With more than 6,500 units across the country, Family Dollar has carved a niche as the go-to store for shoppers in need of a few quick essentials that won’t break the budget. Having spent the last four years adding refrigerated coolers and expanding its food offering, the company is in a good position to capture these frequent trips. And, now that many of the stores sell milk, the company is about a third of the way through an upgrade of its point-of-sale system which will allow shoppers to use electronic benefits transfer (EBT) and food stamps.

“We’re going after the quick fill-in shopping trip,” says Boris Zelmanovich, vice president of merchandising strategy and operations for Family Dollar, adding that food purchases are becoming a larger percentage of shoppers’ baskets. “Our strategy is focused on delivering good-value, low-cost items in a convenient shopping environment to a growing value-conscious customer base.”

And the strategy appears to be clicking with Family Dollar’s hard-working, financially-stressed shoppers. The Matthews, N.C-based chain, which will mark 50 years in business in 2009, posted $6.8 billion in revenues during the 2007 fiscal year.

Thus far, fiscal 2008 has been a test for nearly every retailer, and Family Dollar is no exception. Still, speaking at the Lehman Bros. annual retail conference in April, chairman and CEO Howard Levine said he’s targeting comparable-store sales gains of 1 to 2 percent for the year, buoyed by a solid consumables business, better management of inventory risk and a lift from the nation’s tax stimulus package.

So far, so good: For May, Family Dollar reported a net sales increase of 4.4 percent, with the strongest momentum in the consumables category. Comparable-store sales rose 1.8 percent.

“There’s no question that food is a traffic generator at Family Dollar because their customers, who are extremely price-sensitive and price-savvy, know they’re getting good value,” says Meredith Adler, an equity analyst at New York-based Lehman Bros. “I continue to believe that there are opportunities in the dollar store space; the market is not saturated. But making this model work is not easy. GMROI is better than the margins imply because food turns quickly. The goal here is to get the customer to add one more item to the basket.”

Deborah Weinswig, managing director and senior equity research analyst at Citi Investment Research in New York, also expects consumables to drive Family Dollar’s top-line growth — “particularly in the current economic environment, as cash-strapped low-end consumers cut back on discretionary purchases. However, given the lower associated margins on consumables, the company will experience continued margin pressure ahead.”

Family Dollar’s enhanced food offering appears well timed, given the state of the economy and the fundamental shifts occurring in what consumers are buying — and where. Still, Zelmanovich insists he doesn’t have a crystal ball tucked away in a back room; the food strategy currently in place is several years in the making. And, truth be told, Family Dollar can trace its beginnings in the food business to the early 1970s.

“Our approach to the food assortment has really been evolutionary,” he says. “We’ve moved from largely promotional buys of cookies, candy and snacks in the ’70s to the introduction of carbonated beverages in the early ’80s.” By the second half of that decade, Family Dollar had shifted to a more brand-oriented approach, adding category leaders like Coca-Cola, Frito Lay, Kraft and Procter & Gamble to the mix.

Family Dollar began to introduce private label food items, marketed under the Family Pantry brand, in 2000. It was 2004 when the decision was made to install coolers for the sale of refrigerated foods. To date, the company has outfitted approximately 85 percent of its stores with coolers, which allows it to extend its offering to include items such as frozen pizza, ice cream, bacon and cold cuts.

A broader food assortment, including 12 feet of cereal and an expanded offering of off-the-shelf staple foods focused on the quick-prep and ready-to-eat, debuted in approximately 2,300 stores in February 2007; the expanded assortment was added to 2,800 more stores earlier this year. Today, Family Dollar’s SKU count in the food segment is in excess of 630.

“If you compare the food business today to the programs we had in place a few years back, one of the biggest differences is consistency,” Zelmanovich says. “Shoppers love the ‘treasure hunt’ approach in our apparel and seasonal businesses, where we’re more inclined to change up the offerings to reflect current trends, but in the food area it’s about consistently delivering the products shoppers regularly look for.

“It used to be that a shopper might find Special K cereal, for example, on two consecutive shopping trips but not on the third and fourth,” he says. “That doesn’t happen anymore.”

Consistency also applies to merchandise displays. “By converting the successful promotional programs into basic programs, items such as snacks are always merchandised in the same place,” he says, “so when the customer only has five minutes to run in and grab the soda and chips she needs for a party, she knows where to find them. It’s all part of understanding her hectic lifestyle and tailoring the assortment and the stores to make sure we deliver on the promise of convenience.”

Next