Cover Story - Dollar Store Report
Ringing Up The Sales
Consumables, Private Label Drive Dollar Channel Growth
September 13, 2012
As the U.S. economy plunged into recession in 2008 and consumers began looking for value offerings in different retail areas, a renaissance in the dollar store channel already was under way.
The three dominant players in the channel — Goodlettsville, Tenn.-based Dollar General, Chesapeake, Va.-based Dollar Tree, and Matthews, N.C.-based Family Dollar — were remaking their stores, expanding their offerings, and improving the quality of their products, particularly their private label products.
As a result, dollar stores have been gaining ground quickly in the retail world while other channels have slowly bounced back. Dollar stores accounted for 0.5 percent of all retail sales in 2000, according to a CNN Money report, but tripled that share in the past 12 years.
“Because of the economic pressures, what dollar stores have done well is really reposition themselves to address the bigger issues that kept them from being attractive to more customers,” says Terry Lee, founder of Private Brand Advisors.
Lee had an up close look at the transformation after serving as the vice president of private brands for Dollar General after stints as a private label executive with Albertsons and Safeway. He said the channels have improved the customer experience, helping to keep sales growing as the sluggish economy has struggled to fully recover from pre-recession days.
“One of the things they’ve done is significant work to remodel their stores and make them a much better shopping experience,” Lee says. “If you compare the stores of five years ago to today’s remodeled stores and new stores, there’s a significant difference, a much better shopping experience for consumers.”
Those remodels also have spurred new growth. Dollar General has more than 10,000 locations across the U.S. today, while Family Dollar has more than 7,000 stores, Dollar Tree has more than 4,000 stores and 99 Cents Only has 300 stores. The big three plus one dominate the dollar channel in the country, and as they’ve expanded their reach to challenge traditional retailers in the drug and mass-merchandise channel such as Walgreens, CVS, Walmart and Target, they have adjusted their product offerings to broaden their appeal to customers.
“They really changed their assortment to expand on two things,” Lee says. “They’ve expanded significantly on consumables or food products, things that people are using in their everyday lives. They expanded in that area, food especially. They’ve also changed the mix … one of the largest areas that people complained about in dollar channels was the quality of food. In the past, the channel used to buy a lot of regional brands and closeouts, and that was a stigma that still hangs over the industry. But over the last few years, the channel has focused on bringing in a lot of national brands that you can see on the shelf.”
All three major players have added coolers to stores in the past couple of years, reaching into refrigerated and frozen products that normally were not available in dollar stores. With 99 Cents Only’s heavy focus on perishables — food and grocery accounted for 56 percent of the chain’s sales in 2011, according to its 10K filing with the SEC this summer — food has become a major source of growth for dollar stores.
“Dollar Tree, Family Dollar, Dollar General have all worked hard to expand the number of coolers in stores that can carry refrigerated and frozen products, and it becomes a more complete offering for consumers who want to make that quick trip,” Lee says. “Without some of those key refrigerated or frozen products, it doesn’t make it as attractive a trip for consumers.”
The push into food and consumables, along with the emphasis on improved quality, has had a major impact on the channel’s private label programs. Dollar General ranked 19th on PLBuyer’s list of the Top 35 North American Private Label Retailers last year, while Family Dollar was 27th. Dollar General, under Lee’s watch, pushed its private label into more product categories and offerings first, while Family Dollar has refreshed 15 brands since it began revamping its private label program three years ago.
“The channel has a lot of momentum,” Lee says. “The economy isn’t fundamentally getting better from a sustained standpoint. The dollar channel is continuing to execute and continuing to attract more customers who discover them, and move some of their shopping over here.
“All things are very positive in terms of private label. It’s changing the consumers’ perception of quality. If you have a bad experience in the past, it is really a challenge and requires a sustained effort to fix. But if you have an opportunity to bring new customers in, you need to make sure your product offering and quality is there.”
Here’s a look at the top four players in the dollar channel, and how their private label programs are affecting their sales. All four were offered interview opportunities with PLBuyer. Dollar General declined because of scheduling unavailability, 99 Cents Only declined after its owners took the company private, and Dollar Tree officials did not return repeated requests to participate.
The resurgence of Family Dollar’s private label program began three years ago under the direction of Mary Rachide. The company launched or refreshed 15 brands over that time, with private label sales growing 130 percent. Rachide said that Family Dollar wanted to double its consumables sales after she took control, and the company did that in its fiscal 2011 campaign.
Rachide left the company in June and retail veteran Tammy DeBoer was named the vice president of private brands and merchandising initiatives. She twice led private label programs in her 20-plus year career and most recently ran the Bloom banner for Delhaize America.
DeBoer said her focus from the start would be on product quality.
"The most important function to me is building brand equity," she said. "It has to be a national brand equivalent item when we consider sourcing, whether it's domestically or globally sourced. We have some products that have our consumers saying they like the private label version better than the branded one, and that's what we're pursuing, getting their loyalty to Family Dollar products to come back and buy them again."
Recent announcements from Family Dollar have focused on the addition of national brands into their stores in consumables and health and beauty areas. Bringing Pepsi into stores alongside Coca-Cola was one of the company’s recent additions making headlines, and Lee said it was an example of where Family Dollar’s program is today.
“This is a pretty good example of it being about three years behind where (Dollar General) is,” says Lee, referring to Dollar General’s expansion to both major soft drink manufacturers about three years ago. “It’s all about providing the brands that consumers are really needing and demanding to have, which will kind of drive their decision of whether they shop there or not.
“If you’re a Pepsi drinker and that’s all you’re going to buy, and a store doesn’t offer it, you’ll go somewhere else. So now they’ve expanded their ability to capture that percent of the population.”
Family Dollar added 100 private label items in its consumables categories in the first quarter of the year while rolling out Family Wellness, its private label health care line of products. DeBoer says she wanted to reach out to new and traditional consumers to have them connect with the company’s products.
"Creating awareness of our quality is paramount in the continued evolution of our private brand program," she says. "Our objective is to continue to drive a relevant assortment that is national brand equivalent and consumers understand our products are of great quality and at a great value ... There's a great strategy already in place, and I want to take that strategy and make it even stronger and grow and build those brand identities."
DeBoer highlighted two brands amongst the Family Dollar portfolio of brands — Kidgets, the company's children's line, offering diapers, accessories, and apparel — and Family Wellness.
“I think we’ve done a great job of developing a portfolio of brands that meet the needs of consumers,” she says. “Our Kidgets line … is a brilliant idea with a brilliant concept that’s doing very, very well for us. Family Wellness … has incredibly high quality items. Consumers are often looking for private label items in these categories, and we have some outstanding offerings for them. So our portfolio of brands is an extremely strong offering.”
To create consumer awareness of Family Dollar's private brands, DeBoer says she plans to oversee marketing events aimed at consumers.
"We're sharing our quality assurance process with our associates so they can fully understand the rigorous development process we put our products through," DeBoer says. "And we communicate our quality commitment to our consumers through our 100 percent satisfaction guarantee."
And as more brands come through the pipeline and onto shelves, DeBoer says expect to see more private label consumables and food items in Family Dollar stores.
“There’s still a tremendous amount of growth opportunity and opportunity to create more consumer awareness that we have a great quality product at a great value,” she says.
The leader in overall sales and private label sales in the channel, Dollar General, opened its 10,000th store this year in California. And, although Lee confesses to being a bit biased, he says Dollar General is “clearly the most developed among the players."
“It continues to have opportunities to grow and look to the future,” he says. “It has a well-developed system, it continues to identify opportunities for its private label business, and it has a good reputation of building loyalty.”
Wrapping up the company’s 2011 results, CEO Rick Dreiling told analysts on a conference call that the company had nearly 1,900 private brand SKUs in consumables, and nearly 2,900 private brand SKUs overall.
“We added 16 seats of core health and beauty products in 2011, with a big push in our Rexall proprietary brand, and continue to expand other private and proprietary brand in consumables,” Dreiling told analysts. “We believe we have additional opportunity to capture margin in 2012 from further shrink reduction, expansion of foreign sourcing, and the addition of private ran SKUs as we move into new categories.
“We still have opportunities in sourcing private brands, shrink, warehouse and transportation. There is a lot of room there.”
Lee says the company’s work with its private label brands over the years has paid off.
“Dollar General has done a significant amount of work to improve their private label offerings,” he says. “In the past, quite frankly, a lot of its products weren’t very good. It was focused on presenting a product that was the lowest price. Now its combination of assortments and stores is really boosting its sales.”
He says that expanding into DG Market stores and newer and larger facilities provided the company with a chance to add to its fresh and frozen food products, items that would allow for private label margins along with increased customer traffic.
“That fresh arena is where there’s opportunity in private label,” Lee says. “It hasn’t been touched a lot in the channel by any of the players because of the amount of display space and the volume you need to generate and sustain a private label program in that area. But there’s an area for expansion there, certainly as they expand their DG Market stores going forward.”
The big player with the most quiet private label program is Dollar Tree, something Lee attributes to the chain not using its banner or store name in its private brands.
“Its private label program is a little less visible,” Lee says. “That is a bit more hidden. Its focus obviously is in that treasure hunt shopper, and its mix tends to be on an in-and-out basis, so the customers don’t expect to see that same product every time.”
Lee says the chain generally appeals to higher income shoppers rather than the $40,000 annual household income and below that were the main consumers in the dollar channel.
“At the same time, it’s offering perhaps more food these days to try to capture a little bit of that quick trip, and I feel like you see it doing some of the things that Family Dollar and Dollar General are doing, but leveraging off its history and image that consumers have of it as a great place to go and get fun stuff,” he says.
In a call with analysts after its first quarter, CEO Bob Sasser said the company’s “flexible assortment strategy” was helping drive sales growth and remains the focus of the chain.
“Our goal is to provide our customers a store that offers a balanced assortment of high-value basics, things that customers need every day, alongside seasonally relevant and fun discretionary products,” he said.
The company added coolers to more than 125 stores in the first quarter, with more than half of its 4,400 stores now featuring refrigerated and frozen foods.
“This important category is extremely productive,” Sasser said. “It serves the needs of our customers, drives traffic into our stores, and provides incremental sales across all our categories.”
Lee says one point of differentiation for Dollar Tree is the sourcing of its products, given the higher turnover on treasure hunting kinds of items.
“Dollar Tree does a significant amount of sourcing on its non-edibles, beauty products and personal care products, from overseas, and everybody talks about sourcing from overseas as being a significant opportunity from the standpoint of reducing costs,” he says. “It is a challenging effort. Overseas sourcing has a combination of a lot of upside and a lot of challenges.”
Sasser cited one category on the call that Dollar Tree finds opportunity in with its private label program.
“Carbonated beverages are very important to us at Dollar Tree, it’s a huge business,” he said. “We sell a private brand or a control label. We sell a lot of it. We also sell the single-serve Coke and Pepsi products at the front of our stores. We are very pleased with our Pepsi-Coke sales.”
The smallest of the four top players, 99 Cents Only operates nearly 300 stores in Arizona, California, Nevada and Texas.
The chain saw same-store sales rise 7.3 percent in its fiscal 2011 before the company was bought by private-equity partners that took it private.
On its last public conference call with analysts, CEO Eric Schiffer said the stores made their point of differentiation in the channel on food and grocery items.
“I think a major reason why we are able to compete so successfully is that our concept is differentiated from the other dollar stores,” Schiffer told analysts. “I think for those folks that are in different parts of the country that have not really seen our stores, that can’t be emphasized enough. We are unique in terms of the combination of several material factors, including our food mix, including perishables which includes produce, our large percentage of closeouts (40 percent to 45 percent, with a name brand focus), bigger stores, attractive merchandising, and a 99 cent primary price point.”
Lee says the bigger store formats allow the company to offer more grocery items, particularly perishables, that made comparing it to the big three dollar stores an apples to oranges comparison.
“They’re usually much bigger stores, and its point of differentiation is that fresh offering, particularly produce in its stores,” he says. “Its offering is more of an in-and-out, still some closeout products. It’s kind of a mix of dollar stores in the past, and yet a combination of being able to provide a lot more in the area of fresh products, which other players don’t do primarily.”
Schiffer said the company’s primary focus had to be price.
“Our core philosophy … is that every item in our store needs to be a good to great value,” he said.