Quick-Trip Strategy, Long-Term Plan

It’s a Thursday, and a single mother of two school-age children is in the throes of the early morning rush. As she packs lunches and sounds the “five minutes ’til we leave” warning, she takes stock of what’s left in the cabinet and refrigerator. Two slices of bread . . . maybe a cup of milk . . . a nearly empty jar of peanut butter. Pay day’s not until tomorrow, but she won’t make it on what she has left in the house.

Adept at squeezing every last penny, she stops off at the local Family Dollar store on the way
home from work. Along with the essentials, she picks up a box of spaghetti and a jar of sauce for dinner — enough to tide her brood over until she can cash her check and head to the grocery store to re-stock.

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.” Food segment grows 25 percent
Zelmanovich keeps the financial specifics on Family Dollar’s food strategy success close to the vest, but is willing to share that “very clear targets” were established at the outset of both the cooler and food programs and the company has “hit those objectives – and then some. We’ve grown the food business in excess of 25 percent over the last three years.”

Every initiative Family Dollar undertakes “is based on careful testing, precise ROI models and controlled rollouts. Once we work out the kinks in a program – whether that’s around operational costs or assortment planning or financial dynamics – we take the next steps,” Zelmanovich says, noting that cross-functional teams assess all aspects of every program. “Our best sounding board is the store operations team,” he says. “They have their fingers on the pulse of the customer and watch the business unfold day in and day out. Their input is invaluable.”

Regardless of what’s on his agenda or where he may be in a given week, Zelmanovich insists on spending time in the stores and welcomes the opportunity to stand in the aisles and talk to customers.

“The single mom shopping at Family Dollar might not have as much cash in her wallet as someone else, but she’s every bit as savvy,” he says. “Our customers truly know the value of a dollar and they’re very proficient at managing a budget.”

Family Dollar is not the first player in the small discount retailer channel to chase a portion of the food business. Dollar General, based in Goodlettsville, Tenn., has been in the food business for several years and launched the grocery-friendly “Market” concept in 2003. Still, analysts insist there’s room for Family Dollar to capture a share of the food dollar.

“Dollar General operates a large number of stores in rural markets, with a concentration of stores in the South,” Adler says. Family Dollar “has about 25 percent of its units in urban areas and operates stores in 44 states.

“What’s interesting about Family Dollar is its focus on urban shoppers — many of whom don’t drive and so rely on a local store for convenient fill-in trips. We have a bi-modal economy and the bottom tier is growing faster than many acknowledge.”

POS technology upgrade
The rollout of upgraded POS technology currently in progress will allow the company to accept EBT and food stamps, so Family Dollar will be “in a stronger position to attract low-income shoppers and potentially lift sales,” Adler says.

Zelmanovich points out that Family Dollar is not replacing the traditional trip to the grocery store. “We offer our customers a viable fill-in trip option regardless of format,” he says.

Weinswig says Family Dollar “competes with a variety of retailers, including convenience stores, food retailers, drug stores and discounters. Based on the dollar stores’ limited consumables assortment, they serve the purpose of fill-in trips rather than stock-up trips.”

Rising gas prices “could lead shoppers to stock up once a month at the discounters/warehouse clubs, and then make more frequent fill-in trips in between at the dollar stores for basics such as milk and eggs,” she says. “To that end, Family Dollar could be taking some share from Wal-Mart.”

Price is a key point of leverage for Family Dollar as it takes on convenience store challengers in the battle for the quick-trip food dollar. It has considerable buying power, which brings with it the ability to deliver competitive pricing.

“We’re about helping the consumer to stretch the family dollar,” Zelmanovich says. “With strong vendor partnerships, supply chain efficiencies, convenient locations and a large number of stores, Family Dollar is well-positioned for future growth.”