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The ‘Dollar Guys’ accelerating as other retailers hit the brakes

Admit it, you’ve said it after seeing a “Grand Opening” sign draped over a store awning: “Another day, another dollar (store).”

What may have escaped your notice is that some of the new deep discount stores are getting a bit larger and showing up in more affluent locales.

They’ve moved well beyond the retailing of household supplies and closeout items. A variety of groceries, including refrigerated foods, have helped them draw new customers who want the convenience of a pick-and-go and don’t want the expense or hassle of driving the extra miles to a super market.

But the biggest plus for the discount havens has come with the shift in consumer thinking created by the nation’s sustained recession. A bargain value these days has equal appeal across all income levels, or so it seems, say commercial real estate agents who have witnessed the rapid retailing growth in Mississippi of deep discounters such as Dollar General, Dollar Tree, Fred’s, Family Dollar and others.

“The psychology of retail demographics has modified itself,” said Justin Davis, a commercial real estate specialist with The Shopping Center Group in Tupelo.

“They are looking for value rather than the notoriety of shopping at an upscale store. The customer mindset has changed.”

Middle America, he said, “is more open to the dollar concept than it has been in the past.”

So the discounters have kept their typical customer base of penny-pinching moms while capturing “higher-end customers who are scaling down,” said John Michael Holtmann, vice president of brokerage for Duckworth Realty.

“Consumer spending has definitely worked to the dollar store’s favor,” Holtmann said.

Indeed, the flush economic times of 1998 marked the last year Dollar Tree saw the level of sales it achieved through the third quarter of 2010, said Bob Sasser, president and CEO, in a third quarter earnings conference.

“Customers continue to shop in record numbers and they are buying more each time they visit our stores,” he said in a transcript published by Morningstar.

“Our total sales increased 14.2 percent to $1.43 billion, and our inventory turns increased once again in the third quarter as they have consistently over the past five years.”

Through three quarters of 2010 compared with 2009, sales totaled $4.16 billion, an increase of 13.2 percent, according to Sasser.

With more than 4,000 stores, Dollar Tree is the nation’s largest single-price-point retail chain, Morningstar noted in an analysis that said the retailer is well-positioned to benefit from an expanded customer reach.

Dollar Tree and competitor Dollar General always have gravitated to the higher dollar spaces, according to Brian Estes of The Estes Group commercial real estate firm in Jackson. But in more recent times “they have certainly moved up to little nicer centers.”

Landlords are glad to see them coming. They bring increased customer traffic, stability with corporate-guaranteed leases and – best of all — sorely needed cash flow for building owners, Estes said.

Developers are desperate to fill space and figure the average dollar store is good for 8,000 square feet. A Freds store can take 20,000 square feet off a developer’s vacancy inventory.

“They are sacrificing rates but today is all about survival” for building owners, Estes said.

Duckworth Realty’s Holtmann says site selectors for the deep discount retailers are shifting from inline space to free standing locations. “Some of these dollar guys are even upping their footprint” as they add to their assortment of items for sale, he said.

The dollar discounters occupy between 6,000 and 10,000 square feet, with 8,000 being “the sweet spot,” Holtmann said.

In the West, especially California and Arizona, the popularity of discounters has led them to open in stores of 15,000 square feet, he said, though Holtmann added: “I don’t know if I’m going to predict these guys growing their footprint” to that size here.

With rates at historic lows in Mississippi, if they  “aren’t building they are cherry picking the best sites and locking in the terms. When market rates begin to shift back upwards they are in the driver seat.”

It’s common for the leases to lock-in rates for 10 years and have a pair of consecutive five-year renewal options, according to Holtmann, who said such leases are even occurring in the higher demographic locations new to the dollar discounters.

But the lock-in carries risks, of course, especially in the higher-end locations, Holtmann emphasized.

“The questions is, ‘When the economy improves will you lose the high-end customer?’ That’s the million-dollar question,” he said.

Davis said he doesn’t think the answer is yet clear. “I think that’s what everyone is wondering,” he said. “The economy brought these customers in and changed their shopping pattern. Will they change permanently or will their economic patterns go back to the way they were?”

Morningstar’s analysis of Dollar Tree warns that the retailer could struggle to retain new middle-income customers when economic conditions improve.

Estes said he cannot predict future consumer behavior to that degree. But he said he suspects landlords in the higher value locations won’t be so willing to sacrifice once the economy begins to rebound. “When better times come back the landlord is going to try to get the rates back up on these guys,” he said. “Some of these dollar stores are going to have to figure out if they want to pay more or exit to another center.”

And they’ve got to hope that the recession’s command to be fruitful and multiply does not hurt them later.

Accelerating in a sector that has veered into the deceleration lane is always risky. Retail is sagging for a reason – job losses and little economic growth. If it were to worsen, low-income customers could be forced to cut back on discretionary spending purchases of higher-margin seasonal goods, gifts and apparel offered by deep discounters such as Dollar Tree, Morningstar analysts say.

Rapid expansion also could pose difficulties stocking stores with attractive closeout merchandise, which analysts say could erase the appeal of the treasure hunt atmosphere.

Think Starbucks, said Holtmann. The chain of coffee shops “got a little over-zealous with their customer plans. They just thought ‘growth, growth, growth.’ I’m not predicting that for the dollar guys,” he said.

“But how could you not? Look at where they are.”

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