The Dollar Store Boom
By Mary Ellen Kuhn
As a moderately priced offer, candy also fits nicely with the value positioning of dollar stores, he adds.
“The other thing that dollar stores like about candy is that it’s an easy way to offer brands,” Jones continues. “It’s harder to offer national brands of more expensive items. 
“But when you walk in there and see those familiar Hershey’s candy bars and M&M’s and all those other brands, it gives you a sense that this store is for people like me.”
Add to that the fact that the basket ring at dollar stores is lower than in channels such as grocery stores, supercenters and wholesale club stores, and the significance of candy to the channel is further underscored.
“If somebody picks up a candy item or two for 50 cents or a dollar or two, it’s good incremental sales,” says Jones. “If you’re a dollar store and you sell them [shoppers] an extra dollar [of merchandise], you’ve increased your basket size significantly.”
There’s a particularly strong opportunity to develop Christmas candy sales, reports Todd Hale, senior vice president, consumer insights, for ACNielsen, Schaumburg, Ill. December is a heavy shopping month for dollar stores, he reports, noting that 9.8 percent of dollar store shoppers’ visits occur during that month.
A frequent stop
Generating impulse sales of candy at dollar stores should be getting easier, because consumers are shopping them more frequently than ever before—13 times on average vs. 11 trips annually in 2001, according to ACNielsen. That is only logical because dollar stores are America’s fastest-growing retail channel and tend to be found in convenient, easily accessible locations. Last year, ACNielsen reports, 67 percent of U.S. households shopped in a dollar store.
“People are changing the way they shop,” Jones continues. “People are taking more short trips. The rise of candy in dollar stores reflects the way retail is going today,” he continues. “Shoppers are going into more outlets to buy a few items. You shop where you stop.”
Behind the boom
Why is the dollar store channel so hot? Numbers tell some of the story.
Members of the average, reasonably affluent American household may not realize it, but the median household income has declined in the United States. Between 1999 and 2003, median household income dropped from $44,922 to $43,318, reports David Bishop, a director at Barrington, Ill.-based Willard Bishop Consulting.
Dollar Store Future Forecast
 2004 2009
Number of Stores18,00024,405
Total Annual Sales (in billions)$12.2$18.1
Share of Grocery/Consumables Sales 1.5% 2.0%
Source: Willard Bishop Consulting Store Format Report, June 2005
He adds that two fast-growing population segments—Hispanics and seniors—tend to have more members with incomes lower than the median, which should also support growth of the dollar channel.
“We’re seeing a change in the demographic makeup of the United States,” says Bishop, who also cites economic conditions likely to support continued strength within the dollar channel. He points out that consumers, buoyed by low mortgage and interest rates, have continued to spend in recent years despite a lukewarm economic climate and thus have saved less and acquired more debt.
As interest rates start to increase again, there will be an even greater demand for value shopping opportunities, Bishop predicts.  
What is more, he notes that the dollar store market is far from saturated in many parts of the country.
“Just from a market presence standpoint, the two leading players—Dollar General and Family Dollar—are still limited primarily to east of the Mississippi,” says Bishop. “And even Dollar Tree, which is in the 48 continuous states, still has a lot of room to grow.”
Seventy-five percent of dollar store shoppers live within five miles of the store they shop, so the market can support a large number of stores. “That’s what we’ve seen in the Southeast—a tremendous concentration of stores without a noticeable impact on sales,” Bishop points out.  
Sweet opportunities
Willard Bishop Consulting estimates total dollar store count at about 18,000 in 2004 and forecasts that the total will increase by 36 percent to 24,405 by 2009, so it’s not hard to see the opportunity for candy, which currently ranks as the No. 1 category in dollar sales for the channel.
“My guess is that it will continue to be a key category for the [dollar] channel and offer growth opportunities,” says ACNielsen’s Hale, citing the prevalence of stores and the opportunity to further develop impulse candy sales.  
Branded candy will probably continue to fare well as dollar store chains opt to expand their assortment, Bishop predicts. “As a Dollar General or Family Dollar wants to go more mainstream, it’s important for their products to appeal to a more mainstream consumer … so that’s more of an incentive to stock brands,” he observes.
A Look at Some Major Players
 Dollar GeneralFamily Dollar Dollar Tree
Annual Revenue (in billions)$7.7$5.3$3.1
Revenue Change+12%+11%+12%
Same Store Sales Change+3.2%+1.9%+.5%
Number of States 30 44 48
Source: ACNielsen, May 2005, based on latest available quarterly or annual reports
Jones cites research that has demonstrated the priority that price-conscious shoppers place on branded merchandise. “You would think that the people who can least afford branded are the least likely to buy it,” says Jones. “Wrong,” he continues. “People who can afford it are more likely to take a chance on an unbranded item. People who can least afford it like the idea of buying a branded candy bar at a value.” 
Candy on Top in Dollar Stores
(Top 10 Categories and % Change vs. Year Ago; Ranking Based on Dollar Sales in 2004)
Candy+11%
Paper Products+14%
Detergents+2%
Stationery, School Supplies+15%
Snacks+20%
Wrapping Materials and Bags+13%
Household Cleaners+9%
Pet Food+23%
Laundry Supplies+17%
Batteries and Flashlights +12%
Source: ACNielsen Homescan, 52 weeks ending Dec. 25, 2004
Category development
There’s room for improvement in the approach many dollar chains take to candy merchandising, however.  For one thing, there’s a clear need for better front-end merchandising, Bishop points out.
Display shippers could help do the trick, he emphasizes. “They really support the mandate of reducing labor within the store. If a shipper goes in the store, it would have high visibility because there aren’t a lot of high-impact graphics in the dollar store.”
Improved merchandising fixtures for candy and better merchandising in general will become increasingly important for dollar stores, Bishop continues, noting that as the channel matures, retailers will be searching for same-store growth opportunities.  
In fact, Bishop continues, there will be increased margin pressure as the dollar channel matures and retailers need to invest more heavily in it.
Also, as the number of dollar stores increases, consumer expectations will increase. “Even value consumers will become more discriminating,” Bishop predicts. “If prices are the same,” he says, “it will come down to cleanliness and assortment.”
Single-price-point stores like Dollar Tree and 99 Cents Only will face some of the most severe margin pressure, the experts predict.
“The biggest challenge that they [stores with a single price point] are going to face is margin compression with the continually escalating cost of goods,” says Bishop. “It’s very hard to maintain a single-price-point strategy when the cost of goods goes up,” he continues. “They’ve mitigated it by leveraging their purchasing skill with more imported products or by shifting to a proprietary brand strategy. That can only last for so long. You may see them shifting from nothing for more than $1 to nothing for more than $2.”
ACNielsen’s Hale sees an opportunity for dollar stores to sell even more candy—particularly with the development of expanded format stores like the ones Dollar General has been experimenting with. “I think there’s an opportunity to drive more dollar sales per trip by focusing on bigger packages.” 
Competing for candy sales
The positive growth forecast for candy in dollar stores, may come at the expense of other retail channels.  
According to Information Resources Inc. (IRI) research, candy (either chocolate or non-chocolate) is the No.1 “trip traffic” category in mass merchandisers, drug stores and dollar stores. (Trip traffic refers to the percentage of channel/category buyers purchasing a product category within a year-long period as a percent of total U.S. shoppers.)
In the September 2004 issue of IRI’s “Times and Trends,” the company points out that, “given the current economic climate, mass is apt to see more of its lower-income customers shifting candy purchases to dollar stores and aggressive food and beverage promoting drug chains.” Thus, dollar stores may represent an increasingly serious competitive threat to mass merchandisers in high “trip traffic” categories, including candy.
Still, though, the Bentonville-based retailing behemoth, for one, is not likely to ignore the dollar store competition.
“Wal-Mart is not going to let them undersell,” says Jones. “If the dollar store sells singles for 45 cents, then Wal-Mart will sell it for 44 cents.” n
Dollar Store Demographics
The dollar channel developed to meet the needs of lower-income consumers looking for a place to buy household staples at a bargain price, but dollar store demographics have been changing. The profile of monthly dollar store shoppers indicates that 29 percent have incomes of $50,000 or greater, according to recent data from RetailForward, a Columbus, Ohio-based consulting and market research company.  
Still, though, dollar stores function mainly to provide a shopping solution for less affluent consumers. A total of 55 percent of monthly dollar store patrons have household incomes of less than $35,000, RetailForward reports. And saving money is the single most important reason that dollar store shoppers give for spending more in this channel.
The Delights of Dollar Stores
Dollar store shopping is an enjoyable experience for most shoppers. According to research by Columbus, Ohio-based RetailForward, 73 percent of dollar store shoppers say they enjoy the experience.
“Consumers like dollar stores because they associate them with a ‘treasure hunt’ or a search for a ‘good deal,’” says Laurie Demeritt, president and COO of The Hartman Group, a Bellevue, Wash.-based consulting company.
In fact, says Demeritt, a recent Hartman Group study found that shoppers perceived dollar stores as sort of a “weird” environment, but weird in a good way, she adds.
What is more, 83 percent of dollar store shoppers say they will continue to patronize them even when the economy improves, RetailForward reports.
Our Information Providers
ACNielsen
Schaumburg, Ill.
(847) 605-5000
Dechert-Hampe & Co. 
Northbrook, Ill.
(847) 559-0490
The Hartman Group 
Bellevue, Wash.
(425) 452-0818
Information Resources Inc.
Chicago, Ill.
(312) 726-1221
Retail Forward 
Columbus, Ohio
(614) 355-4000
Willard Bishop Consulting
Barrington, Ill.
(847) 381-4443