Wal-Mart Stores (WMT) is beginning to lose its grip on cash-strapped Americans. Dollar General (DG), Family Dollar Stores (FDO) and Dollar Tree (DLTR)—three rivals that are the biggest of the so-called dollar store chains—have all seen traffic at their stores tick up this year, while Wal-Mart's U.S. numbers have slipped. "Dollar stores are in a sweet spot," says Bernie Sosnick, an analyst at Gilford Securities in Melville, N.Y. "They're on the wrong side of the tracks, close to the where the lowest-income shoppers live. This puts them in position to do more business with people who are suffering from constrained spending power." Adds Sosnick: "Wal-Mart is flailing."
The Bentonville (Ark.)-based retailer generated revenues of $258.2 billion last year from its 3,700-plus U.S. stores, 10 times greater than the combined sales of Dollar General, Family Dollar, and Dollar Tree, which together have some 19,500 outlets. Yet in the most recent quarter, Wal-Mart's same-store sales sank 1.4 percent, trailing gains of 7 percent by Family Dollar, 6.7 percent by Dollar General, and 6.5 percent by Dollar Tree. "Our key point of difference with our customers is our everyday low price in a convenient location," said Dollar General Chairman and CEO Richard Dreiling during a June 8 earnings call. Wal-Mart won't discuss its competitors, says Greg Rossiter, a company spokesman.
A confluence of trends is behind dollar stores' improved fortunes.Squeezed by higher gasoline prices, consumers are forgoing the often long drives to big box stores far from their neighborhoods. "Our traditional shopper is feeling pain," says Jim Kelly, Family Dollar's president and chief operating officer. "When gas prices picked up, they looked for greater value in their basic spending."
Consumers also are being drawn to the stores by an expanding selection of name-brand products. Maria Wildrick, a kindergarten teacher in Carthage, Ill., says she now makes the 35-mile drive to a Wal-Mart in Macomb just once a month but visits her town's Dollar General on a weekly basis, spending $75 on average. "I had thought Dollar General carried cheap stuff, so I was pleasantly surprised," says Wildrick, 54, who stocks up on Nestlé's Fancy Feast food for her cat, Marley.
Family Dollar began building up its stock of name brands during the recession. Its stores now give more space to food, health and beauty aids, and paper products—and less to clothing and other discretionary items. The Matthews (N.C.)-based retailer added more than 100 grocery items in the last quarter.
COO Kelly ticked off some of his recent coups while touring a store in Charlotte: Campbell Soup's (CPB) Prego pasta sauce, Kraft Food's (KFT) A.1. steak sauce, and J.M. Smucker's (SJM) Crisco shortening. "These are names that our customers recognize," he says. "We are broadening our assortment to get more of what our customers are accustomed to buying." Similarly, Dollar General is installing taller shelves so it can accommodate more national brands alongside its own private label food and sodas.
The decline in rents brought about by the real estate glut has spurred dollar stores to expand. Family Dollar is adding 200 stores this year, Dollar Tree 220, and Dollar General 600. Wal-Mart, meanwhile, is slowing its U.S. store openings so it can focus on remodeling its supercenters, which average 185,000 square feet, vs. the 7,000 to 9,000 square feet that is the average for dollar stores. Wal-Mart is also testing smaller formats.
Retail analysts are divided on whether dollar stores can hang on to their new customers once economic times improve. Craig Johnson, president of New Canaan (Conn.)-based consulting firm Customer Growth Partners, predicts that like Wildrick, customers will become hooked once they see dollar stores have evolved. "They've become a new generation of convenience stores, not just a place to buy something on the cheap," he says. Maggie Gilliam, president of New York-based retail consulting firm Gilliam & Co., disagrees. "Most people don't aspire to shop at dollar stores," she says. "As soon as they feel better economically, they'll return to their old stores."
The Bottom Line: Dollar stores are adding outlets and boosting their offering of name-brand products to lure shoppers away from big box stores.