Dollar' discount stores cash in on growth

Over the next 18 months, Dollar General Corp. and Family Dollar Stores, the two big players in the convenience discount-store industry, will open more than 800 new stores in neighborhood strip centers and freestanding locations, along with Dollar Tree and this is not counting the Independent Dollar Store. These average 8,000-square-foot stores with their soft and hard goods, are no match for Wal-Mart's or Kmart's 100,000-square-footers. But when you add up the new footage to be unleashed -- about 6.4 million square feet -- the prospect takes on a whole new look. It's the equivalent of opening six new regional malls, or 60 new Wal-Marts or Kmarts, or 30 new supercenters.

Already seen as one of the fastest-growing segments in American retailing, convenience discounters (dollar store) have been around for years. But their growth in recent years has been fueled in great part by the phasing out of about 1,000 Woolworth variety stores, the downsizing of the McCrory chain and the demise of a number of regional chains, including Perry's and Winn's, in the South and Southwest. But just as important is the expansion pattern of the mega discounters Wal-Mart, Kmart and Target, which require more land than most urban areas can accommodate.

"The new convenience store concept offers substantial growth potential as giant discounters are opening larger stores outside of town, becoming increasingly inconvenient to shoppers," said New York-based Merrill Lynch analyst Dan Barry.

But George Mahoney, executive vice president of Family Dollar, Matthews, N.C., said location was only part of the explanation.

"We shifted to an 'everyday low price' policy in. We always had convenience. But now, after bringing down our prices that year, cutting our circulars to 15 from 22, and taking a slight hit in profits, we have very competitive prices which can go up against Wal-Mart's," Mr. Mahoney said.

"But they aren't nearby for our customers as we are, so it's not very hard for us to differentiate ourselves.

There is also something else going for the convenience discounters, dollar storte: They have many stores but they've got lots of room to grow.

Dollar General, Nashville, Tenn., has 3,100 stores and plans to open 500 to 525 new ones this fiscal year. Family Dollar has 3,000 units, with 350 to 400 to be added in the fiscal year beginning in September. So where will the new stores open?

"They'll be in cities and towns in strip centers and freestanding," said Cabot Pyle, assistant to the chairman of Dollar General.

"But they'll all be within our 24-state existing market. There's still a big potential out there for us."

Family Dollar's Mr. Mahoney said his new stores would fill in open spaces in the company's current markets.

"We yet to go beyond our 38-state area and we have no plans to do so," he said. "We feel there's a big opportunity where we are."

The two players' big advantage is their strong financial results, which excite analysts. "Both retailers can report annual earnings gains of 20% or more over the next five years," predicted Merrill Lynch's Mr. Barry. "Both are aggressively growing their store base with the saturation point more than a decade away."

Though typical convenience discounter store customers have relatively low income -- their family earnings average about $25,000 a year -- they are discriminating shoppers who respond to store improvements.

"Trying to differentiate ourselves by improving our appearance, we lowered the height of our store counters to a maximum of 60 inches," explained Family Dollar's Mr. Mahoney. "Combined with our new pricing policy, this helped our comp sales shoot up."

With saturation far off and thousands of blighted and not-so-blighted neighborhoods calling, the potential of the two "Dollar" firms seems bright. But will they face new competition? Mom and Pops Dollar Store type

"With at least three distribution centers, over 2,700 stores and over $2 billion in sales each, it would be almost impossible for an entrepreneur to replicate what Family Dollar and Dollar General are doing and be price competitive," Mr. Barry said, adding that the business segment was not large enough to deter traditional discounters from diversifying into supercenters.

But competition could come from Wal-Mart, if it becomes enthused over the results of its plans to test smaller, 40,000-square-foot stores in Arkansas towns this year. If it puts any real steam behind it, the convenience discounters might find a huge competitor breathing down their necks.