The Dollar Store Economy

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By Jack Hitt

Heather Mann writes a blog called Dollar Store Crafts, which evolved from her occasional trips to the extreme-discount dollar stores near her home in Salem, Ore. Her readers admire her gift for buying really cheap stuff and then making cool and beautiful things from the pile. Her knockoff "alien abduction lamp" is jury-rigged from a small light fixture, two plastic bowls (flying saucer), a clear acrylic tumbler (tractor beam) and a small plastic toy cow (abductee) — all purchased for about five bucks.

As we entered her favorite store, a Dollar Tree in Salem, Mann warned me that I’d have to hustle to keep up with her. "Look at these," she said. "Cute." Before I could even examine her find — a rack of smushy yellow chickens on sticks (plastic toy? Garden ornament? Edible peeps?) — she had ricocheted down another aisle, where I found her studying a prominent display garishly pushing a superabsorbent shammy. Mann noted that this was not the famously kitschy ShamWow! but a very cheap imitation called, merely, Wow. The display boasted, "As Seen on TV."

"As in, you’ve seen the real ad on TV," she said.

All around, the stacks of products and aisles of merchandise screamed a technicolor siren song. I found four AA batteries for my tape recorder for a dollar ($5.49 when I spotted them the next day at RadioShack), and dish towels that might have sold for $5 elsewhere were just a buck. Mann now brandished something called a "wineglass holder" the way Jacques Cousteau might have held up a starfish. It was a small aluminum device meant to clip onto your plastic picnic plate "for hands-free dining and socializing." At a price of four for a dollar, it's a good deal if your world is overrun with miserly wine connoisseurs.

When I looked up, Mann was already around the corner, having fun with a bottle of discount detergent boasting a "bingo bango mango" scent. Just up the way was a bin of brown bags marked either "A Surprise for a Boy" or "A Surprise for a Girl." Mann's 5-year-old niece accompanied us on our tour and was crazed with excitement over these, and the truth is, we were all in the same exact mood. All around us, strange things hung here and there, urging us on an unending treasure hunt. Perhaps, like me, you have driven by and occasionally stopped in a dollar store and assumed that there were two kinds of customers, those there for the kitschy pleasure of it all — the Heather Manns of the world — and those for whom the dollar store affords a low-rent version of the American Consumer Experience, a place where the poor can splurge. That's true. But current developments in this, the low end of retail, suggest that a larger shift in the American consumer market is under way.

We are awakening to a dollar-store economy. For years the dollar store has not only made a market out of the detritus of a hyperproductive global manufacturing system, but it has also made it appealing — by making it amazingly cheap. Before the market meltdown of 2008 and the stagnant, jobless recovery that followed, the conventional wisdom about dollar stores — whether one of the three big corporate chains (Dollar General, Family Dollar and Dollar Tree) or any of the smaller chains (like "99 Cents Only Stores") or the world of independents — was that they appeal to only poor people. And while it's true that low-wage earners still make up the core of dollar-store customers (42 percent earn $30,000 or less), what has turned this sector into a nearly recession-proof corner of the economy is a new customer base. "What's driving the growth," says James Russo, a vice president with the Nielsen Company, a consumer survey firm, "is affluent households."

The affluent are not just quirky D.I.Y. types. These new customers are people who, though they have money, feel as if they don't, or soon won't. This anxiety — sure to be restoked by the recent stock-market gyrations and generally abysmal predictions for the economy — creates a kind of fear-induced pleasure in selective bargain-hunting. Rick Dreiling, the chief executive of Dollar General, the largest chain, with more than 9,500 stores, calls this idea the New Consumerism. "Savings is fashionable again," Dreiling told me. "A gallon of Clorox bleach, say, is $1.44 at a drugstore or $1.24 at a grocery store, and you pay a buck for it at the Dollar General. When the neighbors come over, they can't tell where you bought it, and you save anywhere from 20 to 40 cents, right?"

Financial anxiety — or the New Consumerism, if you like — has been a boon to dollar stores. Same-store sales, a key measure of a retailer's health, spiked at the three large, publicly traded chains in this year's first quarter — all were up by at least 5 percent — while Wal-Mart had its eighth straight quarterly decline. Dreiling says that much of Dollar General's growth is generated by what he calls "fill-in trips" ­— increasingly made by wealthier people. Why linger in the canyons of Wal-Mart or Target when you can pop into a dollar store? Dreiling says that 22 percent of his customers make more than $70,000 a year and added, "That 22 percent is our fastest-growing segment."

This growth has led to a building campaign. At a time when few businesses seem to be investing in new equipment or ventures or jobs, Dreiling's company announced a few months ago that it would be creating 6,000 new jobs by building 625 new stores this year. Kiley Rawlins, vice president for investor relations at Family Dollar, said her company would add 300 new stores this year, giving it more than 7,000 in 44 states.

And yet, how do dollar stores expand and make impressive returns, all the while dealing in an inventory that still largely retails for a few dollars? How does a store sell four AA batteries for $1? In part this market takes advantage of the economy degrading all around it. When I asked Dreiling about the difference in the cost of RadioShack batteries, he said that "RadioShack is probably in a better spot in the same shopping center," while Dollar General might be in a "C+, B site." RadioShack pays the high rent, while the dollar stores inhabit a "no-frills box."

The dollar-store combination has more to it than low store rents and really cheap products. The labor force needed to run a dollar store is a tiny, low-wage staff. Do the math of Dreiling's announcement: 6,000 jobs divided by 625 stores equals about 10 jobs per store.

Perhaps this is all merely our grandparents’ Woolworth's five-and-dime updated by inflation to a dollar and adapted, like any good weed, to distressed areas of the landscape. But a new and eroding reality in American life underwrites this growing market. Yet even deep discounters have limits. In early June, Dollar General predicted that its sales growth would slow slightly for the rest of the year. Dreiling told analysts in a conference call that his company would be very careful about raising prices, even though its costs for fuel and such were rising. "This sounds almost silly," he said, "but a $1 item going to $1.15 in our channel is a major change for our customer." Such delicate price sensitivity suggests what is changing. Howard Levine, the chief executive of Family Dollar, said to me, although "not necessarily a good thing for our country, more and more people are living paycheck to paycheck."

Profit margins have always been thin in the dollar stores. But now that they are competing for the shrinking disposable income of the middle class, there is a new kind of consultant out there — the dollar-store fixer. Bob Hamilton advises the troubled independent-dollar-store manager on the tactics needed to survive and thrive in the dollar-store economy. One afternoon he drove me to Beaverton, Ore., to give me a tour of a Dollar Tree store whose layout and strategy he thinks is exemplary in its competitive cunning.

In Hamilton's view, the secret of a good dollar store is an obsessive manager who can monitor 8,000 to 10,000 items, constantly varying product display tactics, and sense the changing interests of a local customer base. This frenzied drama requires a sharp eye for tiny details. "The market is moving all the time," Hamilton said as we entered the store. Right away, he threw up his arms, thrilled. This was just before Easter, and he pointed out the big holiday display practically in the doorway, an in-our-face explosion of color and delight that herded us away from the exit. "The natural inclination is to move to the right," Hamilton said, nodding at the cash registers on the left. The hunt was on.

Hamilton pointed out that the aisles are about two inches wider than two shopping carts, which themselves are comically tiny, giving the buyer a sense that even a small pile of goods is lavish. Despite the dollar store's reputation for shoddy products, the mise-en-scène nevertheless suggests a kind of luxury, if only of quantity. "The first thing you feel is this thing is packed with merchandise," Hamilton said, pointing out the high shelves along the walls. Helium balloons strained upward, everywhere. Any empty wall space was filled with paper signage proclaiming savings or "$1" and framing the store's goods.

But wait! There, in the middle of the aisle, was a tower of candy boxes, razored open and overflowing with cheap sweets. "They do this a lot with facial tissue or back-to-school items," Hamilton said. But it was blocking the aisle — a deadly error in his view. Worse are the managers who deliberately create cul-de-sacs by closing off the back of an aisle with goods. "You have to turn around and come back!" Hamilton said, shaking his head in disbelief. "You just watch the customers, and they will skip the aisle, every one of them."

The idea, Hamilton explained, is to create a kind of primal experience and a certain meditative flow. "My theory was to get them in a pattern, and they will just go up and down and go, ‘Oh, I forgot I need that,’ and pick it up."

At one point in the tour, Hamilton spotted patches of bare shelf space and was practically ashamed. His model store was committing egregious mistakes. "This is probably the worst aisle we’ve been down," he whispered. He dashed to a single barren metal hook and pointed in horror. "They have an empty peg! People are thinking, I’m getting the last one!" The stuffed bins, the boxes on wood pallets sitting on the floor, the merchandise piled to the ceiling — all this breeds an excited sense that everything just got here and you’re getting to it first.

"You always keep things full," he said. And always keep the higher part of the shelves engorged with product. "People buy at eye level," he added. Hamilton advised that products should be hung in vertical strips so that in a walk up the aisle, the eye can distinguish one item from the next. We arrived to a back wall covered entirely in plastic, pillar after pillar of household cleaning supplies, a kaleidoscopic blaze of primary colors. Bob Hamilton was one happy man.

"Shopping is our hunting and gathering," says Sharon Zukin, a professor of sociology at Brooklyn College who specializes in consumer culture and suggests that the dollar-store experience is a mere updating of our evolutionary instincts. "This bare-bones aesthetic puts across the idea that there is nothing between you the consumer and the goods that you desire. You are a bargain hunter, and it's not like a bazaar or open-market situation in other regions of the world. It doesn't require personal haggling between the shopkeeper and the shoppers. Right? The price is set, and it's there for the taking. In many cases the cartons there have not been unpacked! You are getting the product direct from the anonymous large-scale producer. You have bagged the deer: you have your carton of 36 rolls of toilet paper."

As strange as sociological metaphors sound in this context, this is very close to how the corporate chain executives describe the next stage of dollar-store evolution, as they try to please their new, more affluent customer. Both Dollar General and Family Dollar are moving toward uniformity in their design and layout, throwing off the serendipity that came of buying random lots and salvage goods and was so admired by, say, crafts bloggers. The new design has opened up the front of the stores "for those whose trip is all about, ‘I’m getting what I need and getting out,’ " said Rawlins of Family Dollar. As a result, the design of the store is no longer catch-as-catch-can but built around groupings of products that all make sense for the mission-oriented hunter. Store designers call these groupings "adjacencies" and draw them up in fine detail in an architectural schematic called a planogram. Toys, wrapping paper and gift cards, for instance, are laid out in a logical sequence that has been revealed by elaborate customer research and designed with precision.

"A hundred percent of our stores are planogrammed," Dreiling of Dollar General says. "We used to have what was called ‘flex space,’ and 25 percent of the store was where the store manager could put in whatever they wanted." No more. "Everything is planogrammed now."’

"Today we have very little in terms of closeouts," said Family Dollar's Rawlins. "Forty-five percent of our merchandise are national brands that we carry every day." Even though the goods are still deeply discounted, the stores will begin to have a similar look and layout — like the higher-end stores already do. Same inventory, same layout, same experience — from coast to coast.

As all these stores expand into really cheap food, they are creating their own store brands. Just as A.&P. long ago, or Target more recently, pronounced its market significance by creating store brands like Ann Page or Archer Farms foods, Family Dollar now sells Family Gourmet packaged meals, and Dollar General promotes its line of discounted packaged foods with the bucolic handle Clover Valley.

What does all this mean for the independent dollar stores? Is there a place for them in the evolving dollar-store economy? There is, but only if they are willing to hustle for pennies.

I called JC Sales, one of the big warehouse suppliers of independent dollar stores located south of Los Angeles, and talked to Wally Lee, director of marketing and technology. He agreed there was little room for error now. If I wanted to open a dollar store, I asked him, where would he suggest I locate it? "Right next to a Wal-Mart or a Target," he said. And how large should my new store be? "If you want to be profitable, start with an 8,000-square-foot store," he said. "That is the most optimally profitable among all our customers." Stores can be as small as 1,000 square feet and go up to 20,000, but Lee implied that there is practically an algorithm of size, labor and expenses — 8,000 to 10,000 square feet is profitability's sweet spot. But it's not all science, Lee said. The very absence of a plan­ogram is the other advantage independents can have.

"You need to have a good store manager who loves to talk to people," Lee said. "If it is a Spanish market, then it has to be a Spanish manager to speak to them to see what their needs are. If you don't do that, you’ll never beat anybody else."

In other words, even as the corporate chains standardize their inventory and planogram their stores down to the last Wow shammy, the independents flourish by retaining a Bob Hamilton-like sensibility — the sense that the market is in motion — with managers buzzing about the store, constantly tweaking the inventory, moving stuff around, ordering things that people request, changing the lineup again, trying out a different placement, listening, yakking and hand-trucking more product onto the floor.

In the basement of American capitalism, you can see the invisible hand at work, except it's not invisible. It's actually your hand.

The streamlining of the big dollar stores opens up, for other outlets, their original source of cheap merchandise: distressed goods, closeouts, overstock, salvage merchandize, department-store returns, liquidated goods, discontinued lines, clearance items, ex-catalog stock, freight-damaged goods, irregulars, salvage cosmetics, test-market items and bankruptcy inventories.

This secondary market supplies another stratum of retail chains below the dollar-store channel, one of the best known being Big Lots. Hamilton explained that if these guys don't sell the merchandise, it bumps on down the line to another level known as liquidators.

Hamilton drove me out to Steve's Liquidators outside Portland, Ore. It was marked by only a sign on the road. The store itself was an unadorned massive warehouse, with not even a sign over the door, a Euclidean concrete cube painted a bright lime green with lemon yellow trim.

As we entered, a scruffy man exited, pushing a busted cart — each palsied wheel pulling in a different direction — into a busy parking lot brimming with older-model automobiles. Inside, the store could not have been more spare, a decrepit imitation of a standard suburban grocery store. Exposed warehouse ceilings above, and below, an unfinished shop floor occupied by metal industrial shelving with aisles wide and deep enough to forklift in the goods. Here is where food products minutes away from expiration hover, on the cusp of becoming compost.

A pallet of giant restaurant-grade cans formed a giant ingot of eggplant in tomato sauce. Hamilton examined the cans, each dented and dinged, labels torn — all still sitting on a wooden pallet, partly in its shrink-wrap. "Must have fallen off a truck," he mused. There were sparse fruits and vegetables and rows of salvaged canned goods. Scattered throughout and along the sides were whatever else had been left behind at the dollar stores and then the closeout stores and maybe even the thrift shops — dozens of princess night lights, a single mattress leaning against a wall, a pallet of car oil, an array of carpets, a thousand boxes of the same generic cornflakes, a leaf blower. Back in the car, I asked Hamilton where the merchandise would go if it didn't sell here.

"The Dumpster," he said.

Jack Hitt ([email protected]) is a contributing writer for the magazine and author of a forthcoming book on amateurs in America.

Editor: Vera Titunik ([email protected])

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