Dollar Stores Are Taking Walmart's Lunch Money Thrifty shoppers looking for low prices on basics are frequently passing up the big boxes of Walmart (WMT) for the tighter aisles of their local dollar stores.

Chains such as Dollar Tree (DLTR), Family Dollar Stores (FDO) and Dollar General (DG) are hitting the world's largest retailer where it hurts -- in the food and pharmacy aisles. The rock-bottom discounters are revamping their stores and replacing no-name products with nationally known brands, luring in both the low-income shoppers who have been Walmart's core customers and higher-income households getting thriftier in hard times.

"Dollar stores for the past two years have put more money behind how they present consumables and fresh food to their customer base," said Brian Sozzi, retail analyst at Wall Street Strategies. "It's in dollar stores' best interest to offer an increased amount of food, in the hopes of getting a greater share of wallet." Their selections are still limited and not comparable to what a Walmart offers, but the addition of national brands helps, he noted.

Sales of those essentials have held up better through the downturn, and as cash-strapped consumers have moved to cut their spending, they've found the dollar stores quite willing to accommodate them. As Walmart pulled back last year on the number of low-price, low-margin items it was stocking to improve stores' sales numbers and boost profits, dollar stores stepped in to fill the void -- and Walmart's sales suffered.

Walmart reacted by bringing back many of the products it cut, adding displays focused on low-priced food and consumables, and launching promotions for everything from apples to turkey trimmings. But it's having a hard time luring those shoppers back. While Dollar Tree's comparable store sales (for stores open at least a year) were up 9% in the latest quarter and Family Dollar's were up 8%, Walmart's were down 1.3% in the U.S., along with store traffic; Dollar General is expected to report a solid quarter next week.

Gaining Ground With Higher-Income Shoppers

"Dollar General is not the place it was two years ago," CEO Rick Dreiling told analysts earlier this year. During 2010, it has added national brands including L'Oreal cosmetics and Heinz foods, part of an overhaul of the company that followed its public offering in November 2009. Older stores are being revamped and new ones have opened at a fast clip.

And as the overhaul continues, it's becoming easier to attract national brands and shoppers. The company's fastest growing customer segment comes from households making more than $70,000 a year, Dreiling told the analysts.

Walmart has not been idle, though. While discussing the disappointing sales numbers with analysts last month, Bill Simon, president of Walmart U.S., said the company will step up its initiatives aimed at its core customers -- households making under $70,000 a year.

"Whether it's for everyday groceries, or for discretionary items, Walmart U.S. will be the price leader throughout the holidays," vowed CEO Mike Duke.

However, Walmart does appear to be losing the pricing edge against the dollar stores and supermarkets. A November spot check by Credit Suisse First Boston analysts noted the price of a basket of 60 common products was 1.3% higher than the same time a year ago. And the difference between Walmart's prices and those at rivals such as Target Stores (TGT) and supermarkets had shrunk to its lowest level since 2007, before the start of the recession.

Pendulum Will Swing, and Dollar Stores Will Adapt


But don't count Walmart out, says Kevin Regan, senior managing director of FTI Consulting. Even if the shoppers' newfound liking for dollar stores carries over to the economic recovery, Walmart's merchants are skilled at balancing prices and profits to draw shoppers in, he said.

"Walmart is a sleeping giant and they realize their productivity has slipped," he said. Walmart has the advantage of having both the national brands the dollar stores have and private labels that are well known to shoppers, he said.

For their part, the dollar stores have co-existed with the big boxes for decades, often in the same malls, said Regan. They even complement each other, with Walmart being the one-stop, once-a-week destination, and the dollar store the source of fill-in shopping during the week, he said.

Once the sleeping giant regains its footing, the dollar stores will adapt, as they have before, Regan believes. Dollar store chains have grown large enough -- Dollar General has nearly 9,000 stores, Dollar Tree over 4,000 and Family Dollar over 6,800 -- to leverage their scale to compete against Walmart without hurting profits, he explained.

"If Walmart becomes aggressive, it will impact [dollar stores] for some time, and they will come up with a counter-strategy," Regan said. "The reason they have survived for 40 to 50 years is they have been good about changing strategy."


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