Gregg Treadway tells me to expect something different. "The store you are about to see, you might not even call it a dollar store," he cautions as we leave the headquarters of Denninghouse Inc., owner of Buck Or Two, Canada's largest dollar-store chain, for the outlet where it's testing its new retail concept.
The store itself is in the Toronto suburb of Scarborough, and as we arrive and pass through its main entrance, Treadway motions me to stop. He smiles expectantly and asks for my first impressions. Well ... it's a dollar store.
Perhaps not the Platonic ideal of a dollar store, but the hallmarks are there: the racks of plastic doodads, stationery, stickers and gift wrap are all priced cheap, cheaper, cheapest. Still, there are differences and I correctly identify some of the features Treadway hopes I'll notice. The wide aisles are a welcome relief from the cramped and chaotic laneways you'd normally expect. The rear wall supports a sprawling floor-to-ceiling display of paper towels that makes this Buck Or Two look sort of like a supermarket.
Then, suddenly, I yell, "Bread!" Treadway's smile widens. It seems stupid to get excited about a loaf of Wonder bread, but this is an important development. To Treadway, who became COO and president of Denninghouse in September after tours of duty with Wal-Mart, Toys "R" Us and Dollar General, these loaves represent the future of dollar-store merchandising. They are a brand-name product sitting in a store better known for its rotating inventory of overstocks, failed goods (purple ketchup, anyone?) and the leftovers of bankruptcy and liquidation sales. More than that, bread is a household staple, the kind of basic item that will encourage Buck Or Two's customers to think of the store as more than an outlet for cheap odds and ends.
As I look around, I start to notice other features Treadway has introduced. Red shopping baskets are stacked strategically throughout, and not just for convenience. Research indicates that consumers carrying a basket will, on average, buy one extra item per store visit. Clip strips -- metallic branches that display merchandise perpendicular to store shelves -- dangle at eight-foot intervals, allowing shoppers to buy, for example, can openers in the same place they grab tins of soup. The dustbins are organized by colour. "Retail is detail," notes Treadway, quoting his former boss, Wal-Mart founder Sam Walton.
Treadway spent more than three months developing the plan for this Buck Or Two outlet, which is a model he wants to roll out at other stores in the chain this fall. His goal: to convince consumers to view his stores as regular destinations, not add-ons to larger shopping trips. His timing is opportune. "Extreme-value retailing" -- as the dollar-store business is known -- is one of the fastest-growing retail channels in North America. According to ACNielsen Inc., the number of dollar stores in the United States grew to more than 13,000 from about 3,000 between 1993 and 2002. In Canada, the number of both franchise and independent outlets surpassed 3,000 during the same period. Revenues ballooned as well. ACNielsen reports they broke the US$13-billion mark in the U.S. during 2003, roughly equal to 5% of Wal-Mart's US$245-billion in worldwide net sales that year. Not bad for stores where the average basket is rarely worth more than a few bucks.
The volume of customers is rising, too, ACNielsen says. More than 62% of U.S. households shopped at dollar stores in 2002, a 13% gain over 2000. The most impressive gains were made at the upper end of the income scale. In 2002, some 45% of households reporting incomes of more than US$70,000 shopped at dollar stores, a 22% gain over 2000, when the figure stood at 37%.
"Ten years ago, if you walked into a dollar store, you sort of held your head low. ... You didn't want your neighbours to see you," says David Uzelman, president of Your Dollar Store With More, a 175-outlet franchise chain headquartered in Kelowna, B.C. "That's not the case today. You can walk out with a bag of goods and your head high, because we don't sell junk any more."
Today, the dollar-store industry is maturing, and carving out a new niche: a convenient alternative to big-box retailers such as Wal-Mart and Zellers. Opening in neighbourhood strip malls or larger shopping centres, store owners want customers coming in for more than cheap spatulas and gimcracks to stuff inside birthday-party loot bags. They also want people buying everyday items like milk, dish soap, toothpaste, Band-Aids and cotton swabs. These items will bring shoppers in on a regular basis, and -- coupled with the impulse purchases of deep discount curios -- help push the average value of that red basket a few dollars higher.
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Click. Click. Click. That's the sound of the "wheel of retail" as it turns. And the wheel, a business theory that charts the evolution of retail niches and categories, offers a handy explanation of where dollar stores came from and where they are going, says Vinay Kaetkar, an associate professor of marketing and consumer studies at Guelph University. Extreme-value retailers, Kaetkar says, are on the cusp of the second turn of the wheel. They've completed the first revolution -- finding a successful niche -- and are now broadening the retail concept. Buck Or Two serves as an example to illustrate the point. In 1987, when chain founder Dennis Klein opened his first store -- a 1,500-square-foot location at the Dixie Outlet Mall in Mississauga, Ont. -- he followed a model established by outfits like Liquidation World, sourcing inventory from bankruptcy sales, insurance claims, distressed merchandise and failed products doomed to retail purgatory. But the model was imperfect, as Liquidation World discovered in the late 1990s when a drop-off in the number of bankruptcies and increased discount competition ate into its earning power. Klein, however, avoided that fate when he latched on to a small innovation in his early years. He discovered that customers would come back if he mixed inexpensive stock in fixed categories like hardware, housewares, gifts and party supplies with "treasure-hunt" items, the cheap knicknacks and tchotchkes. Klein's approach proved to be a reliable money-maker, especially when the Canadian economy sank into recession in the early 1990s. While many businesses struggled, Buck Or Two continued to grow. By 1992, the chain had 50 stores. Seven years later, in 1999, the total had reached 222. In 2003, it recorded revenues of almost $233 million from 322 stores.
But Klein's model was, in fact, something that had been discovered before. Dollar stores are the five-and-dimes of the 21st century, and their growth today is following a pattern established by their ancestors. The grandfather of the concept is Frank Woolworth, a pioneering figure in the history of retail. The scion of a long line of farmers from New York state, Woolworth opened his first store, The Great Five Cent Store, in 1879. It failed within weeks, but Woolworth was undeterred. He realized that the idea of a five-cent store was too limited, so he refined his business concept, and found success with the first five-and-dime, which he opened in Lancaster, Penn. By 1905, there were 179 Woolworth stores in Canada and the United States. They made their money on everyday items, like shoelaces, safety pins and pie plates. But it was the "novelty goods" -- the confections and seasonal items -- that caused shoppers to flock to the counters. Woolworth was also a pioneer in structuring his business to take advantage of economies of scale to keep prices low, notes Dana Frank, a professor of American studies at the University of California who has written about the infamous 1937 strike by Woolworth shopgirls in Detroit. Among his innovations were a centralized ordering system and regional warehousing. He also made regular buying trips to Europe to acquire inexpensive goods.
Woolworth died in 1919, but his chain thrived. By 1962, annual sales had reached US$1 billion per year, and the company began opening Woolco outlets, large discount department stores. But, viewed from the perspective of the wheel of retail, Woolworth was drifting away from its five-and-dime bedrock. The change proved ill-fated. By the 1980s, Woolworth and Woolco faced stiff competition from a new generation of discount retailers that included Costco and Wal-Mart (which debuted in 1950 as Walton's 5- and 10-cent Store, in Bentonville, Ark.). Woolworth's started on a downward slide from which it would not recover. In 1994, it sold its 122 Canadian Woolco outlets to Wal-Mart, a conversion supervised by none other than Gregg Treadway. It closed its operations in the United States four years later.
Ironically, it was the arrival of Wal-Mart and other big-box retailers that created the niche occupied by today's dollar stores. Like nimble creatures darting between the legs of lumbering giants, this new generation of five-and-dime-style retailers serve customers with quick, top-up purchases between trips to sprawling superstores. With floor plans that rarely exceed 6,000 to 8,000 square feet -- they're frequently less -- they are generally compact so that merchandise is easy to find. ("If I'm just looking for a light bulb or picture hangers, I'm not going to walk into a 120,000-square-foot Wal-Mart," says Kevin Walker, president of the 130-outlet Great Canadian Dollar Store franchise.) And with lower costs for inventory and rent, some stores can turn profits in towns with populations as small as 3,000, where major retailers would not, or could not, do business. Dollar stores have even found success in opening near the big-box stores, where they serve as an add-on trip. You could almost call the relationship symbiotic.
If dollar stores have capitalized on the consumer appetite for bargains, they've failed at branding themselves as individuals. "We've actually done consumer intercepts in our stores," Treadway says. "We ask them, 'Can you tell us where you are shopping?' They say, 'Well, it's the dollar store.'"
Most consumers see the outlets as little more than one coast-to-coast aisle of undifferentiated discount merchandise, a perception driven by the fact that almost every store acquires its stock through the same set of distributors. This leads to uniformity, often right down to the packaging. To distinguish Buck Or Two from the rest of the discount rabble, Treadway plays fast and loose with the price point inferred by the name of the chain. When I challenge him about Doritos on sale at the new Scarborough store -- two bags for $5 -- he spreads his arms as if asking forgiveness. "What if I say I can save you a buck or two?" It's a trade-off. The higher prices ring louder at the cash register and offer Treadway the opportunity to carry more brand-name products. But is it still a dollar store? Well, Buck Or Two will sell no-name toothpaste and dish soap, but the z-list stuff will compete alongside the Colgate and the Sunlight.
At the other end of the spectrum, chains like Dollarama find success at the bottom of the price-point ladder, with stores where nothing costs more than $1. Uzelman, of Your Dollar Store With More, keeps his finger on the pulse of his customers with three corporate-owned outlets in the chain, which is otherwise run exclusively through franchisees. That beat, he says, suggests his shoppers are coming in because of the very low prices. So, Uzelman is opening 10 brand new Absolute Dollar locations where no item will sell for more than a buck. Not that Your Dollar Store With More, which is expanding by 25 locations this year, is about to head up-market with its other outlets. Each will continue to follow a strict pricing structure: 50% of all merchandise will cost less than $1, a further 30% will be priced below $5, and 98% of the inventory will not sell for more than $10. The remaining 2% will be reserved for rare occasions when an item, such as a set of saucepans, might hit the stratospheric price of $50.
The thought of spending $50 at a dollar store sounds incredible. Guelph's Kaetkar notes they mostly thrive when items in their inventory cost between 40 cents or 60 cents wholesale, and when they can turn over their inventory six to eight times a year. (By comparison, Sears will turn over inventory three or four times a year.) But dollar stores must work harder than most retailers to protect their prices against inflation, so the occasional expensive item is acceptable, as long as it costs less than it might in other stores. But if prices stray upwards on some items, dollar store owners must also work that much harder to keep the balance of the inventory at the dollar price point. Dollarama, for example, recently discontinued its two-candy-bars-for-$1 deal due to a small price increase from the supplier. It now charges 59 cents for a small block of Hershey chocolate or box of Reese's Pieces. But there are other ways to offset inflationary pressures. Uzelman and Treadway, for example, have focussed on the buying power of chain ownership and making their distributions more coherent. "We're buying products cheaper today than we did six years ago, when we started in the business," Uzelman says. His priority now is developing the distribution system so that headquarters can order direct from China and sell direct to franchisees at a saving of 15% to 20%.
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Back at Buck Or Two's Scarborough store, Treadway and I run into Ron, a district manager. As Treadway ambles off to jawbone, an elderly woman walks up to me and asks if I know where she can find the black-currant jam. I admit I don't, but I offer to help her look. The woman belongs to one of Buck Or Two's target demographics, a senior citizen who lives near a major centre and dislikes negotiating the crowded aisles of big-box stores. In this case, we're on the fringes of Toronto, but we could also be in Airdrie, near Calgary, or the Vancouver suburb of Burnaby.
As we search for the jam, the woman explains that she lives nearby and shops here frequently. She was in a couple of days ago and was told the jam would be in stock by now. We find the appropriate shelf, and, contrary to the store's earlier claim, the jam is still unavailable. The woman is dissappointed. Treadway joins us a few minutes later, and is confronted with an unhappy customer who represents a minor public relations disaster.
At first, Treadway tries to hedge, suggesting the store doesn't carry black-currant jam. When I point out the price-code sticker affixed to the shelf and the empty area above it, Treadway calls over the store manager, who looks nervous. After a brief discussion, he asks the manager to call the woman when the jam arrives, which shouldn't be more than a day or two away. The manager immediately agrees and jots down the woman's number. Then, Treadway hands her his card. Problem solved.
Treadway later admits that keeping inventory levels low is crucial in the dollar-store business. It helps reduce costs. But he also says he hopes problems like the black-currant-jam issue will disappear soon, when Buck Or Two switches to a centralized warehouse system. The change will add "cadence" to the ordering system, Treadway says. Currently, store managers order their baubles and trinkets from more than 200 individual vendors. "You're at the mercy of whatever freight hits the back door." Denninghouse also wants to trim back its vendor list to 60 or so.
In addition, Treadway is working on other, less obvious issues. Despite repeated visits, the jamless woman seems to have trouble remembering where the store stocks its food. Big problem. So Treadway plans to distribute detailed master floor plans to Buck Or Two's 90 corporate stores (the others are franchises) this fall to ensure that every item appears in the same place in every outlet. It should improve on the scattershot retail style of old, where products were flung into whatever space was available.
Still, the woman left Buck Or Two a happy customer. True, she didn't get her jam. But if anything ever goes wrong again, she knows whom to call -- she has the phone number of the president of the company. And during the trip, she bought some large, metallic sunburst medallions to decorate the fence posts in her backyard. She showed them to me before she left. "A dollar fifty," she said, the gleam of a successful treasure hunt in her eyes.