REPORT FORECASTS GAINS IN DOLLAR STORE CHANNEL

COLUMBUS, Ohio -- Dollar stores, one-price stores, closeout stores and similar small-format value retailers will continue to pressure supermarkets, supercenters and other food formats over the next decade or so as they grow in sales and numbers, according to a report by Retail Forward here.Small-format value-retailers are expected to grow sales by 7.5% this year and continue to expand at an average

COLUMBUS, Ohio -- Dollar stores, one-price stores, closeout stores and similar small-format value retailers will continue to pressure supermarkets, supercenters and other food formats over the next decade or so as they grow in sales and numbers, according to a report by Retail Forward here.

Small-format value-retailers are expected to grow sales by 7.5% this year and continue to expand at an average annual growth rate of 6.2% through 2008, Retail Forward said, while more than doubling store counts -- from about 7,000 units this year to 15,000 over the next five years.

As the dollar stores and others broaden their appeal to more middle- and upper-income consumers, more national-brand suppliers are likely to work with the small-format operators to develop special packaging and pricing to meet their specialized needs, the report said.

The report was written by Sandy Skrovan, vice president, Retail Forward, a global management consulting and marketing research firm specializing in retail intelligence and strategies.

Several mainstream players are already exploring dollar store concepts within existing formats, Skrovan pointed out, "[and] looking over the five-year horizon, some mainstream players could even make a play with their own freestanding units."

Wal-Mart Stores, Bentonville, Ark., would be a logical operator to pursue such a strategy, she added. The chain is already testing Pennies-n-Cents sections at some supercenters, she noted, "and given Wal-Mart's buying prowess and labor costs, it certainly seems likely that it could beat Dollar General and Family Dollar at this game," particularly given the availability of vacated Wal-Mart units.

"Homing in on the dollar store is the perfect opportunity for Wal-Mart to get back to its small-town roots and to operate in the smallest of rural markets [and] an opportunity to further leverage all those distribution facilities."

Ongoing expansion into more consumables will drive traffic and shopper frequency among dollar stores and similar formats, the report noted, pointing out consumables represented 61% of the segment's sales in 2003, up from 42% in 1998.

With that in mind, Dollar General is moving forward more aggressively with food by opening two Dollar General Market locations last year -- 17,000-square-foot formats, or twice the chain's normal size, that devote half the space to food -- with plans for 20 more similar locations this year. The company has said productivity at the test stores has been significantly higher.

In addition, since the company began increasing cooler space for dairy and other perishables, the average transaction size has increased from $8.42 at conventional stores to $13.41 at stores with coolers, Skrovan pointed out.

However, "as dollar stores add more perishables and refrigerated food to the mix, managing the supply chain -- particularly the cold chain -- will become increasingly difficult," she said.

"At present, Dollar General stores have little or no back-room space. Consequently, product must enter the store through the front door, typically via direct-store delivery. Further penetration in the perishables arena may depend on the expansion of refrigerated units and improved supply chain and logistics practices."

National brands are becoming a larger part of dollar stores' merchandise mix, approaching 30% to 35% at some stores, compared with 25% five years ago, the report noted. "Suppliers will find more opportunities to align with dollar stores and other formats looking to develop dollar store sections to meet customized product, packaging and pricing needs required by channel players," Skrovan said.

The top 10 players in the small-format value-retail segment represent 60% of the industry's sales, compared with 40% in 1998. The top five players (Dollar General, Family Dollar, Big Lots, Dollar Tree Stores and Fred's) represent 50% of the channel's sales, up from 33% five years ago.