Discount & Dollar Retailers
Date November 2015
- Industry revenue: $60 billion (U.S.)
- Major product categories: Food, general merchandise, housewares, seasonal items, apparel
- Significant companies: Dollar Tree, Dollar General, Family Dollar, Big Lots
- Market share of top: The eight largest companies generate 66 percent of industry revenue
- Recent sales trends: U.S. retail sales for general merchandise stores, a measure of consumer spending at dollar and other general merchandise stores, increased 0.7 percent in the first nine months of 2015 compared to the same period in 2014
Consumables demand affects retail offerings: Supermarket News notes that dollar store grocery and consumable products sales totaled just over $24 billion in 2011. Annual sales are estimated to increase to approximately $28 billion by 2016. To meet increasing demand, many companies are increasing the amount of consumable merchandise available in stores, in particular perishable and frozen food items. Though sold at lower margins, consumable merchandise increases return customer traffic, increasing the likelihood that customers will purchase higher margin items at the same time. Per First Research, the percentage of consumables as a percentage of net sales is increasing at many stores as a result of the increased offerings; sales of consumables at Family Dollar increased 2.4 percent in fiscal 2014 as compared to the year before, comprising 73 percent of overall sales.
In an effort to tailor store formats to customers’ needs and preferences, Dollar General is developing a hybrid format that caters to the budget conscious shopper but will offer a refined assortment, including fresh foods and health and beauty products. The new store prototype will also provide a faster checkout for shoppers looking to use Dollar General for “fill-in” food trips. The new format will be rolled out to all new locations and remodels beginning in 2016. The company’s CEO noted, “The format will allow for a more customer-friendly shopping experience. In this prototype, the consumer will be able to have faster, more convenient checkout, an attribute that is a high priority for our core consumer.”
On the big-box front, in a move to shed unprofitable locations, Target Corporation will close 13 U.S. stores on January 30, 2016. Stores slated for closure are located in Arizona, California, Florida, Indiana, Iowa, Kentucky, Michigan, Minnesota, Ohio, Texas, and Wisconsin. Supporting the move toward discounters’ focus on stocking more fresh food, Creditntell notes that reports indicate Target is “seriously considering partnerships with outside companies to help shore up a creaky fresh food supply chain that has led to chronic shortages on store shelves.” The potential shift to relying on outside partners comes as Target pushes to revamp its food business with newer offerings and aims to get a bigger slice of online grocery sales, which will put new pressures on its food supply chain, COO John Mulligan said in a recent interview. He added, “There is an opportunity to use some partners who may be able to do things a little bit better.” The speculation is that a likely candidate for such a partnership would be Supervalu, as it is also based in Minneapolis and already has a national footprint.
Dollar General in particular sees a significant opportunity to increase its cooler capacity across its store base. The company’s CEO notes, “Perishables drive trips and basket size with our consumer as she looks for a quick meal solution or a fill-in item. Across the chain, a basket with a perishable item is nearly 50% higher than the chain average. This is a big opportunity that we know how to capitalize on, as we have already increased the cooler count on average by just over 50% since 2008.”
Consumable products pose unique challenges in a disposition event. Due to the high perishability of many of the products, sale terms for liquidations in the grocery space are typically short. The majority of sale terms do not run for more than four weeks. As there is no replenishment of staples like meat, dairy and produce, it is important to manage discount rates on additional core products like dry goods, canned items, and paper goods to maximize gross recovery rates for the total sale. Typical high recovery categories include meat and deli products, along with dairy, produce, and staple grocery items like coffee, pasta, rice, and cereal. Lower recovery categories include ancillary products such as kitchenware and slower turning health and beauty items including vitamins. As dollar store and discount retailers continue to bulk up assortments of consumables, it is increasingly important for lenders in this segment to understand how levels of consumables can impact not only normal course gross margins and turnover rates but the liquidation implications for this product as well.
Rapid expansion continues for dollar concept: Typically selling inexpensive items, dollar stores or price-point retailers predominantly sell all of their merchandise at a single price. The dollar store industry has grown rapidly throughout the U.S. and North America in recent years. Stores tend to be located in smaller communities that are too small to support a big-box discount retailer like Walmart. In an $8.5 billion deal, Dollar Tree bought Family Dollar in early August 2014 to create a massive retail chain of over 13,000 stores. In November 2015, Dollar Tree completed its divestiture of 330 stores to Dollar Express LLC, a division of the private equity firm Sycamore Partners. The divestiture satisfied a condition as required by the Federal Trade Commission in connection with the acquisition. The 330 former Dollar Tree stores will operate under the Dollar Express banner going forward.
Another huge player in the space, Dollar General, is making a move toward opening stores in targeted areas to satisfy demand. With potential opportunities for 13,000 new stores, the company expects urban locations to become a larger part of its expansion plans beginning in 2018. While the company expects 40 to 45 percent of the stores it opens in the next few years to be in rural areas or satellite-city locations, approximately 30 percent of its store base is currently in metropolitan areas. Regarding the expansion, CEO Todd J. Vasos noted, “and it’s going to become a bigger piece as we move into 2018, 2019, and beyond.”
The small-format convenience factor, in conjunction with expanded product offerings and store openings in underserved markets, should continue to improve the industry’s outlook. For Dollar General, comparable store sales for the second quarter ending July 31, 2015 improved by 2.8 percent and overall sales improved 7.9 percent to $5.1 billion, reflecting higher store traffic and average ticket. Continued expansion in the dollar segment will likely continue to take market share from big-box discounters like Target and Walmart.