The buck stops here

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As the longest peacetime economic expansion in history leads to a growing array of premium-price products, the fastest-growing package-goods retail channel, surprisingly enough, caters to the poorest consumers. So-called dollar stores, including the Dollar General, Family Dollar and Dollar Tree chains, are all growing at strong double-digit rates even as food, drug and mass merchandise channels struggle to top low single-digit growth. And while premium products such as high-end paper towels, diapers and batteries meet with mixed results, value and private-label products are faring better in some of the same categories.

Whether it's a sign of the rich getting richer and the poor getting poorer or simply of more effective segmentation by retailers and package-goods marketers, it's a paradox with an increasingly pronounced effect on the industry.

As consumer frugality holds its ground in a world of plenty, package-goods companies are paying more attention to consumers bypassed by the prosperity of recent years. They're tailoring some products to dollar store consumers and finding price increases hard to sustain in some cases, despite rising raw material costs.

Dollar stores' growing impact on the package-goods industry stems largely from decisions by major players in the channel within the past two or three years to dramatically change merchandising emphasis from a mix of roughly 70% soft lines and 30% package goods to one that roughly reverses those numbers, according to one consultant for the dollar store industry who asked not to be named.

AFFECT OF WAL-MART'S GROWTH

As in most areas of package goods, Wal-Mart Stores has been a major factor in the shift. Growth of Wal-Mart supercenters and mass merchandise outlets has forced many independent food stores and five-and-dimes out of business in small towns and rural communities, leaving a void that dollar stores increasingly have filled.

As a result: Wal-Mart and dollar stores have an almost symbiotic relationship. The more thinly populated the county, the higher the household penetration rates for dollar stores, according to Todd Hale, senior VP-consumer analytics for ACNielsen Corp. That pattern mirrors the household penetration rates for Wal-Mart and other mass merchandisers.

Dollar General Corp. now has more than 4,700 stores, up more than 400 from last year. Family Dollar Stores, with more than 3,600 stores, has opened more than 200 in the past year. And Dollar Tree Stores, with 1,677 stores, is on pace to open roughly 200 more in the next year.

Sales growth similarly is strong. Family Dollar sales were up 13.9% to $3.1 billion for the fiscal year ended Aug. 26; stores open at least a year were up 5.2%. Year-to-date sales for Dollar General were up 14.7% to $2.8 billion for the 35 weeks ended Sept. 29; sales for stores open at least a year were up 0.8%. And Dollar Tree's sales were up 29% to $1.1 billion for the nine months ended in September; same-store sales in the third quarter were up 5.3%.

A GROWING FACTOR IN CATEGORIES

With combined sales less than $9 billion annually, the three are a drop in the bucket compared to Wal-Mart's $183 billion. But dollar stores are a growing factor, particularly in such categories as laundry detergents and household cleaners. Dollar stores' share of each category grew by more than 30% in 1999 to about 3%, according to ACNielsen.

While moving from a 2.7% to 3.1% share in detergents may not seem dramatic, annual detergent product group sales total nearly $8 billion, Mr. Hale said. "Capturing an additional four-tenths of a percentage point of share shifts nearly $32 million to the dollar store channel," he said. "This channel is more than nibbling away at some of the other channels; it's taking a significant bite."

The dollar store channel already has a similar share in detergents and cleaners to that at drugstores, and helped take share away from mass merchandisers and warehouse outlets in such categories as batteries and school supplies last year, according to ACNielsen figures based on research conducted with its panel of 55,000 consumers nationally.

While neither ACNielsen nor Information Resources Inc. has scanner data for dollar stores, Mr. Hale said client demand is driving them to try to develop systems to track sales there.

Key to dollar stores' success is offering a limited assortment of brands, strong private-label programs and simplified pricing structures generally rounded off in dollar increments and offering in many cases genuine savings over prices even at Wal-Mart, said Burt Flickinger, managing partner of Reach Marketing, a Westport, Conn., consultancy.

A SIGNIFICANT CHANNEL

"The dollar channel is going to be extremely significant, and a channel that Wal-Mart is concerned about, because wealth on Wall Street isn't translating into prosperity on main street," he said. "Every year for the past eight years a million Americans have filed for personal bankruptcy. And 67% of the country had household incomes of $35,000 or less. You've got 35 million Americans one medical emergency away from personal bankruptcy."

Such factors as rising energy costs also fuel dollar store growth, he said, since most of the stores serve areas more than 5 miles from a supermarket or mass merchandise store.

Mr. Hale believes Wal-Mart could easily counter the dollar store threat by rolling out more of its smaller-format neighborhood stores.

But whatever the ultimate outcome, package-goods manufacturers are taking notice of the channel's growth. Just as it forged a partnership with then-fledgling Wal-Mart in the 1970s and '80s, P&G has paid special attention to Dollar General, too, devoting a 10-12 member sales and marketing team to the chain, according to an industry consultant.

At the request of Dollar General and other dollar stores, P&G began offering a non-concentrated version of its Dawn liquid dish detergent two years ago that has made the chain the No. 2 outlet for the brand nationally behind Wal-Mart. Colgate-Palmolive followed suit last year with a non-concentrated version of its Palmolive and Ajax brand liquid soaps for the dollar stores. The dollar stores also sell concentrated versions, but poorer customers appear to see more perceived value in the unconcentrated versions that give them more ounces for their dollar.

PANTENE ORIGINAL REMAINS

As P&G restaged its Pantene haircare line as higher-price Pantene Pro-V Essentials earlier this year, the company also maintained the original formulation and packaging for the brand for its dollar store customers.

"You will see Dawn, Tide, Pantene and Folgers on the shelves in those stores," a P&G spokeswoman said. "Our goal is to make sure our brands are available everywhere, and we recognize the growth in that venue. We've done our own research and we've found that consumers in households that make $35,000 or less a year still want premium performance. No matter how much they have to spend, they want to make sure they're getting a good value."

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