Discount retailers prosper amid economic instability

COLUMBIA, Tenn. -- The color of Princess Barbie's flowing dress wasn't the only thing Catherine Martin considered as she studied the dolls lining the toy aisle at Fred's discount store. She examined the $10.95 price tag, too.

"With a house full of grandkids and both me and my husband retired, we need all the help we can get," said Martin, 57, who will stretch her fixed income to buy gifts for 12 grandchildren this Christmas. The regular price for a Barbie is about $15.

She was among a mostly older crowd of customers shopping for Christmas gifts and other items this month at Fred's store in Columbia, a small town 40 miles south of Nashville.

Though often in the shadow of giant discount retailers like Wal-Mart and Kmart, chains such as Fred's, Dollar General and Family Dollar succeed, even during economic downturns, because they cater to low- and middle-income shoppers living in inner cities or rural towns.

The stores -- which target shoppers between 40 and 50 years old with an annual family income of $25,000 or less -- offer inexpensive items such as food, health and beauty aids and cleaning supplies. Most carry clothing, automotive supplies and seasonal merchandise.

'Everyday basics'

"One of the biggest things driving sales for these companies is they've been expanding their offerings of branded consumable merchandise," said Patrick McKeever, an analyst with Atlanta-based Suntrust Robinson-Humphrey. He estimates that at least 50 percent of the consumables sold at dollar stores are name-brand merchandise.

"They're very focused on the everyday basics ... things people need day in and day out despite fluctuations of the economy."

McKeever says dollar stores also are benefiting from the "graying of the population. They're more convenient than bigger discounters, an easier in-and-out shopping experience."

In 2001, discount retailers' revenue made up 16.2 percent of all retail sales, according to the Department of Commerce. Retail sales include purchases from general merchandise, apparel specialty, furniture, home furnishings, appliance and electronics, and sporting goods stores.

Attracting the young

While older shoppers find the convenience of dollar stores appealing, the discount chains over the past year have attracted a surprising new customer -- college students and other young people.

"Because of the lack of jobs, because of having their hours cut, they're much more dollar-conscious as far as saving money," said Burt Flickinger, managing director of Westport, Conn.-based Reach Marketing. "They've really discovered the dollar stores on their own."

Dollar stores also attract young people by selling department store inventory -- which they bought on consignment or close out -- at 10 cents on the dollar, Flickinger says.

"It's a treasure hunt for young consumers who like to get cool stuff," he said. "Everything from fine crystal that would be sold at department stores to the dancing James Brown singing character."

Both Flickinger and McKeever say Fred's, which operates 440 stores throughout the Southeast, likely will have the best year among the chains in its class.

The Memphis-based company reported earnings-per-share growth of more than 30 percent in the third quarter, and an increase exceeding 10 percent in same-store sales. For November, same-store sales were up 7.2 percent, while Dollar General was up .5 percent and Family Dollar down just .7 percent.

In December, McKeever expects all three to see an increase.

Jerry Shore, Fred's executive vice president and chief financial officer, credits a combination of low prices, convenience and a broad assortment of products for his company's success.

"Discount retailers serve the two fastest growing and most underserved segments -- the low- to middle-income and the fixed-income" shopper, Shore said. "... They have taken traffic from department stores and specialty retailers."

Larger discounters like Wal-Mart and Target also have felt the pinch, Flickinger said. Wal-Mart is even looking into starting its own dollar store division, possibly by 2005, he said.

"Wal-Mart no longer is the headquarters for the lowest prices, and Target's no longer the headquarters for cheap chic," Flickinger said.

Tom Williams, a spokeswoman at Wal-Mart, declined to comment on whether the discounter had plans to start a dollar division.

Accessible location

Holiday shoppers also like the location of discount stores -- usually in easily accessible strip malls off busy streets rather than in jam-packed malls.

"They have everything I need and I don't have to fight crowds," Beth Ladd, 45, who works in her family's restaurant, said as she shopped at a Dollar General in neighboring Franklin.

While the unstable economy factors into her buying decisions, she said she would shop at Dollar General regardless of her income. Among her findings during a recent shopping trip: an address book and journal ($3) and a purple candle ($2) for her son's girlfriend.

"I'm not cutting gifts. I'm cutting prices," she said.