Defend Against Dollar Stores: C-stores can protect their turf against value retailers by focusing on strengths and differentiation

This article originally appeared in a print edition of Convenience Store News, written by contributor Tammy Mastroberte. Convenience Store News’ online content can be found here.

Convenience Store Operators face competition from within the industry, as well as outside of it. This includes quick-service restaurants, drugstores and the expanding dollar store market.

While dollar stores focus heavily on grocery, health and beauty care and general merchandise items, they have slowly been expanding into c-store related categories, such as packaged beverages, alcoholic beverages, fresh food and tobacco.

“Within the food and convenience category, there is a lot of competition,” Keith Daniels, partner at Carl Marks Advisors, based in New York, told Convenience Store News. “Dollar General is expanding and adding fresh food and coolers, and we have seen it in the drugstore channel as well. Competition is coming at c-stores from all angles.”

This past June, Dollar Tree Stores Inc., which operates more than 15,000 Dollar Tree and Family Dollar stores in the United States and Canada, said it would add adult beverages to approximately 1,000 more Family Dollar locations, and expand the freezers and coolers in approximately 400 stores. At that time, the chain had already added alcoholic beverages to 45 stores and expanded freezers and coolers in 55 stores.

Meanwhile, Dollar General Corp., with more than 15,300 stores in the U.S., started a “DG Fresh” initiative that’s designed to self-distribute fresh and frozen products. Its first DG Fresh facility is already providing more than 800 stores with refrigerated and fresh products, according to a report by CSNews sister publication Progressive Grocer. Dollar General is also expanding its DGX small-format concept, which stocks many items focused on immediate consumption, including fountain beverages, coffee, and grab-and-go sandwiches and salads.

“Food could be a huge threat to c-stores because they will be good at it. Everything they have done, they are good at because they have such a large footprint,” said Babs Ryan, group vice president of Bostonbased Publicis Sapient, which works with established organizations on digital transformation. “Also, everyone has thought of dollar stores as suburban and rural, but with the DGX stores, it allows them to get into urban areas and increase their footprint.”

The smaller format also means lower costs to run the stores due to less employees and lower rent — something traditional grocery stores like Aldi have also been doing, noted Daniels, explaining that millennials often prefer a smaller format because they want the convenient experience of a smaller, tighter format.

While in the past, dollar stores targeted low-income earners (which represent 64.8 percent of shoppers), the channel has expanded in recent years to also go after middle-class shoppers (which represent 22.9 percent) and high-income earners (which represent 12.3 percent), according to IBISWorld’s February 2019 Dollar and Variety Stores in the U.S. Industry Report.

“It’s time to stop thinking in segments, and that lower income people go to dollar stores, because that’s not right,” Ryan said. “People with a high income who don’t want to spend $7 on a greeting card will go in and load up on a bunch of other things while they are there. It’s all income groups.”

Where Dollar Stores Win

There are certain areas where dollar stores have an advantage over c-stores, and understanding these areas is important to defend against the value retailers and remain competitive.

The first is the scale and size of the two biggest chains — Dollar General and Dollar Tree — each with more than 15,000 stores. And size really makes a difference when it comes to buying power, according to Ed Collupy*, executive consultant at W. Capra Consulting, based in Chicago.

“The size allows them to leverage their buying power and ability to translate that into a consumer offer that is value based,” he said. “I think that is the biggest threat.”

The two largest and growing brick-and-mortar retail segments are currently convenience stores and dollar stores, so many operators are finding themselves competing for the same properties in certain areas, noted Collupy, sharing that a recent client of his firm cited dollar stores as a competitor because of the geography of its locations.

Two other areas where dollar stores are winning is with online ordering and weekly promotions, he pointed out. While some c-stores are offering online ordering and delivery for fresh food, Dollar Tree allows customers to order online and then if the item is available at a local store, they can pick it up there or have the item shipped.

“It’s a step the dollar store industry has taken that c-stores should take a look at — it’s exploding and continues to grow,” said Collupy. “It’s definitely an area to watch where dollar stores are ahead of the c-store industry.”

And in terms of promotional offers, dollar stores have weekly ads and promotions on merchandise, while the c-store industry is generally still centered on monthly or even longer promotion periods. While dollar stores’ scale likely allows them to do this, it’s another thing that c-stores need to look at for the future, he said.

Ryan additionally pointed out that consumers view dollar stores as a destination, rather than a place to stop for a few things on the way home or to fill up their fuel tank. There is more variety, and the stores offer the “treasure hunt” mentality, she observed.

“Dollar stores have perfected the treasure hunt. People may not be going in there for fresh food, but they may come up with lunch because they were shopping there,” she explained. “They keep enhancing the treasure hunt and people go in for fun. People don’t associate fun with c-stores.”

Putting Up a Defense

With dollar stores continuing to grow and move into new markets and product categories, what can convenience stores do to defend their turf?

It’s all about capitalizing on the strengths of both the industry and individual chains.

“I don’t think there is an industry that understands tobacco better than c-stores, and they are much further along with foodservice than dollar stores, which is a point of distinction,” Collupy said. “Also, in a recent dollar store walkthrough, I noticed the variety in the cooler was much lower than c-stores, so I think that is still a point of difference.”

Also, while dollar stores are bringing in fresh food, such as sandwiches, salads and produce, c-stores are still winning when it comes to made-to-order and hot food items. This is not something dollar stores are looking at yet, and if they do, they will have to go through the years of work that c-stores have already done to understand foodservice.

“Many c-stores already have established foodservice programs and already went through the growing pains, but dollar stores will still have to go through that,” said Collupy. “C-stores can capitalize on the experience they already have and look at what to do next so that dollar stores will have to continue to catch up.”

Daniels thinks it is unlikely dollar stores will enter the freshly prepared food arena. “Dollar stores are all about keeping costs low, so I can’t foresee them getting into fresh and made-to-order food,” he reasoned.

C-stores also have established coffee offerings — though DGX stores plan to add this option — so it’s important for convenience store operators to continue to refine and update their coffee programs to keep them fresh. Coffee has been an offering in the c-store industry for a long time and an area that would be easy for them to dominate, according to Collupy.

“Coffee should be capitalized on and if a chain has not refreshed its program, it’s probably time to look at that and take advantage of what they know, so again dollar stores will be in catch-up mode,” he said.

Yet another plus for c-stores, according to Collupy, is that they’re better at operational execution.

“Dollar stores often have aisles jammed with deliveries, and they are hard to navigate,” he said. “There is also a lot of disorganization and out-ofstocks. I’ve seen shelves in disarray, and it’s not just one store, but multiple stores I have visited.”

On a recent visit to a Dollar Tree store, Collupy said he walked down an aisle toward the back of the store and saw a hand-written poster that said the restrooms were out of order so neither one could be used. Clean and functional restrooms are something many c-stores focus on, and shows their attention to detail and customer service; this is another advantage, he noted.

Above all else, though, the biggest thing c-stores have that the majority of dollar stores do not is fuel. Loyalty programs are a good way for c-stores to further leverage this point of differentiation and get more customers from the pumps into the store regularly.

New Ideas to Beat the Competition

Thinking outside the box can help c-store chains fight back against all kinds of competitors. Whether it is dollar stores, drugstores, quick-service restaurants or convenience stores, competition in the food retail world is real. It seems like everyone is encroaching on one another’s territory, and nobody wants to be the one left in the dust.

Dollar stores, in particular, are jumping into expanded coolers, alcoholic beverages, fresh food and produce, as well as smaller-format stores. But there are areas where c-stores can differentiate themselves and fight back against all kinds of competitors.

“C-stores do well at serving hot food, and if you look at other countries like Thailand that do a lot around heat-and-go foods, that is a big opportunity for c-stores who already have the setup,” said Babs Ryan, group vice president of Publicis Sapient, which works with established organizations on digital transformation. “This is a place where c-stores can compete and win.”

Also, since c-stores have captive customers at the pump, it’s a perfect time to upsell those customers — but not in the way operators might initially think, according to Ryan.

Studies show people don’t go from the forecourt into the store because it takes additional time to park and get in and out of the store. Allowing people to order by voice at the pump and have it delivered to the car would eliminate this hurdle, Ryan advised. Mobile ordering is also an option, but she said adding the human element allows a company to stand out while still using technology to make the customer experience better.

“Let people order by voice while they are at the pump, add it to their tab, and then bring it out to their car,” she explained. “This is a massively missed opportunity. They can say to a human, ‘Bring me a quart of milk, a dozen eggs and a pizza,’ and leverage that human experience where the employee can say, ‘Last time you got this’ or ‘We are offering a special today.’”

Another big opportunity lies in making the c-store a destination, the way dollar stores have. One way to do this is by offering services people need, such as bill payment at the cashier or selling tickets to local events where people can avoid paying extra fees, Ryan pointed out.

“Do the research on services and find the right partner to work with. Integrate the technology needed to come up with a winning formula,” she said. “C-stores can become a destination for frequently used services.”

*Ed Collupy is an executive consultant at W. Capra Consulting Group. You can reach him at ecollupy@wcapra.com. Mr. Collupy has IT leadership and business team experience, providing strategic, operational and project leadership to retailers, emerging businesses and technology companies.