Dollar Stores Get Serious About Private Label Investments
At a time when American consumers are looking to save money when they shop, the store closures affecting Family Dollar and 99 Cents Only came as a surprise to some.
Despite this news, the retail industry as a whole remains bullish on the channel. Playing an ever-growing role within the aisles of dollar stores are private label products. Leading retailers in the channel have grown their respective assortments in recent years by developing items that are something other than name-brand equivalents. This continued effort is not only providing high-value items to consumers, but also offering points of differentiation for each retailer.
For example, when Dollar General launched its proprietary Clover Valley line nearly 30 years ago, it did so intending to carry products that would be equivalent to name-brand items currently available. But as has been seen with many retailers in recent years, the mindset of the dollar store’s merchandise team evolved.
“Our customers started telling us they wanted variety and innovation, not only me-too products,” says Jackie Li, SVP of private brands and global sourcing at Goodlettsville, Tenn.-based Dollar General. “We then started developing products that were equal to or better than the national brands.”
Value Proposition
New product development has also been key to private label growth at Dollar Tree-owned Family Dollar. At the end of 2023, Rick Dreiling, chairman and CEO of Chesapeake, Va.-based Dollar Tree, reported that private label penetration rates at Family Dollar had reached 14%, and that the retailer was on target to hit its penetration rate goal of 20% by 2026. This was despite the fact that Family Dollar was in the midst of shrinking its store count by 600 by the midway point of 2024.
“We believe that as the customer is looking for greater value, they have more options within our private brands,” said Dollar Tree CFO Jeff Davis during the company’s fourth-quarter conference call. “It’s an opportunity for us to improve our margins. And, to the extent that there is sort of price deflation, there’s an opportunity to provide even more value as we think about how we sort that particular product line.”
The shedding of stores by Family Dollar, along with the closure of 99 Cents Only, which in April revealed that it was going out of business and closing its 371 stores across four states, has done little to temper the overall positive outlook that retail analysts have regarding the distribution channel.
“We do not view the planned closure of 99 Cents Only and a tranche of stores by Family Dollar as reflective of the overall state of the dollar and discount store sector,” notes Sujeet Naik, an analyst with New York-based Coresight Research. “We remain bullish on the market-share prospects for high-quality and/or well-positioned discount formats over the longer term.”
He observes that the start of the 2020s was characterized by high inflation and macroeconomic uncertainty, which prompted a shift in consumer shopping habits and made consumers more value-oriented. As a result, Naik expects the movement toward greater frugality to be a structural trend that will outlast short-term economic disruptions and boost discount sales through the rest of this decade.
Challenges for Discounters
While an economy that has a larger number of price-sensitive consumers would seem to favor dollar stores and the value proposition they offer, there are challenges facing these retailers. One such challenge is keeping store shelves stocked with items that are priced at or near the magic $1 threshold. Not meeting or coming close to this key price point could make these retailers less attractive to shoppers looking for products at this price level.
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Competition from the likes of Walmart and ALDI is another hurdle facing dollar store retailers. Bentonville, Ark.-based Walmart’s private label assortment is growing with the launch of its bettergoods assortment, which offers 300 items across a host of categories, with most priced at less than $5. ALDI will also be a bigger presence going forward as the Batavia, Ill.-based discount grocer moves forward with plans to open 800 stores in the United States by 2028.
“Walmart and ALDI have gotten much better at offering lower prices on a variety of goods,” says Naik. “This makes dollar stores have to work harder to stand out.”
Time to Grow
Dollar General’s Li notes that ever-changing economic conditions have created growth opportunities for the value retailer and store brands overall. As a result, the continued development of private label assortments could be the key to dollar stores’ efforts to separate themselves from other retailers while also offering shoppers high-value products.
“One of the many ways Dollar General differentiates itself is our focus on value,” he asserts. “We want to make our customers happy by meeting and exceeding expectations. We made significant enhancements to our private brands in 2023, and we know how important these value offerings are for our customers. We believe these products will further differentiate Dollar General in the marketplace as we look to provide quality products that are customer-centric, on-trend, national-brand or better, and stretch our shoppers’ dollars even further.”
The ongoing effort to expand its private label assortment in recent years is highlighted by the launch of the reformulated and rebranded Nature’s Menu assortment of dog and cat food in 2022.
Responding to consumers seeking affordable, high-quality pet food, the line was revamped to include dry-food options made with natural ingredients such as real beef, lamb and cage-free chicken. The wet-food assortment was updated with added vitamins and minerals, and made with real meat, poultry or fish.
Also in 2022, the retailer debuted its OhGood! private label nutritional supplement line. The assortment of gummy vitamins is non-GMO and gluten-free, with select vegetarian or vegan options. Items in the line have retail prices between $5 and $7.
A year later, Dollar General launched the aforementioned Clover Valley private label assortment of more than 100 new items, including sauces, condiments, entrées, sides and snacks.
With continued expansion of private label assortments a focus for dollar stores, industry experts contend that there’s more these retailers can do to expand their respective customer bases. Grocery is one area of potential growth.
“Food and grocery essentials generally carry lower margins but are fast-moving goods and have higher sales densities than general merchandise products,” says Coresight’s Naik. “The increase in shopping frequency will provide the opportunity to drive incremental sales across all categories, including higher-margin discretionary products.”
