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Dollar Store Format Likely to Feel Growing Pains in Near Future: Retail Forward

COLUMBUS, Ohio -- As dollar stores and other small-format value retailers continue to expand geographically in the next decade, the leading players among them will have to contend with growing pains, a new Industry Outlook report from Retail Forward suggests.

The small-format value-retailing sector has grown dramatically, to a more-than $42 billion channel today from a $31 billion business just five years ago. Retail Forward, a global consultancy based in Columbus, Ohio, projects sales growth for the channel will moderate at an average rate of 5.4 percent per year through 2009.

Meanwhile, the industry is experiencing a shakeup at the top. Five years ago, the top 10 players represented 44 percent of industry sales. Today, the top 10 control nearly two-thirds of sector sales. Retail Forward predicts that the top 10 players will operate more than 27,000 stores by 2009, up from 20,000 today.

"Aggressive new store expansion by the leading players remains the primary growth driver for this sector," said Nick McCoy, senior consultant with Retail Forward and co-author of "Dollar Stores and Other Small Format Value Retailers Industry Outlook."

While dollar stores and other small value retailers will continue to grow, same-store sales gains are becoming harder to achieve, and some profitability issues are beginning to surface. To give same-store sales a shot in the arm, drive shopping frequency, raise transaction size, and attract new customers, small-format value retailers will use expanded food offers, more "treasure hunt" and private label merchandise, and alternative payment options.

Retail Forward noted that the sector is operating in a tough environment. Core low- and lower-middle income shoppers are plagued with rising gasoline and food costs, as well as high unemployment. "As these core shoppers' budgets get stretched to the limit, we're seeing a reduction in the number of shopping trips and a postponement of discretionary purchases," McCoy said. "However, these same economic pressures may lead to more consumers trying the format, because everyone loves a bargain and American shoppers increasingly are value-oriented shoppers."

The leading players in the dollar store sector will continue to make sizeable investments in existing stores, processes, and organizational structures that will better enable them to manage future growth, Retail Forward predicts. "Looking forward, industry players will need to invest in the infrastructure necessary to control bigger businesses and a growing network of stores," McCoy said. "Once the appropriate infrastructure is in place, expect that small format value retailers will continue to raise the competitive bar in terms of convenience, price, and value."
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