One of the few retail niches expanding: dollar stores

01/29/2012 5:00 AM

01/29/2012 8:50 AM

A few days after the New Year’s holiday, clerks at the Dollar Tree store in the St. Paul, Minn., Midway neighborhood were busily setting up new displays celebrating Valentine’s Day and Super Bowl Sunday. Any remnants of the Christmas holiday season were long stowed away, and the bright new merchandise enticed shoppers anew.

No longer dusty, out-of-the-way haunts, dollar stores have grown into a $56 billion industry, a 43 percent increase since 1998, according to the industry research firm IBISWorld.

One of the few niches of retail expanding in a dim economy, the dollar store industry’s four top players — three of which are Fortune 500 companies — are no longer snubbed by developers, landlords, investors and consumers because of their perceived working-class customer.

Publicly traded Dollar General, Dollar Tree, Family Dollar and 99 Cents Only Stores are expanding rapidly — so much so, a recent report by Colliers International found, that there are more dollar stores nationwide than drugstores, a profound conclusion given the nation’s aging population.

Dollar stores have responded to the new value-obsessed consumer by providing a brighter, cleaner retail experience with a dependable, well-edited selection of goods, including many food items, some perishable like milk and eggs.

Dollar chains are opening hundreds of new locations. This is a fortuitous development for commercial real estate brokers. As national retailers such as Borders, Linens ‘n Things, Ultimate Electronics and others shut their doors, landlords have struggled to fill empty space in their shopping centers. Dollar stores often fill the void.

All of the chains emphasize convenience when looking for new space. Typically, they rely on automobile counts on nearby roads as a way of winnowing down potential sites, according to the Colliers report, while other retailers fervently study a potential market’s demographics. In competitive markets, the success of a dollar store often depends on storefront visibility and the impulse shopping urge that it encourages.

“Dollar store success depends on the power of the spontaneous purchase,” said Andrea Christenson, vice president at Cassidy Turley, a Minneapolis-based real estate firm. “You may not need anything going in, but you develop a need once you’re inside.”

Expansion in 2012

Dollar General recently announced that it would open 625 more stores this year — almost two a day — across the country, said Tawn Earnest, spokeswoman for the Tennessee-based chain. She declined to be more specific. Dollar General is the largest chain nationally with more than 9,800 stores.

Historically, Dollar General has opened in rural areas that were so sparsely populated that even Wal-Mart passed. Today, 70 percent of the stores serve communities with fewer than 20,000 residents, according to its annual report. Customers typically live within three to five miles of the store — within a 10-minute drive — and they shop in the store an average of 10 minutes.

Earnest said customers “demand convenience and low prices. We’re positioned well against drugstores because they have higher prices, and against big boxes,” which are so big they’re overwhelming to some shoppers.

When Dollar General announced plans to expand this year, the company also said it would renovate or relocate another 550 stores. At first blush, this may sound like a Herculean effort, but a key to Dollar General’s and its competitors’ success is that a minimal initial investment is required and low maintenance beyond that. The company says it spends about $75,000 for equipment and fixtures to remodel a store, and about $140,000 to relocate one.

The chain does not strictly adhere to the dollar-only price point, and instead offers a variety of value-priced merchandise ranging from a limited selection of clothing to paper products and food — sort of a mix between convenience and variety store.

Virginia-based Dollar Tree, where every item is indeed a dollar, prefers opening new stores in strip shopping centers anchored by mass merchandisers like Target or Wal-Mart, or by grocers, in urban and suburban markets and small towns. It said the number of stores planned for this fiscal year will be announced next month.

Sometimes grocery stores and big boxes try to restrict dollar stores from their shopping centers because they may erode sales.

“They’re everywhere,” said Jamie Cohen, a broker with Upland Real Estate in Minneapolis, who counts Dollar Tree as a client. “I’ve been representing them for 10 years, and have never encountered any resistance (by landlords).”

Cohen says his experience shows that discounters prefer having a dollar store nearby because they add to consumer traffic.

Conversely, Family Dollar targets low- and middle-income consumers at its 7,100 stores nationwide. About 54 percent of the firm’s customers had annual gross income of less than $40,000, and about 24 percent had a gross income of less than $20,000, according to a securities filing. The typical consumer is a female head-of-household.

Because the chain has an urban orientation, it is forced to focus more on price to combat competition, according to the Colliers report. Still, Family Dollar expects to open 450 to 500 stores nationwide this fiscal year, although the locations haven’t been announced yet.

“They offer price and convenience, and that’s pretty much a slam-dunk,” said Mark Miller, an analyst with William Blair & Co.

As chains expand, there is a danger of oversaturation, often a death knell for many national stores, said Ann Natunewicz, manager of retail research for Colliers. Historically, newer entrants are more vulnerable when consumer sentiment changes, particularly if the economy turns around.

But, she added, “I don’t see any change in consumer sentiment regarding dollar stores in the foreseeable future. It’s now OK to be a value shopper.”

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