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Strong dollar

The five-and-dime has evolved into the dollar store, where shoppers willing to take time to scope out the shelves can stretch every bill. It's an industry that brings in more of those dollars every year.

By MARK ALBRIGHT, Times Staff Writer
© St. Petersburg Times
published June 30, 2002


When Jennifer Almodovar hits the supermarket, she usually swings by a dollar store in the same shopping center.

A price check at a Dollar General explains why. It's cheaper on 11 of 12 randomly selected items than a nearby Kash n' Karry supermarket. Some prices are sharply lower: a $1.59 savings on a 100-ounce bottle of Wisk, a 49-cent savings on Kellogg's Raisin Bran and a $2.95 savings on a Sensor for Women razor. On a box of Puff's tissue, Dollar General is 79 cents cheaper than even the discounted price for holders of Kash n' Karry Preferred shoppers cards.

Almodovar's mother taught her to search for deals hidden among the schlock in spartan chain stores such as Family Dollar, Dollar General and Dollar Tree.

"They're really cheap on the necessities of everyday life, the stuff you don't need to be picky about like cleaning products, paper goods, cards," said the Dillard's cosmetics clerk from St. Petersburg.

More shoppers are making the same discovery. Nationally, sales in dollar stores have grown at a 22-percent-a-year clip each of the past five years. Among retailers, that's second only to the growth rate of the grocery/discount store supercenters being built by Target Corp. and Wal-Mart Stores Inc.

Dollar store market penetration is rising, too. In 59 percent of American households someone is a regular dollar store shopper, up 12 percentage points from 1998, according to ACNielsen. Since shifting their real estate focus to urban neighborhoods, dollar stores have tripled their numbers in the past decade.

"The current market could hold several times the estimated 12,000 dollar stores operating today," said Daniel Barry, a securities analyst with Merrill Lynch who forecasts the industry will average 17 percent sales gains for the next five years.

For anyone wondering what happened to the five and dime store, it's been reincarnated as today's dollar store. The ventures range from independently owned single outlets to vast chains. Flush with frugal retirees and low- to moderate-income families, Florida has more of them (713) than any other state.

While much of the recent growth has been in inner city neighborhoods, it's a mistake to label the dollar store shopper low-income. According to AC Nielsen, 13 percent of sales are to female college graduates, while customers with household incomes of $50,000 or more account for 20 percent.

Still, dollar stores remain a niche player compared to the giants. For instance, Wal-Mart's $16-billion increase in revenue last year alone was larger than annual sales for the entire $12-billion dollar store industry. But with three big dollar store chains each rushing to open 400 to 600 stores a year, experts say what began as a small-town retail trend in the South is becoming a national phenomenon.

"You're going to see thousands more dollar stores," said Neil Z. Stern, a retailing consultant with McMillan/Doolittle in Chicago. "They've stripped out all the costs, have very little debt and work on profit margins that are actually better than the discount stores."

* * *

Once located in towns too small for a Wal-Mart or Kmart, dollar stores today are frequently housed in the same shopping centers as the giants. Loyalists find them cheaper on the basics and faster for quick trips than a cavernous discount store with 18 checkout lanes. They also pose a competitive threat to convenience stores, which charge higher prices for the same goods and have seen their household penetration drop 7 percentage points, to 45 percent since 1998.

"Our industry is driven by convenience and price," said George Mahoney, executive vice president of Family Dollar Corp., which is headquartered in suburban Charlotte, N.C.

Not that shoppers can fill all their needs roaming the aisles. None of the chains offer complete selections in any category of goods. So a visit to the dollar store is partly about browsing for treasures amid kitsch ranging from ceramic ashtrays to glittery party hats. Dollar General sells Gillette Mach III razors, but not the cartridge refills. If you really must have that battery-powered Florida State Seminole horse mascot doing the tomahawk chop, don't wait a week for Dollar General to drop the price below $5. The plush toy probably won't be there next time.

"I've actually called the headquarters to plead with them for things I should have bought to complete a set," said Dollar Tree regular Gay Jordan of St. Petersburg. "You have to buy it or it's gone."

The average dollar store customer spends $8 and buys only seven items, so customer expectations are pretty low and easy to meet.

Expenses in stores that need only four to six workers are cut to the bone. No credit cards. No advertising (except for Family Dollar's three annual circulars). Selection is rarely more than two competing brands of any item. The rent is cheap, and remodeling is not part of the program. Pre-opening expenses run a puny $15,000 a store.

Nonetheless, dollar stores have taken some of the hard edge off the shopping experience. They lowered the shelves so there is less reaching. They switched from stocking stuff in bins to shelves. They widened the aisles. They found that customers buy more if presented with a shopping cart.

All three chains started in the mid-1950s as small town variety stores, evolving to draw a crowd today. Dollar Tree was originally a toy store that sold liquidation goods, but diversified to smooth out the peaks and valleys of the fickle toy industry. Family Dollar and Dollar General were essentially small-town general stores that still stock cheap apparel such as $10 denim jeans, $12.50 house dresses and six-packs of tube socks for $5.

These days, however, 80 percent of the merchandise is consumables, ranging from cleaning supplies to Heinz Ketchup. And only 15 percent of it is closeout goods culled from other retailers' liquidation auctions.

Dollar stores have made themselves more appealing by adding brand name household necessities to the mix, almost all of which are bought directly from the manufacturer. Procter & Gamble directly supplies each chain about 12 percent of its inventory. About 40 percent of the toys, gifts and other notions are imported from China.

The dollar label is something of a stretch. Dollar Tree carries nothing priced at more than $1, but you may have to spend more to get it, such as $3 for a three-pack of Bounty paper towels. At Dollar General and Family Dollar, about a third of the roughly 2,300 items are priced at $1 or less.

The chains seek out merchandise that looks like it's worth more than the price. The priciest item Dollar General carries is a 5- by 8-foot rug that fetches $35. Family Dollar's most expensive item is a set of king-size percale sheets (180-thread count) and pillowcases for $20. Dollar Tree recently had lead crystal stems for $1 apiece.

"People will tackle each other to buy something for a buck that looks like it's worth four or five," said Adam Bergman, investor relations manager for Dollar Tree Stores Inc. in Chesapeake, Va.

The latest effort to woo customers is more brand name food. It's almostly all canned or bottled goods with a shelf life measured in years.

Once limited to snack foods, Dollar General is the first to add a selection of perishables: frozen food and cold fruit drinks in a test at 400 of its 5,600 stores.

* * *

The industry has had its share of problems, most of which lurked in lack of inventory controls and the resulting accounting surprises.

Each chain's origin was based on securing goods cheaply. Selling distressed goods for $1 that cost a quarter didn't take a lot of sophisticated inventory tracking. Because the retail price was always $1 there was little emphasis on keeping track of what items sold for, much less how long they stayed on the shelves unsold. Until recently, Dollar Tree's cash registers only had a $1 button to ring up sales. A clearance sale still means changing a sign to "two for $1" rather than one.

Now that most of the goods are bought at full wholesale prices, the industry finally is investing in bar code scanners and computerized cash registers. Only now are the stores beginning to track what they sell by color, size or price.

"These started out as mom and pop businesses," Stern said. "But as they get bigger and bigger, controlling their inventory is a major problem."

Accounting problems because of inadequate inventory controls were among the many reasons some ventures stumbled or disappeared in the past decade.

Among them: Phar-Mor, the Dollar Zone chain and Everything's-a-Dollar. (At that mall store chain, cashiers periodically yelled out, "Price check!" and a chorus of clerks unwaveringly responded, "Everything's a dollar!")

Dollar General is recovering from an accounting scandal of its own last fall in which it had to restate two years' worth of earnings.

The Nashville company changed auditors, instituted new controls and paid $162-million to settle shareholder lawsuits. The company also acknowledged that $116-million in inventory that had been booked as revenue in 2000 probably would still be sitting unsold in stores until 2002. The company has been tight-lipped about how it all happened pending the outcome of an SEC investigation.

"Clearly this ship faltered while I was the helm," said Cal Turner, chief executive and grandson of the chain's founder. "We all learned a valuable lesson. This was the biggest surprise and most jolting disappointment in my 36 years with the company."

While all three chains have been reporting solid revenue gains, most of it comes from opening new stores and doubling the size of many existing ones. Sales in stores open more than a year, a measure of a retailer's staying power with consumers, grew solidly, but far more modestly in 2001: 7.3 percent at Dollar General and 4.1 percent at Family Dollar. Dollar Tree had a tougher time, reporting a same-store sales increase of 0.1 percent in 2001 because it was trying to convert a chain it acquired midyear in Philadelphia.

Dollar Tree's slowdown came in spite of customers such as Jordan of St. Petersburg, who spent more that $500 last year on Christmas presents and decorations there alone.

"It's my favorite store," said the freelance home decorator as she left a St. Petersburg Dollar Tree with bags full of silk flowers and frosted glass apples that became part of a gift basket. Once she found enough notions to make 30 table centerpieces for a charity fundraiser. Each centerpiece cost $8 to make and was auctioned for $30 or more.

"Shopping here is like hunting through a thrift store; you never know what you'll find," she said. "Last Halloween eve I dragged a friend here, and we had the store completely to ourselves. I thought I had died and gone to heaven."

-- Mark Albright can be reached at albright@sptimes.com or (727) 893-8252.

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