Going back to the buck: Dollar retailers riding high as the economy plods along

It's no surprise that in this down economy, sales at dollar stores are up.

As affluent shoppers "trade down" to buy items priced under a buck, dollar stores are rising to meet demand, stocking fancier goods and even adding food.

"We're able to buy stuff today that we wouldn't have before," said Eddie Denha, founder of Hazel-Park based Dollar Castle. Shelves now boast name brands like Tide detergent and Domino Sugar.

Once the province of low income or extremely savvy shoppers, dollar stores have gone mainstream, selling food as well as more items in newer packaging, instead of the outdated labels discount stores usually feature. Corporate chains, as well as independent stores, are stocking a greater variety of inventory than ever before as newer and more diverse merchandise becomes available from retail closeouts and liquidation sales.

It's been a banner year for dollar stores, which are reporting record earnings and preparing to open hundreds of new locations in 2009.

Denha opened three new stores in 2008 -- in Woodhaven, Roseville and Shelby Township -- and plans to open three additional corporate stores and even more franchise locations later this year.

Dollar Castle has 24 locations in Michigan, including tonier suburbs such as Sterling Heights and Southfield, where foot traffic is up, according to Denha.

The number of dollar stores has grown by 50 percent from 2001, to nearly 20,000 stores from 6,654, according to The Nielsen Co., a Schaumburg, Ill.-based market research firm.

More than 60 percent of U.S. households shopped at least one of them last year, with the average family making 13 trips, compared to 11 trips in 2001, according to Nielsen research.

Food items bring traffic

Though sales are "up across the board" for all categories, food is proving to be the sleeper hit, Denha said. Most Dollar Castle stores sell dairy products, but the Allen Park location also carries frozen foods.

Even though food yields one of the lowest profit margins for dollar stores, it attracts extra foot traffic, said Patrick McKeever, a Grosse Pointe Farms-based senior analyst covering discount stores for MKM Partners LLC. More dollar stores are accepting food stamps as the number of people on government assistance increases, he said.

Dollar Tree has been increasing its "consumable inventory," which includes food, for the past few years, according to spokeswoman Shelley Davis. The Chesapeake, Va., chain operates more than 3,500 stores nationwide, including five in Metro Detroit.

Dollar store staples continue to sell, too, of course. Products that are "used and replenished often," such as paper towels, soap and cleaning supplies, are perennially popular, according to Tawn Earnest, spokeswoman for Goodlettsville, Tenn.-based industry leader Dollar General, which also carries some items priced at more than $1.

Dollar General, with more than 8,000 stores around the country, reported 11.2 percent sales growth for the quarter ended Jan. 30, with total sales of $2.85 billion compared to $2.56 billion for the previous fourth quarter.

The chain plans to open 450 stores nationwide, while Dollar Tree expects to open 210 new locations. Neither would disclose whether any will be located in Metro Detroit.

Dollar Tree, the third largest dollar discount chain behind Dollar General and Family Dollar, reported a 6.8 percent rise in sales for its fourth quarter, to $105.2 million from $94.7 million.

Little worry for grocers

Grocery stores aren't feeling the competition because most dollar stores don't carry produce or perishables, according to David Livingston, a managing partner at Milwaukee-based DJL Research.

"It's ineffectual at this point," Livingston said.

However, dollar stores offer "a reasonable cost alternative" to supermarkets in certain urban areas, like New Orleans, where grocery chains have been hesitant to relocate after Hurricane Katrina.

Meanwhile, dollar stores have been sprucing up their shelves to counter their prevailing image as bleak, outdated bargain basements.

Despite high profits and a larger sales volume, Dollar General fell 4 percent in a recent American Customer Satisfaction Index survey. The drop was "not from a decline in service, but from a migration of a higher socio-economic group of consumers to the retailer -- another effect of the recession -- a group that tends to be harder to please," according to the report.

Dollar stores are expected to meet the challenge, McKeever said.

"The stores in general look a lot better than they did a few years ago."

You can reach Jaclyn Trop at jtrop@detnews.com">jtrop@detnews.com.