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

The third and biggest segment, and also the one offering the most potential for most packaged-food marketers, is the "extreme value" channel led by Dollar General and Family Dollar, Bishop says. They tend to stock more national brands and consumables, offer even but multiple price points (e.g., $1 to $9) and appear most likely to evolve into supermarket-like hybrid formats.

As these "extreme value" dollar stores, whose prices tend to be competitive with Wal-Mart's, evolve toward more food offerings, they may start to look more like German-based "hard discounter" Aldi and its U.S.-based cousin, Trader Joe's, Bishop says. Aldi, Trader Joe's and SuperValu's Save-A-Lot feature limited assortments, low prices and often rapidly changing brand and product mixes.

While dollar stores offer high growth potential, they also present some tough strategic choices for food companies.

"You have to ask: Do you have the product portfolio to have an offering in dollar?" Harris says, noting that high-volume consumables that can be priced competitively are key to getting onto the shelf.

Dealing with dollar stores often means creating special labels to highlight the price and sometimes means reconfiguring package sizes or even formulations to hit the desired price points, Harris says. "Are you willing to make the package/product/marketing investment to make a go of it? If you do it half-heartedly, you probably won't succeed."

A self-examination question is whether "you can reconcile the dollar-store offering with your brand image if you're a premium brand." Harris says. Not all brands will be right for dollar stores, which are limited-assortment formats with a laser-like focus on price.

Another big question: If you do a deal with dollar stores, how does it stack up to your deal with Wal-Mart? Pleasing big, fast-growing Wal-Mart, as its supercenters continue to take share from supermarkets, is what keeps many food executives up at night. But dollar stores are what keep some Wal-Mart executives up at night.

"Wal-Mart is hypersensitive to the dollar channel," Harris says. "So if you offer something to the dollar channel, do it with the full recognition that Wal-Mart is going to find out about what you did and ask what you are going to do for them."

Just as food manufacturers developed massive club-store packs in the 1980s and were forced to offer them to supermarket retailers on comparable terms, they'll face the need to do the same with miniaturized dollar-store packs with Wal-Mart and others.

The tradeoff of growth opportunities offered by dollar stores may be accepting lower margins across multiple channels, Bishop warns. Dollar store buyers make no bones about what they want , the lowest prices for their consumers at the best margins for themselves. Through a combination of bare-knuckle bargaining with suppliers and ruthless efficiency throughout their supply chain, dollar stores have been able to achieve better margins than supermarkets or Wal-Mart.

But some household and personal care products manufacturers who already have dealt with dollar stores for years have found them to be major, profitable accounts. Executives of Clorox Co., maker of Clorox bleach as well as Hidden Valley Ranch dressing and KC Masterpiece barbecue sauce, have said the company now gets about 10 percent of its sales from dollar stores.

Procter & Gamble Co. has made dollar stores a central element of its effort to expand sales to low-income consumers in recent years and now gets from the channel about $1 billion in sales , representing more than 4% of its U.S. business. P&G launched a non-ultra-concentrated version of its Dawn dishwashing detergent to hit a $1 price point and a 20 percent smaller, 80-oz. version of its Tide detergent to hit a $5 price point in dollar stores.

P&G recognized the potential of dollar stores five years ago, when the company had a 13-person team working on developing business in the channel. This was long before most of its competitors were paying much attention to the medium, says Gordon Wade, president of the consulting firm Cincinnati Strategies in Cincinnati and an ex-P&G executive who helped Dollar General plan its expansion into packaged goods categories in the mid-1990s.

"Dollar channels are important because of their growth and rapid expansion, and because they enable us to reach shoppers who prefer these stores," says Stefani Valkonen, a spokeswoman for P&G. She wouldn't confirm the size of P&G's team working on the channel or the sales figures. "We collaborate [with dollar stores] to better understand their target shoppers so there is a more effective variety of options to meet their needs, including sizes and price points."

But as Wal-Mart becomes increasingly aware of the threat posed by dollar stores, it's also increasingly demanding products originally developed for dollar stores. Earlier this year, the giant retailer added the non-concentrated version of Dawn dishwashing detergent P&G originally developed for dollar stores. It also scrapped its private label detergent program, opting instead to have its private label supplier, Huish Detergents, Salt Lake City, sell Wal-Mart the 100-oz. version of its liquid detergent Sun. Going head-to-head with dollar stores, Wal-Mart began selling the product for $1.90, 10 cents below the $2 Sun retails for at dollar stores.

Bishop expects similar scenarios to play out across food categories. Despite the likelihood that Wal-Mart will want food companies to match any product or program that works effectively in dollar stores, he believes it's important to try to develop business in the channel.

One reason is that since dollar stores have limited assortments, developing a relationship with them can mean eliminating or diminishing the threat of competition within the channel. "Dole Foods in perishables has a virtual lock on all the items in the produce department," Bishop says. "Pepsico's Pepsi and Frito-Lay divisions have been very aggressive at getting front-end merchandising at Dollar General, where you really don't see Coca-Cola products."