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Do We Really Need 40,000 Dollar Stores?

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When Family Dollar’s management announced that they plan to triple the number of their 7,800 stores I flipped – that will mean that they will have more than 23,000 stores in every corner of the United States. Family Dollar will open 500 more stores this year – that is almost two stores per day. Dollar General, with over 10,662 stores, will add 635 new units in 2013; and I estimate they might add another 6,000 stores over time.  And Dollar Tree stores, which operates larger stores–around 11,500 square feet versus about 8,000 square feet for the other two-- now has 4,800 units and could add another 2,000 stores, in my opinion. There are many other dollar stores with names such as Dollar Store, Jack’s Dollar Stores, Eastside Dollar, Best 99 Store, Big Lots, On-Line Dollar Store, and on and on.

These value-oriented, low-price stores are expanding at a very rapid rate. Discounters like Walmart and Target have taken notice.  These retail behemoths are responding by locating selected “dollar” merchandise in the highest traffic, most visible place in their stores:  at the front entrance. Customers love the cheap items and scoop them up. But this response is not slowing down the dollar stores growth one iota.

The dollar store retailers have become more sophisticated competitors as they have grown. Originally they were convenient style variety stores, selling inexpensive household products for the budget minded at locations that were “around the corner.” Today, they sell groceries and tobacco, in addition to general merchandise, and this has added momentum to their physical growth. While some of the merchandise sells for $1, about 90% of the merchandise is priced under $10. As the dollar stores attract low-income, budget-minded customers in droves, their aggressive price stance will have impact on the pricing structure of discounters, drug stores and low prices specialty stores well beyond the “dollar specials” at front entrances. I believe it is likely that dollar stores, who are true value retailers, will move away from just selling budget price lines--adding higher price points while still offering great values thereby maintaining strong relationships with their customers while taking care of more of their daily needs.

The dollar store sector is also bringing in top retail talent. For example, Family Dollar hired Michael Bloom, a former CVS executive, as their new COO. He brought them the idea of selling tobacco. After successfully testing the product, the company now is committed to a full rollout across all of their stores. By using McLain distribution systems, Family Dollar can efficiently receive dairy, beer and other food items at the same time that they receive tobacco, thereby leveraging the distribution costs across all stores and multiple product lines.

Marketing has also become more important as it serves to distinguish one dollar store concept from another.  For example, Dollar General has aligned itself with motorsports such as NASCAR, sponsoring racers like Brian Vickers and Kyle Busch, as well as drivers in the IZOD IndyCar races. The visibility generated as sponsors of race teams and the placement of car decals on high profile vehicles is enormous. Race car enthusiasts far and wide, many of whom are potential and actual customers, recognize Dollar General’s name and logo from these marketing activities.

My main concern surrounding the dollar store sector is overexpansion. It feels like there is a Starbucks everywhere you look, yet it had only 6,866 stores at the end of its fiscal year. I estimate that if some of the projections become reality, the major chains will operate as many as 40,000 dollar stores across the United States. It is a number that may not be sustainable and will result in a battle of survival of the fittest.