Keeping the Bargain Hunters Happy

CEO Macon Brock of Dollar Tree says his fast-growing, single-price-point company has come up with a formula that's working

Macon Brock Jr., chairman and CEO of Dollar Tree (DLTR ), isn't too worried about customer gripes. They're mainly "happy complaints" of going in to a store and planning to buy a few basics but walking out with an armload of goodies, he says. Shoppers of the Chesapeake (Va.)-based retailer, which prices all items at $1, have come to expect the "thrill of the hunt" when they shop at his stores, Brock says.

Keeping those bargain hunters happy has been the key to success for the chain, which opened its first store in Dalton, Ga., in 1986. Dollar Trees carry everything from soap and toilet cleaner to candy bars and knick-knacks to flip-flops and American flags in summer.

In 2002, Dollar Tree reported net income of $154 million on sales of $2.3 billion, compared to $123 million in income on $2 billion in sales in 2001. It has forecast sales and earnings growth to exceed 15% in 2003 as it expands to nearly 2,400 stores in 47 states. Without counting the recent acquisition of another dollar-only store called Greenbacks, it would increase square footage by 22%, or 200 more new stores and enlarged current stores, Brock says. Greenbacks will add an additional 100 outlets.

With consumers more value-conscious than ever, the dollar-store concept should continue to thrive. The four major publicly traded operators -- Dollar Tree, 99 Cents Stores (NDN ), Dollar General (DG ), and Family Dollar (FDO ) have all expanded and turned in strong financial performance in recent years. And analysts expect that to continue (see BW Online, 7/7/03, "Rising Values for Dollar Stores").

The trick now, says Brock, "is to distinguish ourselves in a sea of dollar stores so that Dollar Tree will mean a little bit more." He aims to do that with as much as high-quality merchandise as possible displayed in cleaner, neater stores. BusinessWeek Online reporter Amy Tsao spoke to Brock on June 30 to get his thoughts on the industry and his company's place in it. Edited excerpts from their conversation follow:

Q: Analysts say dollar stores have come a long way in recent years. What's behind the change?


Clearly from five years ago, there's a big shift. We cleaned out a store not long ago and found some [old] gifts, and the size and the quality of the products was almost comical. These were from a previous generation of stores. These were one-inch figurines. Compared to today, the product would be many times bigger and better, selling at the same price.

We get merchandise from two sources -- offshore and domestically. Of late, because of our larger stores, we've increased our offering of domestic consumable products like candy and snacks, health and beauty care, and paper goods, which turn faster. And that success has given us more recognition among vendors.

And with the offshore purchasing, we've been able, particularly in China, to use our knowledge and experience to improve the merchandise mix. Size has improved, as have quality of the pieces and branding of those goods. We've developed our own internal brands too.

Q: Some of your competitors are talking about increasing their food offerings. What percent of your business is food?


It's a minor issue with us. Our food offerings are focused around snack or single-serve convenience -- particularly beverage and candy. Some of our largest stores have canned goods or dry goods. We're not focused on the grocery business. We carry it as a matter of convenience, where we have the room. Our consumer-goods mix consists of cleaners, household goods, standard grocery-store items.

Q: How can you improve margins when by definition you have no pricing power?


We do give that up since we never change the price. We have a love affair with our customers. We use our buying power and resolve and company focus to always search for best quality and values that can be shown for the one price point. Year over year, we've been able to bring that buying power and bring forth a stronger product mix and a bigger and better store, which has translated into improvement in our sales.

Q: How do you compete against the likes of Wal-Mart (WMT )?


We make no pretense we can outbuy or outsell Wal-Mart. It's not even comparable. We choose to focus on one entry-level price point. And they don't and can't. Also, they have a very large and somewhat more complicated supply chain. They're getting vendors to take the inventory risk. We're not able to do that because of the cost involved.

We are able to import so we can offer products at a lower price. There are really no middlepeople between the consumer and the manufacturer. So, we're a one middleman shop. We go around the world, find products, if they meet our criteria and we think we can sell them, we bring them in -- and we always charge a dollar.

Q: How have trends in sales per square foot been as you've increased store size?


You get lots more sales, quite a bit more. Our dollars per square foot are down, but we don't focus on that. Our larger stores are quite productive. If you want the highest dollars per square foot when you are selling things for a dollar, you need the room because you're moving huge volumes of freight. The larger square-foot stores aren't as productive, but they are profitable. That's part of our scheme.

Q: You just finished a $100 million buyout of Salt Lake City-based Greenbacks. Do you expect to do more acquisitions?


We do not see more coming. There are a plethora of independent stores in the country. An Internet search in Chicago turned up 264 stores with dollar in their name. That speaks to the proliferation of so-called dollar stores.

We can grow organically. We have 90% to 100% return on investment in a store year over year. And we have distribution that can reach all 48 states. So, there's not really a reason to acquire anyone. People do make offers to us since we're an exit strategy for people in this business.

Q: Who is your competition?


You can't shop at a Dollar Tree and survive. You shop there as an opportunity to save money. But we can't carry everything. The competition that we face is single-price point independents. Family Dollar and Dollar General are general stores that have all the categories covered and they're multiprice-point. They're competition, but anyone who sells general merchandise is competition.

Q: Where do you see new growth coming from?


From the contiguous 48 states, except those metro areas like New York City, where it's so expensive we can't afford to go there. But we're going in population centers of the country. With Greenbacks we'll be doing well in the Northwest.

Q: How does your business do in an improving economic environment? Do customers trade up?


We are subject to psychological trends and consumer confidence. So we do better in good economic times like anyone else. Our advantage is that when times are not so good, we still do well because what we're doing is so basic to the American family.

Edited by Beth Belton

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