The confectionery category is a coveted one in an increasingly viable channel that seems made for the sweet stuff: dollar stores. Tween moviegoers looking to save some bucks on theater candy stop off first at their local . . .dollar store.
A working woman on her lunch hour picks up seasonal candy to fill her desk jar at a nearby . . .dollar store. Senior citizens hunt for some sugar-free candies at their favorite . . .dollar store.

A road-bound salesman knows he can typically find a two-pack of extra-strong breath mints for the price of one at any neighborhood . . .dollar store.

Moms are letting their kids pick out candy and gum treats where they advise them to get the most from their allowance money—at the newly opened . . .dollar store.

Could dollar stores be the newest candy stores? Why not? They certainly sell confections in wide variety and assortment—but even more importantly, they’ve developed plan-o-grams with the best of both worlds—filled with “treasure hunt” SKUs (one-time offerings) as well as “re-orderables” (items that can be replenished).

In many cases, what the dollar channel refers to as re-orderables is growing to over 50 percent of a chain’s business. This is due to the increased selection of regularly available product in new and expanded categories, especially consumables such as refrigerated and frozen foods, and, of course, candy and snacks.

“Most of the dollar stores have been shifting their strategies away from a general merchandise focus such as apparel and housewares, and moving towards more commodity categories. That’s what’s driving increased frequency of customer visits,” says Neil Stern, senior partner with Chicago-based retail consulting firm McMillan/Doolittle.

“Food, household chemicals, paper supplies and candy—they are all key categories for frequent dollar store visits. Increasing their presence in the channel has changed the nature of dollar store shopping to a more weekly event in consumers’ lives.”

And candy, all by itself, comes with even more multi-appeal for dollar stores, say Stern and other experts.  First off, naturally low confectionery price points easily fulfill the dollar store mission of demonstrating value—either with larger sizes priced at a dollar, or smaller sizes priced at two (or more) for a dollar.

Secondly, candy allows the dollar channel to offer well-known branded product in consumables. Other than candy, the edible items at dollar stores often are “no names” or imports—typically products the general consumer is not familiar with. Candy allows for merchandising of a consumable category that is brand-dominated, creating a “brand aura” presence for the channel. Apparently, dollar stores are getting more heavily into candy because they can play up these names.
“Candy brands really help establish legitimacy to not just the category, but to the entire dollar store,” says Stern.
Thirdly, candy is impulse-driven and frequently purchased—two more pluses that fit nicely with the dollar store format.

Lastly, confections have great seasonality—and often that is the driver of dollar store traffic. This channel’s customers respond well to party-planning type merchandising, and candy has an obvious fit with that.

There are merchandising distinctions within the dollar store channel. Most experts break it up into three parts: the extreme value dollar stores such as Family Dollar and Dollar General; the single-price dollar stores such as Dollar Tree and 99 Cents Only Stores, and the close-outs, such as Big Lots and Odd Jobs.

“The commonality across all three right now is that they’re putting a heavy focus on consumables, especially seasonal items, candy, snack foods, and HBC,” says Don Stuart, a partner with Wilton, Conn.-based Cannondale Associates, which now evaluates the dollar store trade class on an annual basis. “The basic distinction is that single-price stores are more of the treasure hunt mentality, while extreme value stores (which includes close-outs) focus on the lowest price on everyday consumables. They really want to get the basics right.”

That’s not to say that candy does better in one format over another. “All types of confectionery products—packs, peg bags, feeders, multi-packs, king sizes—they all play very well in either format,” maintains Stuart. “That’s because by and large, confections are strong brands, and they all satisfy an immediate need.”

While no individual chain will reveal any of their specific candy plans, they all admit to being in the middle of a heavier consumable transition. In fact, that may be why they are currently so guarded. Competition is fierce while they all feel out their place as a more frequently shopped stop.

According to industry reports, Dollar General of Goodlettsville, Tenn., has had an “increased focus on highly consumable products from candy to frozen food.” The company has also embarked on three larger market stores, carrying almost full lines of grocery. The concept has been likened to Wal-Mart’s Neighborhood stores, and if successful, is expected to help grow the channel as an even more viable grocery competitor.

Family Dollar, of Matthews, N.C., used to have a 15-20 percent sales volume in apparel, but they are shifting that to consumable items, and expanding their name-brand focus. “So that bodes well for snack items and confectionery,” states Stuart. According to Family Dollar executive vice president George Mahoney, “We consider ourselves neighborhood discount convenience stores.”

Dollar Tree of Chesapeake, Va., is reportedly “sweetening up” its consumables offering, but with a larger focus on private label than some of the others.  Also, “consumables represent over 40 percent of our mix, but for us, consumables are a lot more than just food and beverage, it also includes HBA and household supplies,” says Adam Bergman, spokesperson.

The overall food section (including candy) at 99 Cents Only Stores continues to grow, but currently constitutes about 20-25 percent of store footage.

“Major manufacturers are finally starting to realize the importance of what dollar stores have to offer,” says Dick Saklad, vice president of operations for the Commerce, Calif.-based dollar retailer.

Indeed, the growing popularity of the dollar store concept, especially in light of the focus on consumable brands, brings significant opportunities for candy and other commodity manufacturers.

“These suppliers will need to pay more attention to the dollar store sector as a high-growth distribution channel going forward,” states Sandy Skorovan, a vice president with Retail Forward and author of the Columbus, Ohio-based consulting firm’s recently released dollar store industry outlook report. “Suppliers willing to work with the leading dollar store players to meet special packaging and pricing needs will find themselves in good stead.”

Stern reports that the majority response has been to start creating special dollar store sizes and packages (typically smaller and simpler), and that goes for “no-names” as well as established candy suppliers. “We’re seeing vendors that used to be primarily private label suppliers going after more branded business, creating unique packages and labels for this obvious growth channel,” he says.

That has put many branded candy manufacturers on their toes and jumping through hoops, which they expect will pay off. “We’ve been catering to this channel for three to four years, but now that it’s really in vogue and on everybody’s radar; we have to be even more accommodating,” says one anonymous candy vendor. “We keep track of all the packaging details—for instance, Dollar General and Family Dollar like their emblems, or proprietary pricing formats, pre-printed on the packages. Dollar Tree, on the other hand, specifically told us not to do that—because their customers already know everything in the store is a dollar, and they want to keep that price off the package because they want the merchandise to have a higher perceived value.”

Vendors will come to know these and other specific needs of the channel just by working with the various players. Generally speaking, the extreme discount chains like Dollar General “want national brands, and they expect even prices and multiples that are very attractive,” according to Stuart. “You have to hit some price point for them, keeping in mind they want the lowest prices on everyday consumables.”

 As for single-price stores, “They’re more challenging because that’s the goal—a single price,” explains Stuart. “They also don’t need the item all the time, it’s more of a treasure hunt shopping excitement. So vendors can have a self-perpetuating proposition with extreme value. One item can work for a while. With single price, they may be in, they may be out, it’s just the nature of the beast. They more sharply vary inventory in their stores.”

That’s not to say that candy vendors should ignore the single-price formats. “They should go after both types of dollar stores,” maintains Stuart. And perhaps most importantly: “They need to stop calling it an ‘alternate channel.’ That is such a misnomer now. Channels are blurring; manufacturers can’t afford to show their ignorance here.” n

"Overall, it is fair to say that, like most retailers, Dollar Tree performs best in a strong economic environment.  When customers have more money in their pocket, they are more apt to spend it.  So, when unemployment is relatively low, when gasoline prices are relatively low, when Americans feel their jobs are relatively secure, when wage growth is strong, when the stock market is strong (causing "wealth creation")—those are the kind of economic conditions that have typically been best for us.

"Meanwhile, because everything we sell retails for $1, every day, we offer a tremendous value proposition to the consumer, even when economic times are tough. You can see from our historical results that we perform decently in tough economic times (like 2001/2002), and we perform better in robust economic periods (late 1990s)."

It has been said that if you can’t beat them, join them, and that’s exactly what stores in other trade classes have done: hopped on the dollar store bandwagon with some "dollar store" aisles of their own.

By now it’s no secret that the dollar store sector continues to take share away from other retail channels. According to ACNielsen, grocery and mass merchandisers, in particular, showed consistent losses in an analysis of 10 product groups sold in dollar stores—one of the 10 categories being candy. Dollar stores, on the other hand, gained share in these ten categories across the board.

Fighting dollar items with dollar items, a number of retailers— in channels including supermarkets, mass merchandisers and drugstores—began running dollar store promotions and even complete dollar aisles within their non-dollar stores to capitalize on this exploding retail trend and capture (back) some of the channel’s sales.

For instance, last summer Kroger began testing dollar store aisles in a few Denver-area markets. Albertsons has recently run a 10 for $10 marketing promotion. Target has announced plans to test dollar-store sections in 125 stores. Walgreen’s has heavily promoted its "Dollar Days" sales, along with some periodic dollar aisles. Rite Aid has also tested dollar-item-only aisles, amply stocked in the first quarter immediately after fourth-quarter holiday sales.

And last but not least, Wal-Mart has a dollar-only section in about 20 stores; some Wal-Mart Supercenters are testing an in-store dollar concept called Pennies-n-Cents, where toys, candy and other items are sold for $1 or less. The retail giant has even officially appointed a separate "dollar buyer," according to several manufacturers who have begun working with him.

"Offering a wide assortment of basic household goods at very low price points, the [dollar store] retailers are grabbing the attention of consumers and retailers alike," says Todd Hale, ACNielsen senior vice president. "And when the likes of Wal-Mart take notice, most others do too."
But is this approach truly feasible in the long run for stores that don’t make dollar deals their core business?

"Albertson’s, Target and even Wal-Mart are responding to the success of others; they’re watching and copying a very compelling value message for the consumer," begins Neil Stern, senior partner with Chicago-based McMillan/Doolittle retail consulting firm. "But the economics of dollar stores are very different from other retail channels. They are predicated on very low rent in odd locations, very little labor, very little money spent on fixturing, not taking credit, and just generally keeping costs down. They’re specifically engineered to sell products at a dollar. Other retailers can copy the concept, but they probably don’t have the right economics in place to support it. It’s a defensive strategy, but for most, we question whether it’s the right business decision."

Retailers need to consider how they buy, too. Dollar stores typically buy direct or they import their merchandise; grocery stores and other retailers usually go through third-party suppliers for general merchandise who can set up dollar sections, but at what cost?

"Traditional retailers who want to get in this dollar game need to figure out how to do it most efficiently," says Stern. "If they’re losing margin or sacrificing margin, that’s obviously not good."

Some should consider the fact that they may already have a lot of product selling for a dollar or less, but it’s just not organized as a separate section in the store. "Retailers do risk overkill or saturation when they put items like candy in too many sections, but then again, a good retailer can sell batteries in six locations and the consumer will see it as a benefit and not a distraction, assuming it’s done in an intelligent way," Stern maintains.

"For most traditional retailers now getting into dollar sections, they just have to learn through trial and error what works and what doesn’t," he adds. "Most are still feeling their way through that process."

Consumers have turned buck-spending into billions of dollars of business, The channel is poised to capture $40 billion in sales this year, according to Retail Forward, a retail management firm in Columbus, Ohio.

As lagging sales plague many retail sectors, the smart money’s on dollar stores. According to ACNielsen’s Homescan Service, the dollar store channel is currently the fastest growing retail segment in terms of new store count, with 64 percent  of U.S. households shopping this sector. What’s more, dollar store sales were up nearly 7 percent in 2002, as reported by Retail Forward.

Analysts say that dollar stores are going to outpace other retail channels in store growth because consumers are drawn to their convenience, low prices, and the fact that they stock a lot of highly consumable products (household supplies as well as food) that frequently need replacement. While the average dollar store customer spends only about $8.50, "People get hooked and keep going back," says Britt Beemer, chairman of America’s Research Group.

Just like their drug store predecessors, dollar stores are taking away sales from grocery stores in particular, because consumers are finding it very easy to dash in and out for quick pick-up items. The lines are shorter, and there are dollar/variety stores popping up on every neighborhood corner.

It would be a mistake to assume that the channel targets low-income consumers. ACNielsen research supports the trend that higher income consumers are shopping dollar stores; dollar store penetration among households with income of $50,000 to $69,000 grew from 48 percent to 61 percent in the past year. And penetration at households with incomes of $70,000 or more increased from 37 percent to 49 percent in the same time period. What’s more, about 25 percent of Americans with household incomes of more than $100,000 a year shopped at a dollar store in the past six months, according to Retail Forward’s ShopperScape.

There is no indication of a slowdown in store growth with this channel either. The five major U.S. dollar store players—Dollar General, Family Dollar, Dollar Tree, Fred’s and 99 Cents Only—have added more than 4,445 stores since 2002, an increase of 44 percent, according to Todd Hale, ACNielsen senior vice president.

"The small-format-value retailing sector is on a rapid expansion trail, and market saturation is more than a decade away," adds Sandy Skovran, a vice president with Retail Forward.

Top Dollars The Leading Dollar/Variety/Closeout Retailers
Company/ Headquarters	2003 Sales (in millions)	% Change from 2002	Stores	Sales per Store (in millions)
Dollar General/ Goodlettsville, Tenn.	$6,872	2.7%	6,700	$1.0
Family Dollar/ Matthews, N.C.	$4,750	14.1%	5,066	$0.9
Big Lots/ Columbus, Ohio	$4,174	7.9%	1,430	$2.9
Dollar Tree/ Chesapeake, Va.	$2,780	19.3%	2,513	$1.1
Fred’s/ Memphis, Tenn.	$1,303	18.1%	488	$2.7
Tuesday Morning/ Addison,Texas	$823	12.9%	577	$1.4
99 Cents Only Stores/ City of Commerce, Calif.	$816	22.9%	194	$4.2
Variety Wholesalers/ Raleigh, N.C.	$729	0.0%	526	$1.4
Duckwall-Alco/ Abilene, Texas	$433	7.4%	265	$1.6
Bonus/Bill’s Dollar Stores/ Ridgeland, Mass.	$167	-56.96	174	$1.0