants and executives familiar with dollar chains.

"The potential opportunity for food manufacturers is huge," says Ken Harris, partner with the consulting firm Cannondale Associates, Evanston, Ill. "The interest dollar stores have been expressing [in food] mainly has been only in the past year and a half. And those manufacturers who are quick enough to move have benefited a great deal."

Little stores, big punch

While food marketers who haven't delved deeply into dollar stores may be missing the boat, they haven't missed much of the journey yet. Though more than 800 companies operate 25,000 dollar stores, they've concentrated mainly on apparel and household and personal care products, with relatively little space devoted to food , up to now.

That's changing fast. Dollar General, the biggest player in the business, with 6,700 stores and $6 billion in sales, opened its first Dollar General Market in Hendersonville, Tenn., last year. The market combines the traditional 10,000-sq.-ft. discount store with another 7,000 square feet of fresh, refrigerated and frozen foods. Many of Dollar General's existing 6,700 stores have been or are being outfitted with refrigerated and frozen cases to supplement their lineups. And Dollar General's closest competitor, Family Dollar, with 5,100 stores and $4 billion in sales, is watching closely with similar plans rumored.

Household penetration for dollar stores has climbed from 55 to 66 percent in the past four years. Households that shop dollar stores are shopping them more often, too, with the average number of annual shopping trips rising from 10 to 13 over the same period, according ACNielsen.

The selection in dollar stores is a mixture of private label/store brands, second- and third-tier brands, merchandise no longer actively marketed by its manufacturer and special sizes to meet a certain price point. Increasingly, however, there are products that can be found on any grocery store shelf.

While the roots of dollar stores are deep in low-income neighborhoods, current growth is coming predominantly from middle-income consumers. Among households with incomes greater than $70,000, penetration for the channel grew four percentage points last year to 49 percent, according to ACNielsen. Trips per year by that income bracket grew by one to eight, making it the fastest-growing income bracket for dollar stores in both statistics. By comparison, dollar store penetration of households with incomes under $20,000 grew 3 percentage points to 77 percent, with average annual trips remaining steady at 18.

Dollar stores accounted for only 5.1 percent of candy sales and 1.3 percent of snacks and pet food sales last year, according to ACNielsen. But they were also by far the fastest-growing retail channel for each of those food categories, growing share by 8 percent in candy and 30 percent in pet food in one year alone.

A wide-scale rollout of supermarket-hybrid style stores by Dollar General or Family Dollar would dramatically increase the channel's impact on the food industry, said Christopher Hoyt, principal of the Scottsdale, Ariz., consulting firm Hoyt & Co.

While they're fierce competitors, dollar stores may have something of a symbiotic relationship with Wal-Mart, said Todd Hale, senior vice president of consumer insights with ACNielsen. In a county-by-county analysis, household penetration for dollar stores correlates strongly with penetration by Wal-Mart Supercenters, he said.

Dollar stores are swooping in to meet the fill-in convenience shopping needs of supercenter shoppers -- as each new Wal-Mart Supercenter puts an average of two supermarkets out of business. Shopping the compact dollar store is a lot quicker than trekking through a supercenter. "We're benefiting from the black hole that's being created," said David Perdue, chairman and chief executive officer of Dollar General, during a meeting of the International Mass Retail Association last year.

"The huge potential win is that dollar stores are actively looking for help developing their food business," said Harris. "And there will be manufacturers out there smart enough to figure out a way to deal with them and will grow their business that way."

Understanding the landscape

Success with dollar stores means understanding the different operators, says David Bishop, director of Willard Bishop Consulting, Barrington, Ill.

About a third of the segment is made up of over-run or close-out retailers, such as Big Lots, which tend to deal in discontinued or surplus merchandise , retailers that almost no food company intentionally wants to supply.

Another 19 percent is made up of single-price operators, such as Dollar Tree Stores and 99 Cent Only Stores. They tend to operate at a single price point of $1 or less, have a "treasure hunt" appeal and concentrate more on impulse purchases, including snacks and candy. They've also tended to make heavy use of private label.

 

"Dollar stores are actively looking for help developing their food business, and there will be manufacturers out there smart enough to figure out a way to deal with the them," says Ken Harris of Cannondale Associates.

Although 99 Cent Only Stores has experimented with gourmet produce and other perishables, and SuperValu's "Deals" chain is co-locating with Save-A-Lot limited-assortment supermarkets, this segment still offers "fairly limited" opportunity for most packaged food brands, Bishop says.