The rising value of the dollar store

A few days after the New Year's holiday, clerks at the Dollar Tree store in St. Paul's Midway neighborhood were busily setting up new displays celebrating Valentine's Day and Super Bowl Sunday. Any remnants of the Christmas holiday season were long stowed away, and the bright new merchandise enticed shoppers anew.

No longer dusty, out-of-the-way haunts, dollar stores have grown into a $56 billion industry, a 43 percent increase since 1998, according to the industry research firm IBISWorld.

One of the few niches of retail expanding in a dim economy, the dollar store industry's four top players -- three of which are Fortune 500 companies -- are no longer snubbed by developers, landlords, investors and consumers because of their perceived working-class customer. Publicly traded Dollar General, Dollar Tree, Family Dollar and 99¢ Only Stores are expanding rapidly -- so much so, a recent report by Colliers International found, that there are more dollar stores nationwide than drugstores, a profound conclusion given the nation's aging population.

Dollar stores have responded to the new value-obsessed consumer by providing a brighter, cleaner retail experience with a dependable, well-edited selection of goods, including many food items, some perishable like milk and eggs.

Dollar chains are opening hundreds of new locations. The big ones -- Dollar General, Dollar Tree and Family Dollar -- now only have 153 stores in Minnesota (compared with the biggest dollar state, Texas, with 2,243 stores). So there's presumably room to grow.

This is a fortuitous development for commercial real estate brokers in the Twin Cities. As national retailers such as Borders, Linens 'n Things, Ultimate Electronics and others shut their doors, landlords have struggled to fill empty space in their shopping centers. Dollar stores often fill the void.

While the dollar chains won't say how many new outlets will open in Minnesota, local brokers expect many more to move into the state and the Twin Cities.

All of the chains emphasize convenience when looking for new space. Typically, they rely on automobile counts on nearby roads as a way of winnowing down potential sites, according to the Colliers report, while other retailers fervently study a potential market's demographics. In competitive markets, the success of a dollar store often depends on storefront visibility and the impulse shopping urge that it encourages.

"Dollar store success depends on the power of the spontaneous purchase," said Andrea Christenson, vice president at Cassidy Turley, a Minneapolis-based real estate firm. "You may not need anything going in, but you develop a need once you're inside."

Demanding convenience

Dollar General recently announced that it would open 625 more stores this year -- almost two a day -- across the country with "some" in Minnesota, said Tawn Earnest, spokeswoman for the Tennessee-based chain. She declined to be more specific. Although it is the largest chain nationally with more than 9,800 stores, Dollar General only has 16 stores in Minnesota, many of them outstate.

Historically, Dollar General has opened in rural areas that were so sparsely populated, even Wal-Mart passed. Today, 70 percent of the stores serve communities with fewer than 20,000 residents, according to its annual report. Customers typically live within three to five miles of the store -- within a 10-minute drive -- and they shop in the store an average of 10 minutes.

When Dollar General announced plans to expand this year, the company also said it would renovate or relocate another 550 stores. At first blush, this may sound like a Herculean effort, but a key to Dollar General's and its competitors' success is that a minimal initial investment is required and low maintenance beyond that. The company says it spends about $75,000 for equipment and fixtures to remodel a store, and about $140,000 to relocate one.

The chain does not strictly adhere to the dollar-only price point, and instead offers a variety of value-priced merchandise ranging from a limited selection of clothing to paper products and food -- sort of a mix between convenience and variety store.

"I come here for munchies and pop," said Wayne Evenson, who lives near the Dollar General Store in Mounds View. "They have those cheddar cheese fries snacks that I like. They also have the one kind of cat food my cat likes." Evenson said he visits the store three or four times a month, or whenever he has a little extra pin money.

Vladimir Lelchuk also can't resist the deals. The St. Louis Park retiree recently emerged from the Dollar Tree in Eden Prairie with a coveted package of frozen hash brown patties that sells for twice the price at Trader Joe's. "Look at this," the fervent dollar-store shopper declared. "One dollar!"

Dollar stores everywhere

Virginia-based Dollar Tree, where every item is indeed a dollar, prefers opening new stores in strip shopping centers anchored by mass merchandisers like Target or Wal-Mart, or by grocers, in urban and suburban markets and small towns. It said the number of stores planned for this fiscal year will be announced next month.

Sometimes grocery stores and big boxes try to restrict dollar stores from their shopping centers because they may erode sales. "They're everywhere," said Jamie Cohen, a broker with Upland Real Estate in Minneapolis, who counts Dollar Tree as a client. "I've been representing them for 10 years, and have never encountered any resistance [by landlords]."

Cohen says his experience shows that discounters prefer having a dollar store nearby because they add to consumer traffic.

Conversely, Family Dollar targets low- and middle-income consumers at its 7,100 stores nationwide. About 54 percent of the firm's customers had annual gross income of less than $40,000, and about 24 percent had a gross income of less than $20,000, according to a securities filing. The typical consumer is a female head-of-household.

Because the chain has an urban orientation, it is forced to focus more on price to combat competition, according to the Colliers report. Still, Family Dollar expects to open 450 to 500 stores nationwide this fiscal year, although the locations haven't been announced yet.

As chains expand, there is a danger of oversaturation, often a death knell for many national stores, said Ann Natunewicz, manager of retail research for Colliers. Historically, newer entrants are more vulnerable when consumer sentiment changes, particularly if the economy turns around.

But, she added, "I don't see any change in consumer sentiment regarding dollar stores in the foreseeable future. It's now OK to be a value shopper."