Wal-Mart Stores, Inc. (NYSE:WMT) reported weak same store sales results in The United States. Though international growth offset the U.S. malaise, a still-struggling domestic customer base is a long-term issue at the retail giant. Interestingly, this same situation remains an opportunity for dollar stores.
Bigger Is Better, Maybe
Wal-Mart Stores, Inc. (NYSE:WMT) is the largest U.S. retailer, with a business built on everyday low prices. Part of the reason it can offer such low prices is the fact that it sells from centrally located, massively cavernous stores. After moving into the grocery aisle over the last decade or so, customers can now get just about everything they need at their local Walmart.
While that would seem to set the company up for a solid business, the continued economic struggles of its target audience have hurt the company. Its impersonal stores and low prices are aimed at the lower rungs of the socioeconomic spectrum. While Wal-Mart offers a lot in one store, the stores are usually a drive away. With money tight, making that trip isn’t always the option of choice.
Closer to Home
Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO) both focus on stores that are located as close as possible to their customers. For example, about 40% of Dollar General Corp. (NYSE:DG)’s stores are located in strip malls, with 60% structured as freestanding stores. Almost all of them are within 10 minutes of the markets they serve. Family Dollar Stores, Inc. (NYSE:FDO)’s makeup is roughly similar.
The stores that this pair operate are less than 10,000 square feet in size. Wal-Mart’s big-box format averages 180,000 square feet. So neither Dollar General Corp. (NYSE:DG) nor Family Dollar Stores, Inc. (NYSE:FDO) have the selection of products that Wal-Mart offers, but what they do offer is more than enough.
For example, Nielsen Homescan Panel found that Family Dollar Stores, Inc. (NYSE:FDO) customers visited that company’s stores for food by a 2-to-1 margin over runner-up household items. The third most frequently purchased item group was personal care. Every one of these categories are ongoing necessities that need to be replaced regularly, but might not be enough alone to warrant a special trip to Wal-Mart when a quick jump to the dollar store will suffice.
Growth
Being closer to customers allows the dollar stores to charge higher prices than Wal-Mart. Family Dollar Stores, Inc. (NYSE:FDO)’s profit margins are more than a full percentage point higher than Wal-Mart’s, while Dollar General Corp. (NYSE:DG)’s are around three percentage points higher. In the notoriously low-margin retail industry, every percentage point makes a big difference.
In addition to the benefit of earning more for every dollar of product sold, both dollar concepts still have some room to grow. Dollar General Corp. (NYSE:DG) has stores in around 40 states, and Family Dollar operates in 45. And, despite already large store counts, they both have room to expand in existing markets, too, because of the local nature of their stores.
While Wal-Mart has been struggling with growth in the domestic market, this pair continues to expand. In fact, sales at both retailers were higher year over year in their most recently reported fiscal quarters. Wal-Mart’s same-store sales in the U.S. fell in the first quarter. While the dollar stores may see dips, too, new store openings will likely make up for any shortfalls while the companies wait out the current rough patch.
Some of the problems facing these three companies include the continued weak economy and an increase in the payroll tax, with which customers are still coming to grips. If history is any guide, however, U.S. consumers at all levels of the economic spectrum will shortly get back to spending. Sales should at least solidify at that point.
