Convenience, low prices drive growth

Drug Store News, May 2, 2005

It's more than just the proliferation of the dollar channel that should keep chain drug operators up at night. After all, dollar stores have been around for quite a while. If you consider five-and-dimes as the predecessor volume discounter, then the format may even predate drug stores.

Not only have the leading dollar store retailers reached a store base level where they can begin leveraging their size against ever sharper price points, attracting business from many of the larger suppliers, but they're evolving the concept so that they attract more trips and larger check-stand rings by adding more convenience food items to their mixes.

And it's that evolution that has drug stores concerned because now dollar stores could be taking a very valuable trip from the drug channel: the nonpharmacy-related, front-end convenience trip.

And dollar stores are expanding that format into more suburban and higher-income urban areas, where soccer moms and Nascar dads with greater discretionary spending power are becoming regular visitors to the channel. According to ACNielsen, the dollar channel store base was 5,400 stores larger at the end of 2004 than it was at the end of 2000. By contrast, the drug channel lost 1,272 storefronts in that period. In that time, the percentage of households penetrated by dollar stores grew to 67 percent from 59 percent.

That store base will grow an additional 1,500 stores across the leading five dollar store retailers by the end of 2005.

According to ACNielsen, it is possible that the country could hold as many as 40,000 stores--more than double the number currently operating today (just over 17,000 stores).

According to ACNielsen, the greatest regional opportunities for further dollar store expansion include:

* New England, where household penetration for the dollar channel is only 49 percent.

* the Rockies, where 54 percent of households shop dollar stores.

* the West Coast, where 55 percent of households shop dollar stores.

Nationwide, the number of shopping visits to the channel also is on the rise. The average household made 13 trips to the dollar store in 2004, compared with 11 trips in 2000. All of this translates into sharper competition for drug store retailers. According to a recent ACNielsen channel-blurring presentation, 88 percent of all drug store shoppers also are shopping the dollar channel heavily.

One reassuring sign for drug retailers is that the size of the dollar store marketbasket has remained relatively stable at $11 per trip between 2000 and 2004. So while more customers are coming into contact with more dollar stores more often, they're not necessarily buying more per trip.

Perhaps for that reason, dollar store operators are becoming more sophisticated. For the leaders like Family Dollar and Dollar General, gone is the closeout merchant mentality in favor of a more consistent value-priced product selection.

Dollar Stores

                   2004        %         No.
Chain            sales *    change    of stores

Dollar General   $7,700     11.5%       7,320
Family Dollar     5,300     11.2        5,466
Dollar Tree       3,100     11.6        2,735
Fred's            1,440     10.7          588
99 Cents Only     1,000 **  22.0 **       223

* Sales in millions

** Drug Store News estimate Results reflect end of fiscal year 2004