With consumer debt rising and economic conditions challenging for a large segment of the population, it’s a good time to be a “value retailer,” and this is the ultimate value channel, even beating out Wal-Mart for low-price-leader status.

“This strength is driven by a pricing strategy that is designed to match the promoted price point of the leading mass/discount chain in the market,” says David Bishop, vice president, Willard Bishop Consulting, Barrington, Ill. “This means that Wal-Mart has competitive pricing [vs. dollar stores] only when they’ve rolled back their everyday prices,” notes Bishop, an expert in small-format stores.

Channel Leaders*
Chain	Annual Sales (in billions)
1. Dollar General	$8.6
2. Family Dollar	$5.8
3. Dollar Tree	$3.4
4. Fred's	$1.6
5. 99 Cents Only	$1.0
*For 2005 Source: Company reports

The opportunity before them has not been lost on dollar channel retailers. The nation’s network of dollar stores is spreading like a particularly fast-growing vine, with new outposts cropping up throughout the country.

In fact, the store count has more than tripled in the past decade, going from 5,548 in 1996 to 18,921 in mid-2006, according to ACNielsen’s “Channel Blurring and Consumer Trends” report. Not surprisingly, household penetration is climbing as well. According to the same ACNielsen report, 67 percent of U.S. households now shop in dollar stores, up from 59 percent household penetration in 2001.

“Dollar continues to be a strong growth segment,” says Bishop. “Mean sales growth for Dollar General and Family Dollar grew 5.7 percent and 7.8 percent respectively in September vs. prior year. In terms of same-store sales, Dollar General is slightly positive (0.5%), whereas Family Dollar is up 2.2 percent. The importance of these trends is that a growing number of CPG manufacturers are investing more resources into the dollar [channel] as a way to capture their share of the growth.”

The channel’s growth spurt is not limited to geographic expansion. Across the board, leading chains are adding more perishable products to the mix and installing the refrigeration units required for the move. Dollar General is testing its Dollar General Market format, which is twice the size of its traditional store, in at least 50 locations. Family Dollar has installed refrigerated cases in nearly 4,000 stores so far, and plans to add them in an additional 1,000 stores in fiscal year 2007. Dollar Tree is taking similar steps.

At the same time, the chains are making the shopping experience easier for customers by accepting more forms of payment, including food stamps. Dollar General announced in September that it would begin accepting Visa credit and check cards, and Family Dollar said the chain expects to accept food stamps in 750 stores during the course of fiscal 2007.

Strategies such as these — along with effective merchandising — have helped offset some of the marketplace challenges, including the high price of gasoline for much of the year, says Timothy Reid, vice president of investor relations for Dollar Tree Stores.

“So far in the first half of this year, our average shopping basket is up 3.4 percent,” Reid reports. “And last year it began to increase in the second quarter and was up for the year [by] 2 percent.”

Dollar channel candy sales reached $800 million for the year ending in June of 2006, up slightly vs. the prior year. Candy is a top-selling product category for the channel, and given the fact that it has higher gross margins than most consumable products, it’s unlikely that dollar retailers will lose sight of its profit-boosting ability.

There’s also a definite expandable consumption opportunity. “It’s a highly impulsive purchase,” says Bishop, “which means that more effective merchandising will generate incremental sales for the category and the store.”

Sheila McCusker, editor of “IRI Times and Trends,” predicts that dollar stores will continue to maximize opportunities in the category.

“Consumers know they can go to dollar stores to get a good deal on candy,” she notes. “Now dollar stores will focus on expanding the product mix (although not necessarily shelf space), and as dollar stores are increasingly looking to bring in national brands to enhance the value perception of their stores and appeal to middle- and upper-income segments, we’ll likely see an increased mix of national brands,” she adds. “The risk here is for the second- and third-tier brands that are likely to be displaced as [more] national brands come in.”

Despite its dramatic growth in recent years, the dollar store market is far from over-saturated, most experts maintain. “They are still entering new markets where there’s more unmet potential, especially in the West where Dollar General and Family Dollar are significantly underdeveloped,” says Bishop.

The channel has made some notable strides in the process of remaking itself into an even more viable shopping option for consumers, notes Hale, pointing to Dollar General’s expansion via the Dollar General Market stores. “I think there’s an opportunity for that channel to evolve into something different,” Hale reflects. Look for other chains to experiment with formats similar to the Dollar General Market stores, he predicts.