Value retailers take the low-income road to new heights - Dollar General and Family Dollar plan expansions

Discount Store News, Feb 19, 1996 by Teresa Andreoli

NATIONWIDE DSN REPORT -- Value retailers--whose core customers make up the growing segment of U.S. households earning $25,000 or less--are becoming the next (and likely last) high-growth discount concept of this century.

Low-overhead, low-price general merchants like Dollar General, Nashville, and Family Dollar, Matthews, N.C., will grow their stores by at least 10% this year--2% more than Wal-Mart's '96 plan and double the most aggressive plans of regional discounters. Family Dollar alone is opening an average of five stores each week in '96.

The difficult retail climate and increasing competition from the Big Three have forced regional discounters to re-think their objectives. But Southern-based Family Dollar and Dollar General have coexisted profitably not only with each other, but with the big discounters.

The leading value retailer, 2,450-unit Dollar General, plans to open 350 units this year. Store size is about 6,000 sq. ft, and sku count is intentionally small, about 2,000 to 3,000 skus. Last year, the chain added 390 stores (40 more than anticipated) and closed 25 (half of what was anticipated). Sales for the first nine months of 1995 (ended Oct. 31) hit $1.2 billion. Sales for the entire previous year were $1.4 billion.

Family Dollar operates 2,474 stores, giving it the largest unit base of all value retailers, but it is traditionally considered Dollar General's distant cousin. It ended 1995 with $1.5 billion in revenue, an 8.3% gain. Its net sales for last year soared to $1.5 billion.

Earnings slipped slightly for the second year in a row, reflecting slowing comp store sales, competitive price-cutting maneuvers and the growing pains arising from its newly installed everyday low price structure. Income before taxes in 1995 totaled $94 million, down from $100 million the year before.

Family Dollar will open a total of 235 stores this year, but plans to close 35. Units measure about 6,600 sq. ft. and carry about 6,700 skus.

Both chains target lower-income or fixed-income families, often in markets that have long been neglected. Speaking of Dollar General in particular, Douglas Tigert, a marketing professor at Babson College, Wellesley, Mass., remarked, "It will go to markets no one else wants, operate in locations no one else wants, sell merchandise no one else wants and go after customers no one else seems to be interested in."

This kind of niche marketing is reminiscent of Wal-Mart's 1960s strategy of opening small stores in rural 5,000-people towns. And Wal-Mart still recognizes the value of the rural consumer. This year it will open 300 more Home Town Store retrofits to its base of 400 units. (Wal-Mart instituted the concept last year to remerchandise and micromarket older, small-town stores, most in the 60,000-sq.-ft. range.)

But in terms of new market expansion, the smaller store size has significantly fewer real estate and demographic requirements to fulfill than the prototypical Wal-Mart, Kmart or Target store.

"We don't need a large population base to support our small stores," said George Mahoney, executive vice president at Family Dollar. "We don't need a lot of space or a parking lot area. The store size gives us the flexibility to get into the smallest towns and the largest urban markets." He also repeated the company's customer-driven strategy: "It is important to be seen as the neighborhood convenience discount store."

"As discounters move toward larger stores--megastores, supercenters and the like--they become destinations," said Barbara Miller, an equity analyst with Alex. Brown & Sons, which is based in Baltimore. "The smaller value retailers can offer convenience and often operate within a tighter trade radius."

Dollar General, for example, usually draws customers who live within three miles of its stores. The small stores are well-matched for the shopping patterns of their cash-strapped target consumers--frequent trips for a few basic items. The easy-access, get-in/get-out strategy allows the stores to coexist with the big box retailers.

The nation's soft economy presents further opportunity to the few retailers that cater to fixed- and lower-income consumers. In 1994, more than 20 million U.S. households (roughly 31%) earned less than $25,000, up 13% from four years earlier and up 21% from 1980, according to the U.S. Census Bureau.

"Our core customer is part of a growing market," said Bob Carpenter, chief administrative officer for Dollar General. "There are more low-income people than there were last year, and we expect more next year. The fixed income consumer is an expanding market as well."

It is projected that by about the year 2020, the majority of Americans will be "net government payment recipients" (i.e., drawing on Social Security, pensions, Medicare and other programs) as opposed to "net government contributors" (i.e., taxpaying wage earners), according to consultant Michael Boskin, a professor at the Hoover Institute at Stanford University and the former chairman of the Council Of Economic Advisors.