Family Dollar Bets the Good Economic Times Are Not Rolling Just Yet

Last Updated Aug 26, 2010 2:57 PM EDT

Don't tell Family Dollar (FDO) the recession is over. It is betting that even if the economists say recovery is on its way, consumers will continue to spend like it's 2008.

The discount chain is therefore putting more emphasis on food and consumables while taking a cautious approach to discretionary categories such as apparel. It is also going into the private-label business with much more authority.
Private labels offer the company multiple benefits. They provide a range of products it can consistently sell at a 10 to 25 percent discount to manufacturer brands, noted Josh Braverman, a Family Dollar spokesman. Also, CFO Kenneth Smith, in the company's second-quarter conference call, pointed out that private labels reduce the cost of goods sold, potentially boosting profits as well as sales.

Family Dollar announced strong second-quarter results that included a 33 percent rise in earnings and a 3.5 percent advance in comparable stores sales.

Based in Matthews, N.C. and operating more than 6,600 stores, Family Dollar isn't giving up on discretionary product categories completely. It just launched a private label dubbed Kidgets in children's and toddler's apparel. The move makes sense. Children's products have done relatively well during the recession.

Adults have been more cautious in spending on themselves, so the shoe section has lost store space to better selling necessities. To replace it, the retailer is adding 200 national brand food and consumable products, while also expanding private-label food products.
Family Dollar recently added a dedicated private-label team to its management. Previously, each category buyer developed an individual set of standards for private-label products. Now, the private-label management team will bring to bear a single set of standards across the entire range of products.

In a way, Family Dollar is following in the footsteps of the warehouse clubs, which offer national brand items complemented by quality private-label products. Like warehouse clubs, Family Dollar also will continue to offer products brought in occasionally or seasonally.

The advantage the national brand/private label/temporary product line up brings is what is known as the "treasure-hunt" factor: That is, consumers believe that they will find something to buy no matter what they are shopping for. The enticement to explore can increase the frequency and length of store visits, providing additional time to sell.

Featuring a broad assortment of necessities ranging from groceries to soap to towels, Family Dollar began the recession ready to accommodate consumers trading down from more expensive retailers. As the economy declined, the company expanded its food offerings, adding coolers to more stores so it could sell customers more fresh and frozen items. It also added technology that allowed stores to accept food stamps, which increased the number of lower-income shoppers.

Today, it is building on that strategy to capture more sales from consumers who have either become accustomed to shopping at the low end of the spectrum, or who just don't believe that recovery is here to stay.