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Planet Retail U.S. Research Director Sandy Skrovan told a webinar audience Wednesday that value retailers should no longer be considered part of an alternative channel, but as mainstream players.
“The dollar stores are becoming a mainstream channel and high-growth channel,” Skrovan said. “This whole value mentality that has taken root … continues to be a driving force, as well. Any stigma that had been associated with ‘value shopping’ has all but vanished.”
Skrovan said Planet Retail forecast annual growth of 8.4 percent in the value channel for the next five years, topping the 8 percent annual growth experienced in the previous five years. That’s an opportunity for suppliers in the industry, she said.
“One of the key things is they need to seize this value channel opportunity, because if one supplier doesn’t, someone else will move in ahead of them,” she said. “It’s no longer really looked at as an alternative channel or secondary channel. Suppliers need to be proactive, not reactive, to manage the growth.”
And that means they need to find new solutions for stores such as Dollar General, Family Dollar, Dollar Tree, 99 Cents Only, Aldi, Save-a-Lot, Fred’s and Big Lots.
“It’s extraordinarily important that suppliers work with value retailers to provide right-size products and right-size packaging for the pricing that fits into the value retailer environment,” she said.
Although the value channel has added 5,000 stores over the past five years, Skrovan said Planet Retail forecast an additional 7,000 store openings by 2017. The top three dollar stores have about 22,400 stores open today, that total would reach more than 28,000 over the next five years, with much of the growth expected in West Coast states such as California, Nevada, Oregon and Washington.
Consumables continue to be a growing part of the value channel, Skrovan said. As the channel adds more consumables and more fresh and frozen foods through coolers in store, the companies’ gross margin has trended flat to down slightly in the past two years.
To combat that, she said, retailers are focused on private label.
“They want to include and have as many national brands as possible as traffic drivers, but at the same time they’re extending their private label offerings and increasing private label penetration because it increases margin,” Skrovan said.
Among the areas where private label and consumables are gaining share on other retailers is in frozen and dairy items, as dollar stores have boosted the number of coolers in stores.
“That’s what really has enabled value retailers to reposition themselves from that discretionary, thrill-of-the-hunt shopping trip to one of a fill-in or immediate need grocery trip for many shoppers,” she said.
Baby care is another growing category that Skrovan mentioned, along with pet care.
“Value retailers are doing an increasing amount of things with pets,” she said. “They’re adding more private label, more space to private label, and designing some really interesting end caps.”
To merchandise their products, Skrovan said retailers often were using switch and save tactics.
“Let’s drive and draw shopper traffic into the store for national brands,” she said. “A lot of the middle market and higher-end shoppers want national brands only. But for a lot of shoppers, the private label has that attractive opening price point that really makes them a value.”
Despite the anticipated growth, there are some challenges facing the value channel. Skrovan said retailers needed to offset the “declining or slacking” gross margin, possibly by increasing private label penetration. She said stores such as 99 Cents Only and Dollar Tree could be vulnerable to their single price point as input costs for products continue to rise.
She singled out the competitive threat by Walmart above the rest, speculating what might happen to the value channel if Walmart decided to push forward strongly with its Express small-store format. And she said an improving economy could drive current shoppers back to traditional mass and grocery outlets.
“So what do value retailers need to do to remain relevant to their shoppers? That will be important,” Skrovan said.