Deep discount concept is a Wall Street darling - Extreme Value Retailing

DSN Retailing Today, Nov 24, 2003

Even though their price points may go as high as $20 or more, the value retailers often referred to as "dollar stores"--because of the word dollar in some of their names--have grabbed the spotlight due to unprecedented growth by the top players.

The largest retailer in the extreme-value segment, Dollar General, grew sales 14.6% last year to $6.1 billion. Not far behind and remarkably similar in format is Family Dollar, with sales of $4.75 billion last year. Revenue grew at a similar rate of 14%, with both outpacing the sales growth of industry powerhouses such as Wal-Mart, The Home Depot, Target and Costco.

Both companies open an astounding number of new stores each year, achieved in part because the store sizes are quite small--generally about 7,000 square feet. The mix is very similar, with a broad range of discount-store fare and heavy reliance on consumables, such as non-perishable food and cleaning supplies.

As these two chains have grown. they have moved beyond their initial roots in rural, small towns to more urban locations, in turn attracting a broader customer base beyond the core low-income shopper. Interestingly enough, they are differentiated enough to succeed in close proximity to big-box discounters such as Wal-Mart.

"These bigger companies have improved the image of what a dollar store is," said Joan Storms, research analyst at Wedbush Morgan Securities. "These stores are well-merchandised with nationally recognized brands in convenient locations that offer a lot of value."

Food has become a greater focus for these chains, with Dollar General expanding the most in this segment to add bread in all of its stores and small cooler programs to about a-third of its locations. The company is even testing a broader food assortment at one location, with the experiment still under evaluation.

Fred's is another chain often classified as a dollar store operator, though the company describes itself as a general merchandise discount store. The company operates larger stores of 12,000 square feet to 15,000 square feet, and about half of them feature a full-service pharmacy, a feature that has earned Fred's a loyal following. The company does pursue closeouts and features prices typically at the low end in keeping with its rural, low-income shopper base.

Significant sales and earnings growth at Fred's have grabbed the attention of Wall Street. Revenue grew an amazing 21% to $1.1 billion last year, while net income rose 44% to $28.2 million. These results are being fueled by square-footage growth, high same-store sales and steady expansion of operating margin.

Success in this niche isn't a given, however. One exception is Bonus Stores, which filed for bankruptcy in July. The former division of Icelandic retailer Baugur Group closed 239 stores and in September sold the last 97 units to Variety Wholesalers, a franchise operator of extreme-value stores operating in 14 states under the names Super 10, Roses, Maxway, Bargain Town and Value Mart.

One other retailer worth mentioning is Supervalu's Save-A-Lot format, which sells mainly groceries at deep discount prices. Supervalu acquired dollar-store retailer Deal$ last year and since has added dollar-store items to all of its 1,186 Save-A-Lot stores.