Why Dollar Stores Are Hotter Than Ever (Even Among the Rich)

Dollar Tree
Dollar Tree

Dollar stores are luring a lot more consumers these days.

While it's no surprise these discount retailers gained popularity during the economic downturn, their rock-bottom prices aren't the only reason for their still growing appeal: Dollar store chains have undergone major makeovers in recent years, sprucing up their dingy digs and adding more compelling merchandise.

"At the start of the recession, they decided they didn't want to be recession-dependent retailers, but that they would become mainstream," Dave Marcotte, senior vice president of market research and retail consultancy Kantar Retail, tells DailyFinance.

The strategy appears to have paid off as the chains, which have long been patronized by the cash-strapped, have managed to capture more business from higher-income shoppers.

For example, Dollar General (DG), which just announced plans to open 625 stores this year, noted recently that its fastest growing customer segment is shoppers who earn more than $70,000 a year. And Dollar Tree (DLTR) was called out by Kantar Retail as one of the country's fast-growing retailers in a December report.

Here's why the dollar chains, including top players Dollar General and Family Dollar (FDO), have become some of the hottest places to shop.

Upgraded Merchandise

Once synonymous with generic goods of dubious quality, dollar stores have made a big push in the past few years to upgrade their product mix with the addition of well-known brands -- from Tide laundry detergent to Kellogg's cereals.

"The addition of national brands brings consistency to the merchandise mix and appeals to brand-conscious consumers," Deborah Weinswig, a retail analyst with Citi, tells DailyFinance.

They've also sprinkled their store shelves with items that have a "wow" factor and can spark an emotional purchase -- what the retail industry calls "treasure hunt" goods -- which has created "a sense of excitement in dollar stores," Weinswig says.

And in their selections of general merchandise, these chains have increasingly moved away from "really cheap knockoff stuff" towards better-quality clothing and home goods. They've also standardized their inventory so that shoppers can expect more consistent product offerings year round.

About two years ago, Family Dollar launched Family Chef, a proprietary line of housewares, including cookware and kitchen gadgets, that marked a major upgrade from its prior "very spotty" offerings, Marcotte says.

Meanwhile, Dollar General added in more national brands like Hanes to its apparel mix, he says.

Compelling Grocery, Drug Store Alternative

Also in recent years, the dollar chains improved their food and consumables offerings, which has boosted foot traffic in the stores, Weinswig says. "They've added coolers, quick prep, and ready-to-eat food."

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The dollar chains are also giving drugstores a run for their money by carrying much of the same health and beauty care products as a Walgreens (WAG) or a CVS (CVS), for example -- but at lower prices, Marcotte says. Family Dollar, for example, is emphasizing those deal with in-store signs that urge shoppers to compare its prices to drugstore prices, he says.

The upgrades are poised to "have the greatest impact on the food and drug retailers, as the dollar stores' convenience and competitive pricing gives consumers another option for making convenient purchases," according to Weinswig's Citi report, "Dollar Stores Well Positioned for Success."

Dollar chains have also given their stores facelifts.

"They've made the stores much easier to shop and simpler to navigate," Marcotte says. Today, many of them "are clean, attractive and well lit."

Convenience Fits with New Shopping Patterns

More consumers are forgoing massive shopping trips where they load up on household goods that will last them a month -- a shift that has been a boon for the dollar chains, Peter J. Keith, senior research analyst for hardline retail and consumer products for Piper Jaffray, tells DailyFinance.

"In terms of the dollar store popularity, I would say the greatest reason is convenience," he says. "Consumers are now preferring to make smaller purchases on a more frequent, as needed basis. This type of shopping lends itself well to dollar stores where you can park right by the front door and get in and out in five minutes. Conversely, a trip to Walmart (WMT) might take 30 minutes with the large parking lot and large store to navigate."

Meanwhile, some dollar chains are becoming even more bargain-conscious in their pricing due to the nation's lingering economic malaise.

Dollar General, for one, has expanded its offerings of $1 priced items in response to "the high unemployment levels among customers without a high school diploma," says Weinswig's report.


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