Dollar stores thriving

August 06, 2006|By MICHAEL E. KANELL | MICHAEL E. KANELL,COX NEWS SERVICE

ATLANTA -- Edwin Worrell struts down the aisle, waving his hands and pointing with satisfaction as he passes the shelves he installed at his Dollar Smart store in Buford, Ga.

On display are toys, paper goods, pet items, stationery, candles, sunglasses, shampoo, CDs, gift bags, soap, balloons, coffee mugs. ... And on and on.

Prices are rising, consumer confidence is wobbling, the economy is slowing, but you wouldn't know it here.

"Everything is a dollar - at least 99 percent of it," said Worrell, who also owns the Dollar Smart in Dacula, Ga.

Dollar stores are not immune to inflation, but with a mix of hustle, hardball, selectivity and luck, they seemingly battle it to a standstill. Only the struggle is constant.

Stephanie Cody emerged from Dollar Smart with a couple of CDs she can play for the nine toddlers she teaches, a poster board and some maps. Final cost: $5.50.

"You can always find something," she said. "I come in here all the time."

Most "dollar stores" are chains, with somewhat different approaches. Dollar Tree Stores Inc., based in Chesapeake, Va., still embraces the all-for-a-buck notion at its 3,100 outlets. Not so at Family Dollar Stores Inc., of Charlotte, N.C., although most everything is less than $10 at the chain of 6,000 establishments.

All of them are a distinct part of the economy - a place to buy everything from toys to toiletries at prices often below Wal-Mart's.

And the challenge for all is the same: how to fill shelves with low-priced goods in a world where many basic costs keep climbing.

Consumer prices have been rising, and the pace of the climb has picked up. Government data recently showed wholesale prices increasing even faster.

Commodities are ever more costly - especially oil. Prices have tripled in the past three years.

Oil and its byproducts are a component in many items - plastic broom handles, CDs, shampoo bottles. Almost as inescapable is its effect in raising the cost of transporting goods.

The pathway to low prices has been well-trampled by Wal-Mart Stores Inc., which became dominant through a relentless emphasis on cutting costs. Yet the dollar stores survive, using a grab bag of tricks.

First, of course, is volume.

Typically, the dollar store is not a destination for one-stop shopping. Instead, the store is often in a strip mall, a place where consumers might wander on foot after eating at a restaurant or dropping off some dry cleaning.

Not that customers at the dollar store are likely to drop huge amounts of cash - after all, everything is cheap. But a dollar store can thrive if sheer numbers make up for what it lacks in magnitude.

Dollar Tree Stores, whose first store was in Dalton, Ga., posted sales last year of $3.4 billion, yet the average customer's tab is just $7, said Bob Sasser, president and chief executive.

"I've got to believe that a high percentage of people in the store are tempted to buy something. Everybody likes a bargain. Even rich people like a bargain."

Dollar stores serve a critical function, one that also lets them profit, said Eugene H. Fram, marketing professor at the Rochester Institute of Technology.

Sometimes they buy products from a company or store going out of business. Sometimes they buy from a manufacturer who has suddenly gotten stuck with all sorts of products on its hands when a big chain canceled a contract.

In both cases, the goods are dirt cheap, Fram said.

Just as crucial as what a dollar store carries may be what it doesn't.

Many of them don't worry about consistency, gladly swapping out offerings so long as they can stick to their chosen price point. A store with that strategy can pass up anything that costs too much, Fram said.

"At a dollar store you find the inventory continually changing," he said. "They rotate through different items."

Dollar Tree hopes customers see the element of surprise as part of the attraction, Sasser said. "It's the thrill of the hunt. Our philosophy is, buy it now, because it may not be here tomorrow."

The price of an item depends largely on how much the store paid for it.

And while the buying power of the dollar stores is dwarfed by Wal-Mart, the dollar store chains are big enough to forge their own contracts with factories. And, like Wal-Mart, they have found the best deals in Asia.

"Probably 50 percent of what we do in our stores is made to our specs - our design, our brand," Sasser said. "We source things directly from factories worldwide, mostly in Asia and particularly China."

Tiny independents must do their buying from wholesalers.

In the search for merchandise, Worrell goes to Las Vegas twice a year, to Chicago five times. He buys from more than 100 vendors.

Wholesalers face vicious competition, something that works to the dollar store's advantage, he said. "Business is tough and a lot of retailers are going out. He can sell to me or he can sell to nobody."

He flips through a catalog with hundreds of items - and not a single price. Why not? "Because it's so negotiable," he said. "They are going to charge as much as they can get away with and as little as you can fistfight for."

When a supplier does want to charge more for a product, the dollar store has four possible responses, said Kiley F. Rawlins, vice president of Family Dollar: absorb the increase, negotiate with the supplier, raise the price to the customer or drop the item.

The company prefers to stay with the price point if it can, she says. So it often tries to persuade the supplier to make the product a little smaller.

Dollar Tree commits to carrying certain categories but not necessarily a certain product, Sasser said. "We are going to have toothpaste. Sometimes I can have Crest. Sometimes I can't."

Right now, the store doesn't carry brooms and mops, Worrell said, because their plastic handles are petroleum-based and cost too much.

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