Deep discount garners interest outside of dollar store realm

DSN Retailing Today, Sept 23, 2002 by Mike Duff

NEW YORK--The meteoric success of the dollar store channel has been the envy of mass retailers everywhere. From the unchallenged addition of millions of square feet of selling space to a return on investment that tops many an analyst chart, this extreme-value concept is being as readily embraced by the American consumer as baseball, hotdogs and apple pie. With a great growth record in hand, and the promise of much to come, it's no surprise competing players in other channels, such as Wal-Mart, Fleming and Supervalu, are now dabbling in extreme retailing--and so far the results are equally as promising.

The reasoning behind the other-channel initiatives is as simple as customer acceptance, low start-up costs and high margins. In addition, offshore manufacturers that have successfully upgraded the quality of their goods can provide more retailers with merchandise they can sell for a buck or less without any loss of reputation.

Wal-Mart's experiment with an in-house dollar store concept sparked a slump in sales of dollar store stocks in mid-summer, but neither that nor the occasional irrationality of the stock market provides a sense of the bigger picture. In fact,. Fleming and Supervalu already have launched major efforts that could become a greater challenge than even Wal-Mart to the established dollar stores as time goes on.

The Wal-Mart initiative that garnered so much attention is taking place in multiple outlets concentrated around the Baltimore market. In July, at a location on Route 7 near I-695 in the city's outskirts, Wal-Mart opened a deep-discount boutique dubbed Hey Buck. Located in approximately 250 square feet on the main egress between the store's single entrance and its McDonald's restaurant, Hey Buck carries an assortment of consumables, health and beauty aids, housewares and toys. Products range from snack cakes, popcorn and soda pop to serving spoons and toy cars. The section is merchandised with about 48 feet of wall fixtures and three on-the-floor displays, including a rack of greeting cards. It also has its own checkout with a single cash register.

Despite the name, the operation is not single price and much of the merchandise is in a typical Wal-Mart designation: 97 cents. However, some goods are less expensive. Two-liter bottles of private-label soda pop, for example, were offered for 58 cents. Much of the consumables assortment is private label, though branded goods also are offered throughout the operation.

The fixtures looked to be typical discount store racks and the impression was that WalMart can do more with the wall space as it refines the section. "It's still a test," said spokesman Tom Williams, who added that even though Hey Buck represents the development of Wal-Mart's thought process regarding dollar items, it's not a strictly isolated effort.

Williams credited WalMart's store managers for coming up with a number of dollar store initiatives throughout the chain. For example, a store manager in Loredo, Texas, had created a dollar store section that had been successful enough to gain the attention of Wal-Mart management. In the case of dollar operations, the innovation has been occurring at the store level, with Wal-Mart refining various initiatives and testing them, he said.

Although the presence of retailing's 800-pound gorilla near anybody's fence causes a degree of excitement, Michael Baker, a Deutsche Bank Securities Retailing/Hard Lines analyst, said the stock market reaction to the Wal-Mart test was exaggerated. For one thing, Wal-Mart's efforts are only in the test stage. For another, the dollar store segment is such that an investment in a standalone concept probably wouldn't be the most attractive option for Wal-Mart, so whatever moves it makes will probably be restricted to its discount stores and supercenters.

With dollar items confined to Wal-Mart, dollar stores are protected from the full brunt of competitive pressure by one of their traditional advantages: convenience. As the dollar store presence is defused through neighborhoods around the country, most consumers would have to drive past dollar stores to get to Wal-Mart. That isn't something a lot of folks are going to do for the dollar store shopping occasion, Baker said.

"Convenience is compelling enough to allow Dollar General and Family Dollar and the others to compete effectively," he said. "The convenience of the box really drives the traffic."

Still, Wal-Mart's interest in the buck-and-under business as part of its overall mix is understandable, Baker said, given the financial particulars associated with dollar store operations. "The concept of very high returns, very high margins is really a compelling business motive. You can also achieve higher gross margins and high return on capital if it's done right."

Another motivation for people to impinge on the dollar store channel is its very success. According to ACNielsen's Channel Blurring study, dollar stores not only were the fastest-growing retail channel in percentage terms between 1993 and 2001, growing from about 3,700 stores to about 9,100, but they also gained significantly on such measures as customer base, which was basically fiat or declining for all other channels except supercenters in the period between 1998 and 2001.