Dollar Stores Buck the Grocery Sector

Dollar stores, with their discontinued cereal and 99-cent toilet cleaners, might not seem like much of a threat to supermarkets. But as one of the fastest-growing segments of retailing, dollar stores are quickly beginning to nickel-and-dime food retailers out of a sizable chunk of business, analysts say.

With lower-income families and retirees continuing to make up a greater percentage of the population, there’s never been more demand for bargain havens such as 99 Cents Only Stores, Family Dollar Stores Inc. and Big Lots Inc.’s Pic ‘N’ Save stores, analysts say.

And as they’re growing, they’re gaining increasing clout with manufacturers and access to better merchandise.

Some packaged-goods companies such as Nestle are even beginning to test-market special products or assortments geared toward low-income families at these stores rather than at supermarkets.

Despite rock-bottom prices, dollar stores also are reaping higher profit margins than their grocery competitors or even operators of discount super-centers such as Wal-Mart Stores Inc., said Mark Miller, an analyst with William Blair & Co.

“They may be ‘ankle biters’ to Wal-Mart Stores and most supermarkets now,” Miller said. “But over time in aggregate, they pose a more significant challenge.”

Although growth in the supermarket industry slowed last year, the number of new dollar stores almost tripled to 9,133 from the year before, according to market research firm ACNielsen.

And as the number of outlets has grown, so has their share of sales of such products as cleaners, paper towels and napkins, pet food, bread, snacks and drinks.

The number of trips shoppers make each year to supermarkets dropped to 75 last year from 85 just three years earlier, while trips to dollar stores, super-centers and convenience stores edged up.

“Supermarkets have been hit at both ends,” said Asma Usmani, an analyst with Edward Jones in St. Louis. The super-centers are drawing away more high-income customers while the smaller dollar stores are siphoning off lower-income customers, she said.

To get shoppers coming in more often, many dollar stores are setting up refrigerated cases and offering popular perishable items such as frozen foods, milk, butter and eggs.

The strategy has worked with Teddy Ong. The Los Angeles theater stage manager and his wife go to supermarkets less oten these days. They drop in at the 99 Cents Only store down the street from their house whenever “we’ve got some free time” or need to pick up something such as luncheon meat.

“Ham is $2.99 in the supermarket,” he said on a recent outing. “Here, it is 99 cents and it’s the same quality.”

Because stores such as 99 Cents Only are selling many of the same branded goods as supermarkets, shoppers said it means little to them where they buy it.

“This is a good brand,” said Bea Samorano, a campus police officer, pointing to a box of Keebler Fudge Shop cookies. “And it’s a good deal. I come here for batteries and end up buying snacks too.”

The dollar stores’ best customer is a woman with a household income of $30,000 or less, in many cases a retiree or a mother with small children.

She makes twice as many trips to the dollar store as shoppers with household incomes of $50,000 or more, according to ACNielsen.

Because dollar stores in urban areas such as Los Angeles often are wedged into strip malls within densely populated neighborhoods, they may be more convenient than supermarkets or discount stores such as Wal-Mart.

And their smaller size--6,000 to 8,000 square feet on average--makes them easier for older people to navigate than the large stores of discounters such as Wal-Mart or Kmart Corp.

“You can get in, grab items quickly and get out quickly,” said Jim Kelly, vice chairman of Charlotte, N.C.-based Family Dollar Stores.

And increasingly, as these stores expand, consumers can get many of the same brand-name items they would find at a supermarket--such as Tide detergent and Stouffer’s frozen meals--but with a lower price.

Some are close-outs, slow sellers or products that have gone through a slight change in packaging.

But in some cases, they are new items or items in new sizes vying for the attention of the growing numbers of low-income shoppers.

Nestle, for instance, is using Big Lots to test-market its Friskies pet food for dogs in economy-size cans. Wm. Wrigley Jr. Co. is selling packages of its Tape Twisters gum for kids, bundled up two for 99 cents, at Big Lots.

Food, health and beauty aids and cleaning products make up 30% of the merchandise in Big Lots’ 1,300 stores and are the hottest movers, with sales rising 19% in March over the same time last year.

Albert Bell, Big Lots’ vice chairman, attributes it to a back-to-basics mentality that gripped the nation in the political and economic uncertainty of last year.

But many dollar stores also have received an unexpected boost from the struggles of Kmart.

“The first thing we noticed was additional availability of product from manufacturers as a result of canceled ... orders by Kmart, but we’ve also seen a nice improvement in our business,” Bell said.

Kmart counters that its shelves are 90% stocked, spokeswoman Julie Fracker said. “We don’t consider [dollar stores] a direct competition,” she said.

Nonetheless, Bell said business is so good that Big Lots is taking the unusual step of launching a national advertising campaign after it changes Pic ‘N’ Save and some of its other stores to the Big Lots name in coming months. The company had been getting the word out through fliers.

Bell said much of the company’s recent success is linked to thinking like a supermarket and offering the food and cleaning aids consumers need most.

“This is what customers want,” Bell said. “And we know that our stores are more convenient than a giant grocery store or super-center.”

Supermarket and discount super-center chains concede that dollar stores are posing competitive challenges.

Ralphs Grocery Co., which has a strong presence in California with 325 Ralphs stores and 111 Food4Less stores, said dollar stores compete with Food4Less.

“We offer higher quality, a better variety and more quality of service,” Ralphs spokesman Terry O’Neil said.

“Overall, they’re part of the nontraditional retailers entering the grocery business.”

To counteract the loss of customers to discount stores, Ralphs stores have added products such as small appliances and office, gardening and kitchen supplies, O’Neil said.

Wal-Mart also is aware of competition from smaller discount stores, especially in urban markets, said company spokesman Tom Williams. But “we’re aware of competition in all the markets we’re in. We do the same thing we do in all our stores: We compete with price and service.”

Times staff writer Elena Gaona contributed to this report.