Dollar stores are the new retail darlings. We can hardly read anything about retailing these days
without seeing comments about how this long-ignored retail segment is finally coming into its own, with employment faltering and consumers moving downscale. Suddenly everyone is wondering just how much damage these will do to the bigger-box discounters, including Walmart. The dollar stores are often more conveniently located, and small – typically about 7,500 sf (4% of a typical Walmart’s 185,000, and about 20% the size of a Walmart Neighborhood Market).
The dollar store segment actually has a few forms: One, chains that source their goods from the major consumer products companies as well as through private label programs; and secondly, those chains that buy opportunistically (close-outs and such). Family Dollar and Dollar General are the dominant examples of the former, while 99-Cent Stores and Big Lots are examples of the latter.
The opportunistic-buying chains seem to come and go. They face competition from internet retailers at the higher price points, and their product offerings are dependent on the mistakes of others. This used to be a pretty lucrative retail segment, but with the massive big-store consolidations, much more sophisticated inventory systems, and much sharper manufacturing and distribution channels, these businesses that capitalize on ‘mistakes’ will be increasingly difficult to sustain. I’m reminded of a tour of one now-defunct LA-based chain some time back. They had enormous quantities (described as so many box-cars full) of some ill-conceived permutation of Capn Crunch cereal in a warehouse. They took obvious pride in great price for buying the whole production, but they did concede that it would likely take them a year or so to actually sell all those boxes (one moral: check expirations). Anyway, those types of guys are probably a dying breed.
More intriguing are the FDO’s and DG’s. These have seen terrific same store growth along with now-respectable earnings (and now, multiples befitting that growth history). Between them they have $20B in sales, in 17,000 stores. FDO is opening about 300 per year now, DG about 600. These recent new-store rollouts, interestingly enough, have had a positive same-store-sales impact. The new stores typically do 90% of the company’s average in the first year, then gather steam. So the second and third years give the overall comps a boost.
We’ll recall that DG was a KKR-owned IPO in 2009 – we are seeing some of the high-impact effects of their KKR and Goldman Sachs consulting arrangements. DG management is mostly from Long Drugs (the CEO also did a stint running Duane Read).
FDO is more home-grown. While I’ve never met the FDO guy, this seems to be his resume: son of the founder, worked at the company at lower levels awhile, left for another place for awhile, then ‘managed his investments’ for several years, and then returned to FDO to progress through a rapid succession of senior management jobs before taking over as CEO (not knocking this by the way, just observing). The FDO stores have a more down-home, less polished feel. The cashiers likely know the customer ahead of you. Anyone reading this could probably go into one and come out with a decent list of ideas for quick improvement. In contrast, at my local DG store the ‘low-hanging fruit’ has been mostly picked.
Both have shown impressive same store sales growth, and they have been shedding their stigma. One component of that sales growth from increased store hours this past year (both: 8am to 9pm, 7 days). DG is now rolling out alcohol sales in its stores. Interestingly, both are now trying to push heavily into ‘private label’. This, at the same time that Walmart is scaling back its private label in favor of national brands (more on that later). They see private label as much higher-margin, but from arms length those FDO and DG private label efforts both have an amateurish ring to them.
Both chains sell mostly consumables – food, cleaning products, some drug store personal item type stuff. FDO has a fair amount of space designated for apparel; most garments sell for $7 to $10. FDO does a good job of keeping price points under $10 (DG is creeping up). FDO’s average sale is $10. With sourcing, FDO has acknowledged that their own-label product has suffered from quality issues (they say they’ll to do a better job communicating their standards to their Chinese sources going forward – they’re even going to station someone in China full-time to make sure).
DG has had its own private label problems – but it claims any unfortunate experiences that anyone had in the past with its Clover Valley food products can come back – their private label food is now good enough for consumption. And although Clover valley is priced well below those national brands, DG’s margin on it is really good. So they’re hopeful. Meanwhile, the DG near me has added some decidedly upscale offerings – Progresso soups; Heineken, etc. Maybe the KKR and GS guys have had an impact.
DG does have one interesting exclusive program – their Rexall branded items. Presumably the former Long drugs crew will do a good job with this. We should perhaps appreciate what other opportunities a KKR/GS sponsorship might foster.
We could see where convenience stores everywhere would be concerned. The Walgreen’s and CVS’s might also take notice. These stores do offer local convenience, dollar-level price-points that appeal to paycheck-to-paycheck consumers, and do carry a combination of aggressively priced national and cheaply priced private brands. But should Walmart, for example, be concerned? Do these stores offer a sustainable combination of convenience and value? Is their buying and distribution that sharp?
That’s a good question. To get a ‘value’ comparison on a branded item, we can take one product that all these guys carry (plus Kmart and Costco, for that matter): Bounty paper towels – not the single-ply ‘Bounty Basics’ – but the real thing.
. FDO and DG have 6-packs - both at the same $6 price – but in smaller 40-sheet rolls than the other retailers carry.
. They both also carry single rolls of Bounty, plus substitute brands that they steer us to.
. On a Bounty sheets-per-dollar basis, Walmart’s huge pack is the everyday lowest price (96 sheets/dollar).
. KMart maddeningly has the worst everyday pricing but the very best short-term promotional price
. FDO’s and DG’s six-roll price is 40sheets/dollar, double the Walmart big-package price on a per-sheet basis.
But what for the customer who only has one dollar? WMT and FDO both have ‘Sparkle’ brand single roll double-ply paper towels: FDO’s $1 roll has 40 sheets, while WMT’s harder-to-locate 84-cent roll has 70 sheets ….Walmart is essentially half the FDO price-per-sheet for the Sparkle single roll. Walmart recognizes that it doesn’t do a good job of communicating its relative value at these lower price points, or of making them accessible.
One of Walmart’s claimed initiatives is to get their package sizes down to dollar-store pricing, where they can present themselves more favorably to the dollar consumer – and we presume, position the dollar stores as higher priced convenience stores by comparison. One FDO customer I know said she tried shopping WMT for Halloween candy, but she didn’t want the $3+ Walmart bag when she could get a $1 bag that served her purpose at FDO. Walmart is just now realizing that deficiency. As to the convenience trade-off? Convenience stores are always more accessible. The test will be whether Walmart can package and promote relative value. (btw – if price points are an priority and if you haven’t been one of WMT’s new ‘market’ stores, you may want to check them out for comparison to your local supermarket).
Back to private label – one of the cardinal rules of a successful private label product is that if you have to deliver discernibly better quality than the original. Nordstrom, LLBean, Costco and others do a decent job. Walmart recently said it’s scaling back some of its private label inventory, and going back more to national brands. The example it uses is Oreo – they’ve determined that it doesn’t matter if they offer a better-value Oreo substitute – their customer won’t be impressed. They’ve come around to thinking that if they offer Oreos at the best price anywhere, they’ll win business. So Walmart is ramping up ‘brands’. Hanesbrands recently said they expected good sales this season as a result of Walmart’s re-emphasis. The dollar stores are currently working hard to be where Walmart has been. Will it work? We’ll see. (A by-product of Walmart’s re-emphasis on national brands by the way, is improved working capital, as it has been extracting payment terms from the brands that it couldn’t get from private label).
In the short run, we can expect to see continued same store sales growth from the dollar stores. We’ll see the near-term effects of increased store hours; new store second-year impact; remodels and expansions (yes, those are considered ‘same stores’ ); additional product lines like alcohol; and perhaps some help from their new-found cache. But much of the year-to-year from those initiatives will cycle out.
And the reasonable limits on the existing space? Annual sales at FDO are somewhere about $170sf, and DG says its sales per square foot are just under $200/sf. CVS stores, by comparison, generate sales of about $150 per square foot.; Walgreen’s is less. (Walmart’s sales are well over $400/sf, on far larger stores).
Long term? Who knows. This week’s Barron’s carried an analyst interview where one call was to buy WMT and short DG, taking advantage of low multiples of one and the perhaps stretched multiples of the other. That may be premature –the same store sales reports will be decent for awhile, but it’s a segment to watch.
Now, to get this post back on topic for BRK: what Hanesbrands is experiencing with Walmart’s shift back to brands is also likely to be experienced with Fruit of the Loom, Russell, and other brands. For awhile now there’s been a sort of dichotomy in consumer brands. If we want Coke or Gillette, we don’t want anything else. But it’s been a generation since Fruit of the Loom, Hanes, and others have been truly premium brands. It’s been clear for awhile now that the once-fragmented but now highly consolidated retailers have come into their own, shifting the balance on many apparel brands. If Walmart drops Hanes for FOTL or vice versa, it’s a bigger problem for the brand than for the retailer. Private labels like Costco’s Kirkland can give any national brand Costco carries some competition on both overall quality and value.
So for owners of branded products, it’s refreshing to see the world’s largest retailer give national brands their due – recognizing that the brand can still be part of mega-retailers’ value propositions to their customers….and that there are some ’ middle-men’ worth keeping. But this recognition probably doesn’t come cheaply for the brands.
Considering Walmart’s history with suppliers, this business probably isn’t priced to be a windfall for the brand-owners. Using Hanesbrands as an example again, they are experiencing dramatic increases in cotton prices (plus, they report follow-on opportunistic price increases from their polyester and other sources). Can they pass that on to Walmart? They’ve broadly hinted they’ll particularly hit up department stores and other customers, and they’ll do what they can with Walmart. They’re hedged for awhile into next year -- information Walmart is also likely attuned to, so that may buy them time. (But how might this play out for FOTL and Russell vs Hanes? Who’s hedged the best? Who will flinch?)
Anyway the good news here is that, in a large segment of the world, brands are back. Except in the dreams of the dollar stores. We’ll see how this plays out.
without seeing comments about how this long-ignored retail segment is finally coming into its own, with employment faltering and consumers moving downscale. Suddenly everyone is wondering just how much damage these will do to the bigger-box discounters, including Walmart. The dollar stores are often more conveniently located, and small – typically about 7,500 sf (4% of a typical Walmart’s 185,000, and about 20% the size of a Walmart Neighborhood Market).
The dollar store segment actually has a few forms: One, chains that source their goods from the major consumer products companies as well as through private label programs; and secondly, those chains that buy opportunistically (close-outs and such). Family Dollar and Dollar General are the dominant examples of the former, while 99-Cent Stores and Big Lots are examples of the latter.
The opportunistic-buying chains seem to come and go. They face competition from internet retailers at the higher price points, and their product offerings are dependent on the mistakes of others. This used to be a pretty lucrative retail segment, but with the massive big-store consolidations, much more sophisticated inventory systems, and much sharper manufacturing and distribution channels, these businesses that capitalize on ‘mistakes’ will be increasingly difficult to sustain. I’m reminded of a tour of one now-defunct LA-based chain some time back. They had enormous quantities (described as so many box-cars full) of some ill-conceived permutation of Capn Crunch cereal in a warehouse. They took obvious pride in great price for buying the whole production, but they did concede that it would likely take them a year or so to actually sell all those boxes (one moral: check expirations). Anyway, those types of guys are probably a dying breed.
More intriguing are the FDO’s and DG’s. These have seen terrific same store growth along with now-respectable earnings (and now, multiples befitting that growth history). Between them they have $20B in sales, in 17,000 stores. FDO is opening about 300 per year now, DG about 600. These recent new-store rollouts, interestingly enough, have had a positive same-store-sales impact. The new stores typically do 90% of the company’s average in the first year, then gather steam. So the second and third years give the overall comps a boost.
We’ll recall that DG was a KKR-owned IPO in 2009 – we are seeing some of the high-impact effects of their KKR and Goldman Sachs consulting arrangements. DG management is mostly from Long Drugs (the CEO also did a stint running Duane Read).
FDO is more home-grown. While I’ve never met the FDO guy, this seems to be his resume: son of the founder, worked at the company at lower levels awhile, left for another place for awhile, then ‘managed his investments’ for several years, and then returned to FDO to progress through a rapid succession of senior management jobs before taking over as CEO (not knocking this by the way, just observing). The FDO stores have a more down-home, less polished feel. The cashiers likely know the customer ahead of you. Anyone reading this could probably go into one and come out with a decent list of ideas for quick improvement. In contrast, at my local DG store the ‘low-hanging fruit’ has been mostly picked.
Both have shown impressive same store sales growth, and they have been shedding their stigma. One component of that sales growth from increased store hours this past year (both: 8am to 9pm, 7 days). DG is now rolling out alcohol sales in its stores. Interestingly, both are now trying to push heavily into ‘private label’. This, at the same time that Walmart is scaling back its private label in favor of national brands (more on that later). They see private label as much higher-margin, but from arms length those FDO and DG private label efforts both have an amateurish ring to them.
Both chains sell mostly consumables – food, cleaning products, some drug store personal item type stuff. FDO has a fair amount of space designated for apparel; most garments sell for $7 to $10. FDO does a good job of keeping price points under $10 (DG is creeping up). FDO’s average sale is $10. With sourcing, FDO has acknowledged that their own-label product has suffered from quality issues (they say they’ll to do a better job communicating their standards to their Chinese sources going forward – they’re even going to station someone in China full-time to make sure).
DG has had its own private label problems – but it claims any unfortunate experiences that anyone had in the past with its Clover Valley food products can come back – their private label food is now good enough for consumption. And although Clover valley is priced well below those national brands, DG’s margin on it is really good. So they’re hopeful. Meanwhile, the DG near me has added some decidedly upscale offerings – Progresso soups; Heineken, etc. Maybe the KKR and GS guys have had an impact.
DG does have one interesting exclusive program – their Rexall branded items. Presumably the former Long drugs crew will do a good job with this. We should perhaps appreciate what other opportunities a KKR/GS sponsorship might foster.
We could see where convenience stores everywhere would be concerned. The Walgreen’s and CVS’s might also take notice. These stores do offer local convenience, dollar-level price-points that appeal to paycheck-to-paycheck consumers, and do carry a combination of aggressively priced national and cheaply priced private brands. But should Walmart, for example, be concerned? Do these stores offer a sustainable combination of convenience and value? Is their buying and distribution that sharp?
That’s a good question. To get a ‘value’ comparison on a branded item, we can take one product that all these guys carry (plus Kmart and Costco, for that matter): Bounty paper towels – not the single-ply ‘Bounty Basics’ – but the real thing.
. FDO and DG have 6-packs - both at the same $6 price – but in smaller 40-sheet rolls than the other retailers carry.
. They both also carry single rolls of Bounty, plus substitute brands that they steer us to.
. On a Bounty sheets-per-dollar basis, Walmart’s huge pack is the everyday lowest price (96 sheets/dollar).
. KMart maddeningly has the worst everyday pricing but the very best short-term promotional price
. FDO’s and DG’s six-roll price is 40sheets/dollar, double the Walmart big-package price on a per-sheet basis.
But what for the customer who only has one dollar? WMT and FDO both have ‘Sparkle’ brand single roll double-ply paper towels: FDO’s $1 roll has 40 sheets, while WMT’s harder-to-locate 84-cent roll has 70 sheets ….Walmart is essentially half the FDO price-per-sheet for the Sparkle single roll. Walmart recognizes that it doesn’t do a good job of communicating its relative value at these lower price points, or of making them accessible.
One of Walmart’s claimed initiatives is to get their package sizes down to dollar-store pricing, where they can present themselves more favorably to the dollar consumer – and we presume, position the dollar stores as higher priced convenience stores by comparison. One FDO customer I know said she tried shopping WMT for Halloween candy, but she didn’t want the $3+ Walmart bag when she could get a $1 bag that served her purpose at FDO. Walmart is just now realizing that deficiency. As to the convenience trade-off? Convenience stores are always more accessible. The test will be whether Walmart can package and promote relative value. (btw – if price points are an priority and if you haven’t been one of WMT’s new ‘market’ stores, you may want to check them out for comparison to your local supermarket).
Back to private label – one of the cardinal rules of a successful private label product is that if you have to deliver discernibly better quality than the original. Nordstrom, LLBean, Costco and others do a decent job. Walmart recently said it’s scaling back some of its private label inventory, and going back more to national brands. The example it uses is Oreo – they’ve determined that it doesn’t matter if they offer a better-value Oreo substitute – their customer won’t be impressed. They’ve come around to thinking that if they offer Oreos at the best price anywhere, they’ll win business. So Walmart is ramping up ‘brands’. Hanesbrands recently said they expected good sales this season as a result of Walmart’s re-emphasis. The dollar stores are currently working hard to be where Walmart has been. Will it work? We’ll see. (A by-product of Walmart’s re-emphasis on national brands by the way, is improved working capital, as it has been extracting payment terms from the brands that it couldn’t get from private label).
In the short run, we can expect to see continued same store sales growth from the dollar stores. We’ll see the near-term effects of increased store hours; new store second-year impact; remodels and expansions (yes, those are considered ‘same stores’ ); additional product lines like alcohol; and perhaps some help from their new-found cache. But much of the year-to-year from those initiatives will cycle out.
And the reasonable limits on the existing space? Annual sales at FDO are somewhere about $170sf, and DG says its sales per square foot are just under $200/sf. CVS stores, by comparison, generate sales of about $150 per square foot.; Walgreen’s is less. (Walmart’s sales are well over $400/sf, on far larger stores).
Long term? Who knows. This week’s Barron’s carried an analyst interview where one call was to buy WMT and short DG, taking advantage of low multiples of one and the perhaps stretched multiples of the other. That may be premature –the same store sales reports will be decent for awhile, but it’s a segment to watch.
Now, to get this post back on topic for BRK: what Hanesbrands is experiencing with Walmart’s shift back to brands is also likely to be experienced with Fruit of the Loom, Russell, and other brands. For awhile now there’s been a sort of dichotomy in consumer brands. If we want Coke or Gillette, we don’t want anything else. But it’s been a generation since Fruit of the Loom, Hanes, and others have been truly premium brands. It’s been clear for awhile now that the once-fragmented but now highly consolidated retailers have come into their own, shifting the balance on many apparel brands. If Walmart drops Hanes for FOTL or vice versa, it’s a bigger problem for the brand than for the retailer. Private labels like Costco’s Kirkland can give any national brand Costco carries some competition on both overall quality and value.
So for owners of branded products, it’s refreshing to see the world’s largest retailer give national brands their due – recognizing that the brand can still be part of mega-retailers’ value propositions to their customers….and that there are some ’ middle-men’ worth keeping. But this recognition probably doesn’t come cheaply for the brands.
Considering Walmart’s history with suppliers, this business probably isn’t priced to be a windfall for the brand-owners. Using Hanesbrands as an example again, they are experiencing dramatic increases in cotton prices (plus, they report follow-on opportunistic price increases from their polyester and other sources). Can they pass that on to Walmart? They’ve broadly hinted they’ll particularly hit up department stores and other customers, and they’ll do what they can with Walmart. They’re hedged for awhile into next year -- information Walmart is also likely attuned to, so that may buy them time. (But how might this play out for FOTL and Russell vs Hanes? Who’s hedged the best? Who will flinch?)
Anyway the good news here is that, in a large segment of the world, brands are back. Except in the dreams of the dollar stores. We’ll see how this plays out.
