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In tough times, it pays to stretch a dollar as far as you can

By Carolyn Shapiro
The Virginian-Pilot
© October 19, 2008

CHESAPEAKE

Louis Soto picked his way through the Dollar Tree aisles and filled his cart with eggs, margarine, juice, crackers, frozen Salisbury steak dinners and Comet cleanser.

It was Soto's second grocery-shopping trip to the all-for-$1 store on South Military Highway near his Chesapeake home. He still stops at a Food Lion supermarket for some items but tries to grab as much as he can at Dollar Tree.

"I'm going to school and funds are tight, and it's economical for me," said Soto, who is studying aviation mechanics. "It's cheap. It's easy. It's quick. And for the money, you get the most bang for your buck."

Soto and other consumers gobbling up groceries at Dollar Tree have helped the national retailer thrive while other chains struggle through this economic slump. For its most recent quarter, Dollar Tree Inc. reported a 6.5 percent increase in comparable-store sales - at stores open at least 12 months - from the same period in 2007. Earnings for the first half of the year rose 15 percent, and its stock is up about 64 percent from its 52-week low in mid-January.

Dollar Tree officials attribute the boost to customers buying more "consumables" - food, beverages and other basic household necessities. Those goods bring customers to the store more frequently and encourage them to spend more, said Bob Sasser, Dollar Tree's chief executive.

"I believe we're seeing people that would not have shopped with us in the past come into our stores," Sasser told analysts during a conference last week at the company's headquarters, on Volvo Parkway in Chesapeake. "And I believe because of the mix of products that we have now - the things that people need every day - and the fact that we're really going after that business right now, we are seeing new customers. We're seeing repeat customers. And that's what's driving our sales increases in the quarter."

The $1 tag doesn't always offer the best deal on certain groceries, but dollar stores we re enjoying elevated appeal as a place to buy basics even before the recent economic fallout.

Consumers today are more price conscious, more likely to "cherry pick" certain items in certain stores, seeking the best deals, said Edward Fox, an associate professor of marketing who specializes in consumer packaged goods at the Cox School of Business at Southern Methodist University in Dallas.

"They are people who value a bargain," Fox said of dollar-store grocery buyers. "They want to think of themselves as smart shoppers."

Worsening financial conditions further encourage this tendency, said Ken Bernhardt, a marketing professor at Georgia State University's Robinson College of Business. In boom times, shoppers might eschew Dollar Tree and spend more money on items they consider better-quality, he said.

"Today, in this environment, the status symbol is how much you saved," Bernhardt said. "And I think Dollar Tree is a beneficiary of that change."

 

During a recent trip to the South Military Highway store, Joyce Long clutched a bag of white-chocolate-covered Pretzel Flipz she found for a buck. The 45-year-old said she would pay more at Wal-Mart.

Her sister, Mary Long, recently moved in with her in Norfolk and got her hooked on Dollar Tree groceries.

"I get bread, cereal, sometimes the cheese," said Mary Long, 39, a single mother of four. "Italian ices. Hot dogs. Sausages. I use those for spaghetti."

Historically, Dollar Tree wasn't in the grocery business. It was less focused on consumables than were competitors Dollar General and Family Dollar. Dollar Tree started as a mall-based chain with 3,000-to-5,000-square-foot stores, selling toys, gifts and party goods, Sasser said.

As it expanded, the retailer moved to shopping strips. Discount supercenters came to dominate the landscape, offering a variety of merchandise in a one-stop shop, so Dollar Tree needed a mix of products to make it a destination in its own right, Sasser said. Store size has settled at an average of 10,000 square feet, large enough to hold the food sections and a broader selection in categories such as health and beauty products.

In 2000, Dollar Tree acquired Dollar Express, a small Philadelphia-area chain that had freezers and refrigerators to carry food and drinks. Dollar Tree gained experience with that business and, in 2005, began to expand cold cases to some of its own stores, particularly at larger locations with extra space. Now it has coolers in about 1,100 of more than 3,500 U.S. stores.

Consumables now make up about 40 percent of Dollar Tree's merchandise, compared with 25 to 30 percent five years ago, Sasser said. And Dollar Tree has ended up in an ideal position to profit from economic conditions.

"We had no crystal ball that said, in 2008, there's going to be great pressure on the consumer and they're going to need more and more and more of this product," Sasser said in an interview last week after the analysts conference.

It was more than luck, though, Sasser added. To him, Dollar Tree's success stems from its responsiveness to customers and their needs.

Dollar Tree's chilled offerings include shredded cheese, hot dogs, frozen waffles and seafood. At least a half-dozen other aisles carry canned vegetables and condiments, breakfast bars and instant oatmeal, spices and sauces, sandwich bags and shaving cream. The South Military Highway store even has a small bakery with ovens in which employees heat up muffins and cookies to set out for sale, filling the air with their aromas.

This summer, some Dollar Tree stores sold a quarter pound of steak for a buck.

"We are not the same company we were 10 years ago," Sasser said. "Retail is really about evolving, listening to customers, expanding to meet their needs."

 

Alisha Wilson said she started buying groceries at Dollar Tree after she noticed the frozen-food cases. The 22-year-old likes the frozen sausage biscuits and the breaded chicken breasts. She buys Mrs. Smith's microwavable apple pies for her mother at home in Chesapeake.

Wilson, who works in medical records for Sentara Leigh Hospital, said she would have trouble preparing an entire meal from a Dollar Tree trip. Shoppers can't usually find meat and poultry, fresh fruits and vegetables or larger containers of milk there.

Every week, though, Wilson takes her shopping list to Dollar Tree first and then to the supermarket.

"There's no point in buying it at the other store if I can get it here for a dollar," she said.

Dollar Tree merchandisers work with food suppliers to help them develop products at a cost low enough to allow the company to make some profit, Sasser said. Sometimes, a manufacturer has excess inventory that it's willing to unload at a discount.

That "closeout" merchandise provides some of the brand names that Dollar Tree carries. In other cases, a brand-name manufacturer might make a special size that Dollar Tree can sell for a buck. The stores have a "freshness guaranteed" policy and pledge to sell no items past their expiration dates.

"With the volume that we buy, we're able to get some really good deals, as long as we plan in advance," Sasser said. "Suppliers across the country are knocking on our door, really, trying to get in."

For some groceries, Dollar Tree isn't a bargain. Wal-Mart, Food Lion and Farm Fresh all sell some canned vegetables of the same size as Dollar Tree for less than $1. The Duncan Hines mix at Dollar Tree makes enough for 12 cupcakes, while the same brand at Wal-Mart will produce twice as many for $1.04.

On the other hand, a loaf of Mary Jane bread at Dollar Tree costs less than half the price at local supermarkets. Other grocery stores also charged more for Softsoap liquid hand wash, Sun-Maid raisins and cans of Pepsi.

Audrey Sorey, 75, lives on a fixed income in Virginia Beach and shops for groceries at Dollar Tree as much as she can. Her husband loves the Little Debbie Honey Buns, which she has seen in supermarkets for higher prices, she said.

She stocks up on cookies and candy for her grandchildren and has tried the ice cream and sausage. Today, her cart holds cake mix, Del Monte spaghetti sauce, clam chowder, pet shampoo, sandwich bags and Sun laundry detergent.

She has found the detergent works as well as her supermarket brand, and so does the Dollar Tree dishwashing liquid.

"I usually buy Dawn, but Dawn is so expensive when I can get it here and it works just as good," she said. "I have to come where it's cheaper."

Carolyn Shapiro

 

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