Dollar stores moving up the retail food chain

DALLAS — Dollar stores are hot, and not just because of the financial strains caused by the U.S.’s uneven economic recovery. While they still rely on low-income households for the majority of sales, some dollar-store companies are moving up the retail food chain.

In particular, they are appealing to consumers from all income levels who want discount prices for everyday household goods. The success of the modern five-and-dime is the latest sign the U.S. has become a nation of bargain hunters, a shift that’s causing headaches for some traditional retailers.

Dollar General Corp., the largest dollar-store chain in the U.S., says households with annual incomes of more than $50,000 represent its fastest-growing market. The number of such households who shopped at its stores between 2001 and 2004 increased 27 percent. By contrast, the number of households with incomes below $50,000 increased 14 percent. Dollar General declined to say what portion of sales those two groups represented.

According to a recent study from Boston Consulting Group, consumers are dividing shopping into two categories: big-ticket items such as cars and televisions, on which they are willing to splurge; and everyday items, such as canned food and over-the-counter health remedies, for which they won’t pay more than discount prices.

As a result, a quarter of Americans with household incomes in excess of $100,000 shopped at a dollar store at least once in the past six months, according to Retail Forward, a Columbus, Ohio-based marketing and consulting firm.

“Poor people need low prices. Wealthy people love low prices,” says Todd Hale, a senior vice president at market-information company ACNielsen Corp.

The lure of the decades-old dollar stores is putting pressure on major retailers who are also grappling with the effect of higher gas prices and stagnant wages. Retailers including Target Corp., Albertsons Inc. and Kroger Co. have responded to the dollar-store phenomenon by installing aisles in stores devoted to items costing $1. “As we did our research, it became very clear to us that it was a consumer trend that we could not ignore,” said Albertsons’s Chief Executive Larry Johnston in a June conference call with investors.

It’s hard to know how long dollar stores will be able to extend their appeal. Dollar stores have recently seen margins slip because of the impact of high gas prices. Competition from other retailers, including the powerful Wal-Mart, is also likely to increase.

The number of dollar stores in the U.S. has tripled over the past decade to 16,000 and industry observers say there’s room for more. Dollar General, which owns 7,100 stores, plans to open 695 new stores by the end of this year after opening 587 outlets in 2003. Over the past five years, the annual average U.S. sales growth for each of the three biggest dollar stores — Dollar General, Family Dollar Stores Inc., and Dollar Tree Stores Inc. — was higher than that of Wal-Mart.