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Dollar Stores Stealing Market Share As They Drive Retail Growth

Family Dollar Stores posted a 10.7% increase in net earnings for the quarter ended Feb. 25th. They are one of three major dollar retailers – the other two are Dollar General and Dollar Tree Stores. In the last four years these ultra-discount retailers have been gaining market share from traditional big box stores, as well as pharmacies and groceries.

Apparel constitutes between 6%-8% of total earnings for most dollar retailers. Apparel sales at discount retailers are increasing, though their share of total revenue is declining due to strong growth in pharmaceuticals and the recent introduction of tobacco products. Apparel sales at Dollar General, for example, increased 10% in 2011, but fell from 7.2% of total earnings to 6.9%.

Dollar retailers carry a diverse range of products, from housewares and apparel to consumables. It is growth in consumables that is driving the recent increases in market share, but apparel makers stand to benefit from the additional foot traffic and the higher sales per customer being posted by the dollar retailers. The stores have seen consistent single digit increases in their sales per square foot, quarter on quarter, with no apparent slowdown in sight. That has driven profits that exceed increases in overall revenues, as they are able to capture more productivity from their employees and real estate.

Critically for sourcing executives, stores are upgrading their mix. They are moving away from their traditional “everything is one dollar” mentality and beginning to offer some branded merchandize and higher quality apparel. This is critical, as fluctuations in the price of cotton and rising labor costs in China make low-end apparel sourcing increasingly difficult and uncertain. Higher priced goods tend to be better insulated from market fluctuations.

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The trend of improving offerings reflects the stores’ heightened role as the primary retailer for many groups of consumers, and opens the possibility of introducing slightly higher priced apparel and accessories into the stores. Dollar General recently noted that its fastest growing group of customer earns more than $70000 a year.

Growth in the US apparel industry in 2012 will likely come at the high and low end of the price point spectrum, as retailers expand luxury offerings to capitalize on the wage growth in the top quintile of earners, and pinched middle class shoppers look down the value chain to meet their basic needs. Stores such as JC Penny’s, Gap, and Sears have been suffering from this trend, as their traditional clientele migrate up or down the economic ladder.

The recession and continued high unemployment underline most of the increase in earnings and market share, and has led to expansion plans for all three chains. Family Dollar is executing an ambitious plan, with a goal of adding 500 stores in the next year. Dollar General plans to open 600 stores. Discount retailers have been well positioned during the economic downturn, and continue to benefit from the lopsided nature of the recovery. Many of their customers are people who have not seen employment or earnings rebound, despite overall economic growth.

Family Dollar has enjoyed 16 straight quarters of double-digit increases in earnings. Overall revenue rose by 8.6%, indicating an increase in straight margins, and same store sales rose 4.5%.