Dollar stores cash in

Not long ago, a trip to the dollar store meant going on a treasure hunt through cluttered aisles not knowing what you would find: a cranberry-scented candle, a scratchy towel, a box of look-alike Oreos.

But in the last few years, dollar stores have been going through a makeover, adding refrigerators and freezers, stocking more food and cleaning up the presentation. As the recession hit, the dollar stores were ready with low-price groceries to attract a newly frugal middle class. And sales have soared.

Nearly half of all U.S. households shop at dollar stores each month, up from 36% in 2002, according to Retail Forward, a Columbus, Ohio, market research firm. Shoppers of all income levels are walking through the doors.

“It doesn’t matter how much you earn, everybody loves a bargain,” said Jeff Gregori, vice president of retail services at Nielsen Co., a suburban Chicago market research firm.

Shoppers with an annual household income of more than $100,000 reported an 18% uptick in spending at dollar stores in the second half of 2008 from a year earlier, a bigger gain than at mass-market discount chains such as Wal-Mart Stores Inc. and at warehouse clubs, according to a Nielsen report released this week.

Pasta, cheese, soup and dried grains appeared for the first time in recent memory among the 10 fastest-growing categories at dollar stores in 2008, the report found.

Griselle Rodriguez, 37, of Chicago said she had noticed a “lot more food and milk” at the Family Dollar store on North Elston Avenue in the city.

“They’re putting a lot of food out,” Rodriguez said. “That’s a good thing.”

Although they promote themselves as dollar stores, some of the retailers also offer merchandise that costs more, though very few items sell for as much as $10.

The three biggest dollar store chains all reported sales gains at stores open at least a year, a key metric of retail health, even as retail sales industrywide fell.

So-called same-store sales at Dollar General Corp., the largest of the three, rose 9.4% for the fiscal quarter that ended Jan. 30. At Family Dollar Stores Inc., the No. 2 dollar store, same-store sales rose 6.4% for the fiscal quarter that ended Feb. 28. And at Dollar Tree Inc., same-store sales for the fiscal quarter that ended May 2 climbed 9.2%.

At the same time, all three chains are expanding. Dollar General plans to open 450 stores this year. And Family Dollar and Dollar Tree plan to open more than 200 each.

The growth comes as retail sales fell for the second straight month in April, damping prospects for a rebound in consumer demand, the Commerce Department said Wednesday.

“We see no slowdown in consumers trending toward general thriftiness,” Goldman Sachs Group Inc. analyst Adrianne Shapira said in a May 10 report. Dollar stores are in a position to benefit from the recession as consumers shift from “aspirational to desperational spending,” she said.

Family Dollar, based in Matthews, N.C., unveiled last month more than 200 new grocery items, including recognized brands such as Triscuit and Oreo, to compete with discount supermarkets and mass merchandisers.

Dollar General, owned by private equity firm Kohlberg Kravis Roberts & Co., is rolling out a marketing and merchandising plan this year aimed at letting shoppers know its stores are clean, fresh and easy to shop.

Rick Dreiling, chief executive of the Goodlettsville, Tenn., retailer, said during an earnings call with analysts in March that “saving money is going to be fashionable for a very long period of time.”