Dollar Store, Inc.: The Booming Business of Being Cheap

Multibillion-dollar franchise grew its empire by being cheap.

December 11, 2012, 12:49 PM

Dec. 11, 2012— -- 'Tis the season for packing the mall and racking up the credit card bill.

There's a reason Christmas as become so crassly commercial. Retailers ring up as much as 40 percent of the entire year's sales between Black Friday and Christmas day. But there is one segment of stores that skips the holiday hoopla. In fact, they seem to fly under the retail radar all year long: Dollar stores.

The three top players, Family Dollar, Dollar Tree and Dollar General, have quietly become a $56 billion industry and they are opening new locations faster than Starbucks. By one estimate, there are more dollar stores in the United States than drug stores.

"Believe it or not, we can still open a lot of stores," said Family Dollar CEO Howard Levine. "Particularly in California where we just opened a store a year ago… this is probably a 1,000-store state."

Right now, Levine overseas an empire of 7,550 stores nationwide -- and counting. Family Dollar opened 500 new stores this year – more than one per day.

"If somebody told me I was cheap, I would take that as a compliment," he said. "That means we are looking for value. That means we don't overpay for stuff."

When asked what his answer was to the stereotype that dollar stores only sell junk, Levine said, "I say you haven't been in a Family Dollar, maybe ever, to make that kind of comment."

But cheap is working. The three dollar chains are Fortune 500 companies. Another chain, 99 Cents Only, is eyeing real estate on Beverly Hill's ritzy Rodeo Drive. There is already a store on Wilshire Boulevard, not far away, and it is the chain's best-performing location. It makes double the sales of most others.

Dollar stores have been expanding while the rest of the economy has been receding. Family Dollar has been doing well more than a half century. Levine's father opened the first one in Charlotte, N.C., in 1959.

"My friends say, 'I'm miserable, but you must love this economy,'" Levine said. "That's not really the case. We would much prefer a strong economy, strong employment. People need jobs and when people have jobs, they spend money. We do pretty well in a tough time, but we do very well in good times."

In the beginning, Family Dollar sold only things that cost a buck, but they abandoned that years ago. Today, roughly 90 percent of their products are less than $10. About one-third of everything they sell is not made in America, but Levine said that's just the nature of the business.

"Unfortunately, a lot of manufacturing has gone overseas," he said. "They have a cheap way of doing it and consumers accept it. There is no backlash from that so you got to go where you get the value and you got to go where you have the workmanship and the factories to do that."

Inside one of Family Dollar distribution centers is a speeding maze of conveyor belts and sorting machines. There is little room for error because in the dollar store business, it's the cents that really matter.

"A good retailer, after taxes, if you can make 5 cents on every dollar you sell… it's amazing," Levine said.

Being fast and efficient is just one of the secrets to the dollar store business's success. The other is doing everything, well, on the cheap.

The winning formula begins in tiny towns -- the underserved communities even Wal-Mart or Target wouldn't give a second look. Dollar stores gobble up cheap real estate, sometimes an old store front on a forgotten Main Street, or the strip mall that lost a bookstore or an electronics retailer. Then they hire a small work force -- each store might only have two people working at a time, whereas a Wal-Mart or Target will have a payroll of more than 100.

Dollar stores use almost no advertising. No expensive TV commercials. Customers can pick up a circular in the front of the store to find deals.

Their final secret is a laser-like focus on the customer -- some might even call it an obsession. When Family Dollar President Mike Bloom is talking about business, he paints a picture of a mother.

"Eighty percent of our customers are women so we think about 'her' all the time," Bloom said. "She earns $40,000 a year or less and a lot of them earn $25,000 a year or less. It's usually a single mom in a household typically taking care of kids."

Bloom spent three decades working for drugstore giant CVS. When he came to Family Dollar, he said he noticed the company's cheap corporate culture from day one.

"I would sit in meetings and watch presentations, I would miss half of the presentation because they would print on both sides," he said. "I'm like, 'this is brilliant, right?' I'm thinking of where I worked for 31 years. Never did we print on both sides."

Levine said he expects to double the size of his chain in the U.S. He is already a millionaire many times over, but 50 years after he first walked the aisles of his father's store in North Carolina, he still shops there.

"This is what I have brought," he said proudly, holding up a pair of man's pajamas. "Eight dollars, I mean, unbelievable. Where else can you get a value like this?"