Family Dollar Triumphs Over Prosperity and, as a Consequence, Recession
Family Dollar (FDO) is the success it is today not because of how the company adapted to the recession, but because of how it reacted when the economy was booming -- and killing its business by driving up fuel prices.
Family Dollar demonstrated what can happen when a company responds to customers under economic duress by determining how to better serve their needs. The company initiated a strategy of expanding food and everyday needs such as paper towels and soap to provide customers with low-cost alternatives to traditional, pricier products as fuel prices virtually doubled between 2006 and 2008 and burned up their discretionary incomes. As things turned out, that put Family Dollar on the right footing to negotiated the recession and led to its posting 2010 comparable store sales, those at locations opened for at least a year, that were the best in the past five annums.
Economic weakness and the prospect of deflation in at least some product categories could be a continued boon to dollar stores. It will make them a regular stop for more consumers and provide time to refine their competitive strategies. Family Dollar has demonstrated it is particularly adept at using an expanding assortment of food and everyday needs from frozen dinners to soap to drive sales and improve its market share.
Walmart (WMT) and many supermarket operators became interested in chasing more affluent shoppers in the mid-decade period, adding more fashionable apparel and gourmet food. The change afforded dollar stores with an opportunity to move in and satisfy lower income customers who has become a lesser priority elsewhere.
Now, as a range of retailers scramble to tuck back into the bargain space -- and not just Walmart but supermarket chains such as Supervalu (SVU), with its Save-a-lot discount grocery store division and Delhaize (DELB) with its Bottom Dollar value supermarkets -- Family Dollar continues to improve on a strategy that it developed in duress. The retailer has not only expanded necessities but continue to improve its selection of bargains snacks, soft drinks and seasonal products while at the same time cleaning up aisles and improving store signage to make environments more acceptable to affluent consumers.
Fiscal 2006 was a pretty good year for Family Dollar with comparable store sales up five percent. However, in 2007, as gasoline and energy prices sucked up its core lower-income customer's discretionary cash, Family Dollar's comparable store sales growth slip to one percent.
By then, though, the retailer was deemphasizing categories such as apparel and pushing food and everyday needs. The investment in those consumable categories really paid off in fiscal 2009. Even as the United States slid into a deeper phase of the recession, comparable store sales in consumables gained almost seven percent, carrying the retailer to an overall four-percent comp gain in the fiscal year.
The trend continued in fiscal 2010. Ken Smith, Family Dollar's CFO noted in a conference call that consumable products enjoyed accelerating sales in the third quarter. Critically, they helped drive the number of customers going through the check stands. Such store traffic improvements result when existing shoppers coming in more frequently and new customers making their initial visits. Family dollar posted comparable store sales of five percent in the fiscal year with momentum building at annum's end as fourth quarter comps hit six percent. Results by segment won't be broken out until Family Dollar announces its 2010 earnings in a few weeks, but count on food and everyday needs being key to the company's gains.
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