Whether it is clothes, toys, electronics, or home furnishings, retail sales for many companies have been in the dumps. But there's one retail segment in particular that's exploding in sales and profits bigger than ever, and that's the dollar stores. The winners include Family Dollar Stores (NYSE:FDO), Dollar Tree Stores (NASDAQ:DLTR), and Dollar General (NYSE:DG). What's their secret? Here are five different reasons why these dollar stores are getting rich.
Reason No. 1: The economy
It may sound counterintuitive at first, but the weak economy since the Great Recession has actually been a boom for dollar stores. For example, Dollar Tree CEO Bob Sasser recognizes that there is a "very cautious consumer environment," but he believes this has resulted in growth of the retailer's merchandise and in traffic.
Suppliers to Dollar Tree and others are seeing weak demand at traditional stores and in response are lowering their wholesale price points to levels that Dollar Tree can afford. This means more and higher quality merchandise available to consumers for the same $1 price.
Meanwhile, consumer traffic is growing according to Dollar Tree. Sasser stated, "New customers are finding Dollar Tree to be part of their solution to balance their household budgets." In other words the more budget-constrained people are, the more likely they are to ditch traditional stores in favor of the dollar stores. It doesn't hurt that the $1 at a time price point means, for example, that you can buy one roll of paper towels instead of six. The days of buying in bulk for some have become buying single servings to save short-term cash.
Reason No. 2: Fill-in perishables
Sasser points out that the "consumable" merchandise sales have been growing faster for Dollar Tree than the non-consumables.
Family Dollar Stores likewise saw similar results. While Family Dollar Stores' sales rose 3.2% overall last quarter, it was the consumables, such as refrigerated and frozen foods, that were strongest, rising by 4.7%. Chief executive Howard Levine stated, "I know for sure is that we have to stand for low prices every day, and we have to offer [customers] competitiveness on those consumables that [they're] buying every day."
Likewise, according to Dollar General, "Consumables, which include tobacco and perishables, showed the strongest sales gains." Dollar General continues to see gains in consumables "in units and dollars over the [four]-week, 12-week, 24-week[,] and 52-week periods. [Its] market share in dollars continues to grow in the high-single digits."It helps that if the consumer comes in to get a consumable purchase, she may buy other things while there as well. It's the same reason why grocery stores usually keep milk and eggs in the back corner; It gets you to walk past a lot of other merchandise.
Part of the reason can be traced to simply convenience that is taking market share from the bigger retailers such as Wal-Mart and Target. Those stores tend to be once-a-week trips, while the dollar stores are convenient for fill-in trips to get eggs, milk, bread, etc. speedily instead of taking the longer trip to bigger retailers. Higher gas prices also play a role here.
Reason No. 3: The hunt
In our eBay-Craigslist-pawn-shop world, the thrill of the chase, the scavenger hunt, the treasure-seeking bargain hunter in us all is coming out. Walk down the aisles of Dollar General, Dollar Tree, or Family Dollar Stores and often you can "discover" items you never knew you could have so cheap. You may only be saving a few pennies, but the thrill of the hunt is exhilarating.
My own personal example involves batteries for the remote, smoke detector, etc. These vital batteries seem to always run out at the worst times and can cost $4 to $10 a pack, while the same things are available at the dollar store. Sure, the batteries aren't name brand, but the voltage is the same. Try them sometime. You too will probably feel like a hero.
Reason No. 4: The enormous volume
Dollar chains have gotten so big that it's now worth it for manufacturers of name-brand products to custom make smaller-sized versions to fit the dollar-store format. For example, you'll never find a regular-sized box of Post cereal for $1 at Dollar General, bottle of Heinz ketchup for $1 at Dollar Tree, or box of Cheez-Its for $1 at Family Dollar, but you may find all of those in now-reduced sizes.
Reason No. 5: Online competition
It's now worth it to the manufacturers to design and spend resources on developing production lines that are tailor-fit for the dollar stores. Years ago the dollar-store industry was too small to justify the investment. Now having those name brands in the dollar stores encourages more traffic and more purchases, as it provides more items that consumers want. It also helps bolster the image of dollar stores away from a former reputation of just selling generic, inferior "junk."
There has been a big shift to online shopping with some retailers benefiting as consumers log on to their websites. Other retailers are hurting as consumers log on instead to competitor websites such as Amazon.com. However, the amount of online shopping for $1 impulse purchases is still fairly limited due to the prohibitive shipping costs.
You can go to Dollar General, Dollar Tree, or Family Dollar and pick up a single wine glass or a bottle of floor cleaner or perhaps a sweet-smelling candle, but it's unlikely that you'll be logging on and paying for shipping for that same $1 item. This means the potential negative effect of online competition is absent.
Foolish final thoughts
It seems like a perfect storm right now for Family Dollar, Dollar Tree, and Dollar General. All three deserve a closer look by Fools looking for a pocket of strength in the retail sector. As for competition with each other, there's one thing you can be sure of: They won't be competing on price any time soon, at least among their true dollar-priced merchandise.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.