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Are Dollar Stores the Latest Threat to Traditional Supermarkets?

By Nickey Friedman - Mar 27, 2014 at 10:01AM

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A jolt in perishable sales threatens to dethrone the grocery kings.

Increasingly, Dollar Tree Stores ( DLTR 1.64% ), Dollar General ( DG 2.87% ), and Family Dollar Stores ( FDO.DL ) are each becoming the main destination of shopping trips rather than just a side one. As all sorts of groceries, including perishables, line the shelves in increasing numbers, these dollar stores threaten to take a greater piece of the supermarket pie. Can you really live on dollar stores alone?


Source: Dollar Tree

The real threat
The concern here for supermarkets isn't that mass quantities of people will avoid them altogether. Most, if not all, of us can't imagine being without the traditional grocery aisles we've come to rely on. The threat, though, is that the more we don't have to take specific mini-trips for certain items, the more we may find other things while at the dollar stores.

For example, if we can get eggs at the dollar store, we may end up grabbing other items: paper towels, a birthday card, a pack of pens, and toilet bowl cleaner that we would have otherwise bought at the grocery store. The grocery stores know it; that's why they keep the eggs in the back corner in the first place.

It's not about quality necessarily
They key to consider is the theory that if you "could" do all your shopping at the dollar store, then there is the potential to sell most "emergency" goods to consumers. Consumers may get accustomed to checking out the local dollar store first for a quick trip before looking elsewhere.

A quick pop into my local store revealed you can indeed get just about every traditional food category you can think of. Whether it's bread, milk, cheese, eggs, lunch meat, pizza, bacon, orange juice, coffee -- they have it all at Dollar Tree! Items come in much smaller sizes than traditionally in most cases, but they're available. You can even get a tiny rib eye steak if you look hard enough.

Seriously, a rib eye steak at the dollar store?
Since I wasn't brave enough to take the challenge on my own, I found an article written by Doug Bennett of The Tampa Bay Times who actually tried the $1 rib eye. To me, that is the ultimate test of dollar stores. If one of them, in this case Dollar Tree, could get away with selling an edible piece of steak of such high quality as a rib eye, perhaps there is more to this threat than you think.

Source: Dollar General

The verdict was that the rib eye was found to be "tender with a deep, meaty flavor." The review, however, added, "Just don't pretend you're getting a real steak. It's almost sandwich-style thin but could be parlayed into a great cheesesteak." Okay, Dollar Tree probably won't be putting Ruth's Chris Steakhouse out of business any time soon, but any additional market share it can snag is good for the company and bad for grocery stores.

What the stores are saying
Dollar Tree's third-quarter conference call was loaded with details. CEO Bob Sasser has been saying for quite some time that the "consumables" category, as he calls it, is where the excitement is. He attributed that quarter's fantastic growth mostly to consumables for Dollar Tree. Sasser mentioned that Dollar Tree has been seeing this trend for several years for two reasons.

First, the bad economy has been pulling more grocery shoppers into dollar stores looking for bargains. Second, the expanded selection of consumables has in turn attracted more shoppers.

For Family Dollar Stores and Dollar General, it's been similar. Dollar General has enjoyed 24 consecutive years of same-store sales growth. However, last quarter, results were barely positive at 1.6%. It may have been negative were it not for the addition of tobacco and -- you guessed it -- the rise in perishable-goods sales.

Source: Family Dollar

For Family Dollar Stores, refrigerated and frozen foods showed the strongest gains last quarter, rising by 4.7%; same-store sales on everything else, however, actually fell by 2.8%. Chief executive Howard Levine stated, "I know for sure...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."

Conclusion
Since you can get just about anything at dollar stores, even rib eye steaks, you can bet some people indeed will do so. Expect to see more consumables available at Dollar General and Family Dollar Stores everywhere.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Family Dollar Stores Inc. Stock Quote
Family Dollar Stores Inc.
FDO.DL
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
DLTR
$137.04 (1.64%) $2.21
Dollar General Corporation Stock Quote
Dollar General Corporation
DG
$222.00 (2.87%) $6.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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