The recession may be over, but one of its legacies—the popularity of dollar stores—is here to stay, according to retail industry insiders. In spite of slightly decelerating same-store sales growth, dollar stores should remain a viable alternative to discount stores, supermarkets and drugstores on many everyday necessities. As a maturing industry, however, the three major dollar store chains will have fewer opportunities for new store openings going forward and will start focusing on portfolio management rather than on expansion, experts predict.
The fact that Dollar General, one of the sector’s largest players, posted same-store sales growth of only 3 percent for the fourth quarter of 2012 has caused some to question whether the era of the dollar store was coming to an end. According to ICSC’s quarterly sales index for the sector, in which the year 2010 equals 100, same-store sales at dollar stores have registered a gradual slowdown in growth from a high of 116.4 in the fourth quarter of 2011 to 106.5 in the third quarter of 2012, the most recent period for which data is available.
Yet the index has consistently scored over 100 for every quarter since the end of 2010. Prior to the recession, the index has stayed in the 80s and low 90s.
The likely culprit for lower same-store sales growth among dollar stores is sales cannibalization, rather than lower shopper traffic, according to David Solomon, president of NAI ReStore, a Narberth, Pa.-based retail real estate services firm. Dollar General, for example, now operates approximately 10,000 stores in 39 states. Family Dollar has 7,300 stores in 46 states. With the three major sector players, including Dollar Tree, opening hundreds of new locations every year, there are often several dollar stores co-existing within a five-mile radius in many markets.
“I think there has been a bit of an oversaturation of these stores; I don’t see them growing at the same pace they grew over the past five years,” Solomon says. “It’s just natural and it will affect comp store sales somewhat. I don’t think it means it’s suddenly an unhealthy environment for dollar stores—they are a fact of life and they are here to stay.”
Now a mainstay
One of the reasons dollar stores will likely remain popular in spite of an improving economy is that shopper habits are very hard to break, Solomon notes. It was a feat to get middle-class consumers to start visiting dollar stores during the recession. Now that they have gotten used to shopping there, it will be just as difficult to get them to abandon those stores.
Moreover, dollars store executives have been adding new product categories to their merchandise selections over the past several years, including limited grocery items and other everyday necessities. The broader selection has created a new shopper draw, allowing dollar stores to steal market share from supermarkets and drugstores, according to Jeff Green, president of Jeff Green Partners, a Phoenix-based retail real estate consulting firm.
“The consumer found out they had a good experience with the dollar stores during the downturn and if you’ve had a good experience, you have no reason to leave,” says Rod Sides, the leader of the retail consulting group at global professional services firm Deloitte. “And they haven’t saturated all the markets either.”
Coming to maturity
There remain, for instance, opportunities for the dollar stores to expand on the West Coast, Sides notes—all three of the big chains have so far gravitated toward growth on the East Coast, where they are based. And they can still make a push into more urban markets, according to Jeff Green. Most of their growth up until this point has been in suburban and rural areas.
It’s true that the dollar store segment is beginning to reach maturity, which means that instead of seeing explosive growth in new dollar stores in the coming years, the retail industry will likely see moves to optimize existing portfolios, Solomon says. That means that the bottom 10 percent of any companies’ stores might be closed or relocated and replaced with 10 to 15 percent of new, better performing stores.
Going forward, Morningstar forecasts that the three biggest dollar store chains combined will open approximately 1,100 new stores a year, including roughly 540 new stores a year for Dollar General, 350 new stores for Family Dollar and 230 new stores for Dollar Tree. And once they reach from 12,000 to 15,000 stores domestically, they might look at international expansion, notes Sides.
That doesn’t seem a good reason to believe that the dollar store era is over, according to Green.
“A slowdown of significant growth is still significant growth,” he notes. “When you compare dollar stores to the rest of the retail segment, it’s still the highest growth niche.”