The success of dollar stores has been one element of the recent discount boom in U.S. retail. Is their growth a threat to the core grocery category? If you're a big, established grocery store, the answer may be 'yes.' After crunching the numbers on the biggest dollar stores, our figures show that the dollar store segment remains niche. But, coupled with grocery discounters and Internet-only retailers, dollar stores threaten to splinter spend away from the biggest players in the grocery space.
Here's our thinking, based on a look at the four biggest dollar store chains, in order of decreasing sales:
Swift Growth: Dollar-Store Sales Leap to $42 Billion
Dollar stores have grown sales fast. From 2010 through 2015, the top four chains grew their combined
Groceries, or “consumables” — typically defined by these companies as food, tobacco, health and beauty and household paper and cleaning products — have driven this growth. Based on company filings, we estimate that these four chains grew their combined annual grocery category sales by just over $10 billion from 2010 through 2015, from $18.3 billion to around $28.6 billion, representing a CAGR of 9.3%.
Consumables have become a more important part of the sector; the category’s contribution to these retailers’ sales increased by approximately three percentage points during the five-year period we looked at. Consumables accounted for 64.8% of total sales at these retailers in 2010 and for an estimated 67.4% of aggregate sales in 2015.
What Those Billions Really Mean
That $28.6 billion worth of grocery sales seems huge, until we look at it relative to the entire U.S. grocery market. Keep in mind that:
- Total sales by grocery retailers stood at exactly $1.0 trillion in 2015, according to Euromonitor International. Our 2015 dollar store grocery estimate is equivalent to just 2.9% of this sector size, up from 2.0% in 2010.
- Based on data from the US Bureau of Economic Analysis, we calculate that total consumer spending on core grocery categories (excluding tobacco and over-the-counter drugs) stood at $1.1 trillion in 2015. Our 2015 dollar store grocery estimate is equivalent to just 2.6% of this market, up from 1.9% in 2010.
So, dollar stores remain a niche segment. But they still pose a threat, not to be overlooked. Grocery is a volume-sensitive business, with high fixed costs and low margins: any chipping away at volumes threatens established grocery chains. Moreover, the seemingly minor share of the dollar-store retailers must be added to other seemingly niche segments—including grocery discounters such as Aldi and Internet pure plays such as AmazonFresh—that have grown share at the expense of conventional grocery stores.
What This Adds Up To
We see dollar stores as one element in the potential fragmentation of consumer spending away from the biggest grocery-focused retailers and toward more specialized retailers. This trend is not unique to grocery: U.S. department stores, for instance, have lost share to targeted clothing specialists over the long term. As online shopping increases and discount options grow, including the entry of Lidl into the U.S. market by 2018, grocery could be just the latest sector where big generalists come under threat from more niche rivals.
