“Dollar” Stores Make Inroads in Food

Long considered the place where brands go to die, “dollar” stores are taking a bite out of Wal-Mart and other grocery retailers by offering no-frills value and a growing line of products.

Family Dollar Stores Inc. has added 200 new food products, including national brands like Triscuit crackers and Kraft salad dressing. Dollar Tree Inc. has added new freezers for ice cream, sandwich meat and frozen dinners, and now manufacturers are looking to launch or test new products in these once-scorned retailers. The business model is the same as with “small footprint” markets like Tesco’s “Fresh & Easy”: multiple shopper visits for small buys of things like dry food, cereal, snack foods, and frozen items vs. the shopping in bulk associated with conventional food outlets.

The immediate victims of the “dollar stores” success will be the small, regional “mom & pop” grocer or chain. Unemployment is seen as playing to the cheaper alternatives, since shoppers now have more time to make purchasing decisions, and value is important. The glut of “cheap” retailers already includes warehouse clubs like Costco Wholesale Corp. and discounters like Wal-Mart. Grocery chains are trying to counter the trend with increased private label offerings, though theoretically private label can’t be the “cure all” for every problem in the grocery category.

Private label, after all, is not necessarily transferable to other stores, with shoppers who have traded for PL free to trade among PL brands based on price alone, slashing everyone’s margins. Dollar stores were already expanding their food offerings before the Recession, and average household trips to them stands at 13, up from 11 in 2001 according to Nielsen. This mirrors shopping trips to grocery stores which is down to 59 trips in 2008, off 13 from 2001.

The stigma of buying at “dollar stores” has faded, and many of them are now located conveniently to food retailers, making shopping there easy. What’s more, the channel is expanding faster than conventional grocery retailers, growing 52% from 2001-2008 (6,823 locations) while supermarkets expanded by just 5.3% (1,622). 99 Cents Only will focus on the western United States, while Dollar General plans to open 450 new stores to the 8,400 it already has. While not typical, Supervalu Inc.’s plans to close 50 stores in the Albertsons, Jewel-Osco and Save-A-Lot chains is in sharp contrast, but reflect its “substantially below” estimated profit margins.

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