REPORT Reverdy Johnson, [email protected], 415.364.3782 Ryan Duck, [email protected], 415.364.3779

Dollar Stores Maintain High Margins, Grow Customer Base

Companies: BIG, DG, DLTR, EBR:DELB/DEG, FDO, FRED, KR, NDN, SHLD, SVU, SWY, TGT, WFM, WMT December 15, 2011

Research Question:

Will dollar stores be able to maintain higher margins relative to big-box discount retailers?

Silo Summaries Summary of Findings 1) SUPPLIERS/DISTRIBUTORS  Dollar stores are well-positioned to maintain high margins All three sources said dollar stores will be able to maintain high because of their purchases of closeout and overstocked margins. Dollar stores are successfully adjusting their product items, beneficial supplier relationships, off-brand and assortments to include more grocery items, and are buying the right private labels, and decreased packaging sizes. high-margin merchandise from suppliers. Also, dollar stores are downsizing packages, including for juice, coffee and shampoo. A  Four of our five dollar store sources reported stronger sales distributor of specialty packaged foods said is moving to in the past six months and an increase in new customers, a larger version of its DG Market concept and believes the company particularly from the middle class. Cleaning supplies, and will fare better on margins because they offer personal care and staple grocery items are dollar stores’ top multiple price points. sellers.  Three Chinese manufacturers of products supplied to dollar 2) INDUSTRY SPECIALISTS stores said export prices will not increase in the short term All three sources said dollar stores are being aided by a weak economy, but may rise in the long term. Wal-Mart Stores Inc. (WMT) an influx of new customers, and current customers’ shopping habits. has the strongest purchasing power and will threaten dollar Dollar stores will be able to maintain their high margins but not without stores if it lowers prices. difficulty. The purchasing power of big-box retailers and Wal-Mart’s decision to roll out more compact stores could affect the dollar store  Family Dollar Stores Inc. (FDO) and Dollar General Corp. industry. (DG) offer multiple price points, giving them more margin protection than (NDN) and 3) MANUFACTURERS Inc. (DLTR). These three manufacturers of products supplied to dollar stores said  Customer sources choose dollar stores based on price and prices to dollar stores will not increase in the short term but likely will convenience, but prefer the shopping experience offered by rise longer term. For now, sources are not passing on higher costs Wal-Mart and Target. Dollar stores’ expanded food sections because of stiff competition. Dollar stores will maintain margins in the will not affect these sources’ shopping habits. short term. Wal-Mart continues to have the strongest purchasing power and will threaten dollar stores if it lowers prices.  Target Corp. (TGT) and Wal-Mart store sources do not consider dollar stores a direct threat, but corporate actions 4) DOLLAR STORE VISITS reflect otherwise. The discount retailers are opening Four of the five sources reported experiencing sales growth in the past smaller, more urban stores that will offer merchandise six months; business and margins were helped by consumer demand similar to dollar stores’. for personal care products and cleaning supplies, and by the downsizing of packaging. Sources’ customers are seeking out holiday products and are selecting both private-label and name-brand Package merchandise. Customers also appreciate dollar stores’ large aisles and Maintain Overall Sizes clean appearance. A Dollar Store manager in Florida said younger, Margins Business Decreasing more middle-class people are starting to frequent the location. Prices have been stable the last six months.

Suppliers/Distributors 5) BIG-BOX RETAILER STORE VISITS These five big-box retailer sources do not consider dollar stores a Industry Specialists threat and have not noticed a slowdown in business related to local dollar stores. Target and Wal-Mart managers said their stores offer comparable pricing to dollar stores but a greater product selection. Manufacturers N/A N/A Their stores also offer price-matching programs.

6) CUSTOMERS Dollar Stores Only three of the seven sources shop consistently at dollar stores, particularly for pasta, soups and cleaning supplies. Two sources have decreased their dollar stores visits and spending. A Target customer Customers N/A has stopped her dollar store shopping completely because she disliked the long lines, dirty aisles and substandard quality in some products. Other sources voiced concerns over product quality and said the shopping experience was better at big-box retailers.

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Dollar Stores

Background Sources in Blueshift Research’s May Dollar Stores report said dollar stores were becoming more accepted as consumers look for opportunities to save money. Dollar General was the market leader because its wider selection, including electronics and food, provided consumers with one-stop shopping convenience. Sources also said dollar stores were becoming the new big- box , and were beginning to take share from Wal-Mart.

CURRENT RESEARCH In this next study, Blueshift assessed whether dollar stores would maintain higher margins relative to big-box discount retailers. We employed our pattern mining approach to establish and interview sources in seven independent silos: 1) Suppliers/distributors (3) 2) Industry specialists (3) 3) Manufacturers (3) 4) Dollar stores (5) 5) Big-box discount stores (5) 6) Customers (7) 7) Secondary sources (3)

Blueshift interviewed 26 primary sources, including three repeat sources, and included three of the most relevant secondary sources focused on new dollar store customers, Dollar General’s larger grocery section, Wal-Mart’s Express store locations, and dollar stores’ location expansion.

Silos 1) SUPPLIERS/DISTRIBUTORS All three sources said dollar stores will be able to maintain high margins. Dollar stores are successfully adjusting their product assortments to include more grocery items, and are buying the right high-margin merchandise from suppliers. Also, dollar stores are downsizing packages, including for juice, coffee and shampoo. A distributor of specialty packaged foods said Dollar General is moving to a larger version of its DG Market concept and believes the company and Family Dollar will fare better on margins because they offer multiple price points.

 Distributor of specialty packaged foods to discount retailers; repeat source Dollar stores are doing well across the board, but Dollar General and Family Dollar will fare better on margins because they offer multiple price points. The source reported strong growth within dollar stores’ food category since May, but commodity prices are increasing 3% to 5% monthly and are passed down to the consumer. The number of middle-class customers has continued to rise. Big-box stores like Target and Wal-Mart have not committed to offering numerous dollar Gross margins are sustainable. items, but traditional grocery stores are adding more merchandise at dollar- store prices. They can keep downsizing their . “Since the May report … there is really good growth in foods in dollar offerings. … It’s a way to stores. In this economy, it’s a bargain. It’s a promotional vehicle and disguise the price. Juice that dollar stores are beefing up their buying staff to food-specific buyers was 64 oz. is now 53 oz.; the instead of general-merchandise buyers.” . “There is a supply chain issue on perishables. It’s a traffic issue. … For bottle looks identical and the fresh or perishable [goods], customers have to be geared to buying customers don’t notice the those at a dollar store. They require a quick turn compared with downsize. Downsizing of nonperishables, and dollar stores are still working through supply chain packaging will continue to issues. They will continue to struggle until they find a solution for that.” increase this year. . “Gross margins are sustainable. They can keep downsizing their offerings. … That will occur more and more. It’s a way to disguise the Distributor price. Juice that was 64 oz. is now 53 oz.; the bottle looks identical and Specialty Packaged Foods Retailers

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Dollar Stores

customers don’t notice the downsize. Downsizing of packaging will continue to increase this year.” . “Customers are looking for value, and dollar stores are competing with traditional supermarkets. They are cherry-picking the best grocery-store items and taking them into the dollar stores.” . “There is definitely a lot of middle-class shift to dollar stores in the last 18 months, more and more all the time.” . “Dollar stores are [losing the stigma]. All the new stores are nice. Dollar stores used to be dingy, but now they are nice looking and a pleasure to shop in.” . “The dollar stores typically work on 35% to 45% margins on their goods—much higher than traditional grocery retailers and Wal-Mart, which is between 25% and 35%.” . “Corn, wheat, cheese and dairy—there’s definitely inflation on anything that is commodity-based. Domestic products—which is what we deal with—are going up. Prices are increasing on a monthly basis, up in the With commodity increases, the 3% to 5% range. There are more issues with global supply; it’s affecting dollar-price-only stores—99 everyone. Everything is trucked, and diesel fuel prices are not going Cents and Dollar Tree—will down.” have more pressure to find . “Private labels are doing quite well. They have more perceived value. Dollar stores are using off-brand or control labels that look like the items to stock while the other branded ones.” dollar stores—Dollar General, . “With commodity increases, the dollar-price-only stores—99 Cents and and Family Dollar—have Dollar Tree—will have more pressure to find items to stock while the multiple price points in the other dollar stores—Dollar General, Fred’s [Inc./FRED] and Family stores so they can better adjust Dollar—have multiple price points in the stores so they can better adjust to price changes and can move prices up.” to price changes and can move . “Dollar General and Family Dollar are leading the way. I don’t know prices up. much about Fred’s. 99 Cents Only is struggling with their margins. Distributor There is a lot of competition in the Northeast. Dollar Tree has done Specialty Packaged Foods Retailers extremely well; they have a good growth plan. I was there this week and … the quality was really good.” . “Dollar General is moving to larger versions of its DG Markets. This is a larger format store—15,000 square feet—that has more perishables. They use a food wholesaler to bring in the fresh products. They are doing very well in their current locations. There are 65 currently, with a plan to open 40 to 50 this year. They opened 10 in last month.” . “Grocery stores are increasingly offering dollar sections or dedicating an aisle to $1 merchandise to capture business from dollar stores. … This is supermarkets only, not big-box stores like Target or Wal-mart.” . “Delhaize [Group/EBR:DELB/DEG]—which owns Food Lion, Hannaford, Harvey’s and Bottom Dollar [Foods]—has just opened 30 locations with 20,000 square feet with more emphasis on dollar price points to compete with Aldi [Group] and [Supervalu Inc.’s/SVU] Save-A-Lot; these were in Philadelphia, now they are moving to Pittsburgh and Cleveland with the concept.” . “Big-box $1 offerings are not great or limited to a small section. They have not made a major commitment to dollar items. Target better think about the middle-class customer shift to dollar stores. . “Target has a very small dollar section in the front of stores with few items; Wal-Mart, which goes by being the low-price leader, has not experimented with dollar sections.”

 Founder and CEO of an online and warehouse supply company Dollar store sales have been trending up 10% to 20% per year for the last five years. Gross margins are boosted by the companies’ smart buys and smaller I see smaller packaging. That packaging. The produce push appeals to the lower-income customer, but leaves creates more turnover and the stores messy. Price fluctuations occasionally occur and are based on more volume in general. sourcing raw materials, but prices have been steady across the board. Twelve-pack pencils are now six . “There is an uptrend in dollar stores the last five years. Every year it has or four. Those that do better been going up. The trend is increasing 10% to 20% per year because customers are looking for less expensive and disposable products and rely on the volume and they can find it at dollar stores.” turnover. . “The dollar store end users are blue-collar and people who like to buy Founder & CEO less-expensive products. The middle class is getting into dollar stores. Online & Warehouse Supply Company

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There is more change year to year as to the middle class is buying cheaper.” We buy from , locally, . “We buy from China, locally, closeouts and distressed or overstocked products. The prices have generally been stable, but it depends on the closeouts and distressed or products. Time to time, plastic items are more expensive because of overstocked products. The the raw materials; same with paper products. It goes back to the prices have generally been primary source of the product.” stable, but it depends on the . “There are two types of dollar stores: chain and mom-and-pop. National products. Time to time, plastic chains average 40% markup, where the mom-and-pop maybe 25% to 30%. It depends on the practice the companies use; some use more items are more expensive expensive products as loss leaders, some do fewer loss leaders. It’s a because of the raw materials; different business mentality.” same with paper products. It . “Dollar Trees have multiple items. Dollar General is doing better. 99 goes back to the primary Cents Only is doing poorly based on products in the stores, and they source of the product. got into produce. It looks bad and they have flies. Dollar General and Dollar Tree are not into produce.” Founder & CEO . “Dollar store business is based on repetition, volume. Some are more Online & Warehouse Supply Company favorable on companies like the 99 Cents Only because of the high turnover. There is more turnover in grocery and produce products than general dollar store merchandise.” . “Customers are buying into the food idea because of the area where they live and because they are in the lower- income bracket.” . “I see smaller packaging. That creates more turnover and more volume in general. Twelve-pack pencils are now six or four. Those that do better rely on the volume and turnover.”

 President of a general merchandise wholesaler and importer; repeat source Dollar stores will maintain their margins by offering smaller packaging and finding the best closeouts. In Blueshift’s May report, this source said Chinese manufacturers were absorbing higher costs, but now China’s greater petroleum and labor costs are pushing up product prices. The industry will grow, and chain discount and dollar stores will buy out independent stores and then will begin to consolidate during the next five years . “Gross margins are sustainable for the next four to five years. They will sell smaller packages and rely on closeouts. There will be a shift in the product assortment … a profit shift on more sales on lower-margin goods.” . “Wal-Mart and Target price cuts don’t have much of an effect. Customers go to dollar stores for an assortment, not to buy one item. On average, they buy eight to nine items.” . “My favorite has always been the 99 Cents store. They are more regional but pretty powerful. You walk in and the majority is closeouts. They drive value to the customer, and they lead the grocery push.” . “All the dollar stores do pretty well. Family Dollar and Dollar General are about the same. Dollar Trees are coming on. 99 Cents Only was bought out by an investment bank firm. There is opportunity to open a lot of stores. The tipping point—where they are going to max out—is in about five years.” . “Product prices are definitely going up. Wholesale items definitely are going up. One of our best-selling items is flip-flops; they were 60¢ last year and now they are 70¢. Fleece blankets were $1.75 and jumped to $2.10. Inflation is coming in on all goods from China. The petroleum prices are going up and that affects all discounters—the cost of oil and the cost of labor. The way stores combat that is by offering products with fewer ounces; they are not going to change the price point. Dollar stores also combat this by finding more overstock and discontinued items, canceled orders and closeouts. … Wal-Mart is too big for that. They Gross margins are sustainable plan out much farther than dollar stores, and they can offset that with for the next four to five years. apparel over a period of time.” . “You might think if the economy returns there might not be as many They will sell smaller packages closeouts. But manufacturers and retailers take more chances when and rely on closeouts. There the economy is good and they still make mistakes. Closeouts are will be a shift in the product always there.” assortment. . “ [Inc./BIG is] a true closeout [outlet]. Seventy-five percent of what they do is closeout. They have a national contract with major President names. Price doesn’t matter; price should maintain. They are General Merchandise Wholesaler

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somewhere between a Wal-Mart/Target and a dollar store. They offer everything. … They are their own niche. I’d open a dollar store next to a Big Lots next to a Target, even if the rent was more, because they spend millions to drive traffic in.” . “There is more profit on private label, and [dollar stores] have to have private label to fill the shelves. … And dollar stores would prefer customers buy those, but the branded goods drive customers in.” . “Dollar stores are becoming more accepted by middle-class customers who shop at Wal-Mart and Target. … Dollar stores lost their ugliness. There’s the feeling that they are an adventure: ‘Let’s find something different.’” . “What we see in chain discount dollar stores is that the economy is still not good. The customers they have accumulated over the last three years are still there. Discount and dollar stores have quickly converted stock to the basic items: shampoo and cleaning products to more food … and that would drive customers to stores more than once per week. … More stores are converting to food/health and less to the gift area.” . “All the discount/dollar stores are realizing there is more and more opportunity in the grocery business.” . “Discount/dollar stores are becoming the convenient stores of yesteryear.” . “Chain stores are fine. Independent stores are having trouble. … Independent dollar stores can’t make it because they can’t do closeouts.” . “The first fallout will be that chains will replace independents. That will happen with a good five years of growth. … Then the battle will be among the chains themselves in different areas. 99 Cents are located at the cusp of middle- to low-class neighborhoods. Family Dollar is in small-town America, but they are starting to grow into larger towns. At the moment, they aren’t stepping on each other’s toes. Like any industry, they’ll start to consolidate. I don’t see new startups coming out.”

2) INDUSTRY SPECIALISTS All three sources said dollar stores are being aided by a weak economy, an influx of new customers, and current customers’ shopping habits. Dollar stores will be able to maintain their high margins but not without difficulty. The purchasing power of big-box retailers and Wal-Mart’s decision to roll out more compact stores could affect the dollar store industry. A retail- focused professor said shoppers now are buying more food at dollar stores.

 Retail pricing consultant; repeat source Dollar store margins will be steady because suppliers will continue to partner with the channel as it grows, anticipating a payoff as more customers, including from the middle class, turn to dollar stores. Customers do not mind the off-brand products, unique items and smaller sizes. Expansion of food options will pressure margins while increasing sales volume and customer visits. Wal-Mart’s price cuts could hurt dollar stores. Private labels are gaining popularity and play a key role at big-box and dollar stores. Target does a better job than Wal-Mart with private labels. . “Dollar stores are gaining customers. Extreme-value retailers and limited assortment stores are all doing well in the current economy, and dollar stores are right there.” . “Dollar stores continue to be more accepted by consumers. As long as the economy stays in the toilet, people will try the dollar stores because they really need to save money.” In general, dollar stores do . “Margins are sustainable at dollar stores. Anytime you are in growth pretty well from a margin mode as a retail channel, suppliers are willing to invest along with you. standpoint. They sell a lot of … The most important thing they can do is to hold their price gaps close brands that many traditional or to their competitors’.” major retailers may not sell, . “In general, dollar stores do pretty well from a margin standpoint. They sell a lot of brands that many traditional or major retailers may not sell, and frequently they will have and frequently they will have access to unique items. Dollar stores are access to unique items. really focused on hitting price points, and they will work with more off- Retail Pricing Consultant brand manufacturers.” . “Dollar stores are operating on what we would characterize as ‘opening price points’—someone looking to get four rolls [of toilet paper] for a buck. You cannot do any better than that. At a club operation, you get 24 or 48 rolls, but the cash outlay is higher.” . “One of the battles within dollar operations right now is margin percentages relative to annualized gross profit dollars. Food brings those retailers a lot higher velocity. If you are buying bread or food stuffs, you buy them

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Dollar Stores

many more times [a month]. People buy gallons of milk twice a month and only buy picture frames when they need them. Picture frames and other nonconsumable items will have gross margins of 50% to 70% and food items, 30% to 35%. The retailer has to make a decision whether they will be margin-percentage focused or margin-dollar focused.” . “I think Dollar General is outpacing the competition a little bit, and they have done more with food and bitten the bullet on the margin. There I think Dollar General is was an announcement about Dollar General rolling out more of what they call their ‘Dollar General Market stores,’ which include food. I think outpacing the competition a it is a smart idea for them, but that is a trend that has not been little bit, and they have done universally followed.” more with food and bitten the . “Consumers are shopping more for food at dollar stores than in the bullet on the margin. past because food prices have gone up so much and so many of the dollar stores are operating with a fuller variety of food.” Retail Pricing Consultant . “Food prices are rising. Commodities are going up, and those prices have been really going up at a rate that far outpaces the general inflation rate. We are about to enter the second year of it. Most suppliers are charging stores more.” . “What do you do about it as a retailer? Do you pass those costs on? Are there other ways that you can take the costs out of the system? That is a tough thing to do these days.” . “Even though Family Dollar and Dollar General are not flat-priced at $1, they are very conscious of what their price position is and the fact that they need to provide a real competitive value relative to a Wal-Mart.” . “Wal-Mart’s price cuts will have an impact on dollar stores. Dollar stores have been less expensive than the big- box guys, but somebody who historically is a Wal-Mart shopper may start to realize how much money they will save at a dollar store, but if Wal-Mart cuts its price and gets within 8%, they can reclaim that shopper over time.” . “Private labels are a key part of the mix at dollar stores. It allows the retailer to be able to offer some extreme value kinds of products.” . “Private labels are selling at big-box stores, but they are not as important. One of the ways that Wal-Mart kind of stumbled in the last couple of years was they rolled out a new private label called ‘Great Value.’ Wal-Mart was the one who hopped on the trend of using national brands at lower prices, as a way to clearly show how much money you can save by shopping there. As they went to private labels, it became harder and harder to understand their pricing, and that hurt them.” . “Target has done a better job with private brands. They have created a whole line of products that are consumer preferred. They created a lot of really high quality things and kept their prices right in line.”

 Retail-focused professor for a Southeastern university Dollar stores can maintain higher margins than big-box retailers despite the larger retailers’ economies of scale. Dollar stores continue to gain customers because of their attractive pricing. Shoppers are buying more food at dollar stores than in the past, prompting stores like Family Dollar to carry more national brands. Wal-Mart has rolled out smaller “express” stores to compete with dollar stores and cater to consumers who like smaller-store formats. . “Dollar stores can maintain higher margins relative to a big-box retailer, but it is difficult. Big-box retailers usually have more locations, which leads to greater economy of scale.” . “Even before the recent economic downturn, dollar stores were gaining in popularity. The downturn has only heightened that effect. As long as we stay in the current economic state, dollar stores are poised to keep Dollar stores are gaining growing. This economic climate is only helping them.” customers, particularly . “Dollar stores are gaining customers, particularly customers who are customers who are looking to looking to buy food and household essentials. Big-box stores have buy food and household noticed this, and stores like Wal-Mart and Target are including dollar sections.” essentials. Big-box stores have . “There has been a move among some dollar stores—particularly Family noticed this, and stores like Dollar—to carry more national brands as a means of drawing in Wal-Mart and Target are additional customers, especially in the food and home essentials including dollar sections. categories. The idea is that shoppers who may not be comfortable purchasing private-label or generic food products would be more Retail-focused Professor comfortable with the national brands they see at other stores.” Southeastern University

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. “The longer-term trend has been that shoppers are buying more food at dollar stores than in the past.” . “Big-box retailers are also popular but have recognized that some shoppers prefer a smaller store format with easier access. For example, Wal-Mart has been rolling out smaller Express stores over the past few years. These stores are much smaller than a Supercenter and are usually located in heavily populated areas.” . “Wal-Mart price cuts force all other retailers to either lower their prices or find alternate products and/or brands for which they can justify asking customers to pay more.”

 Chair of a university department focused on retailing; financial magazine blogger, book author and retail consultant Dollar stores have a successful concept in taking other retailers’ leftovers and selling them cheaply. This attracts new and repeat customers looking for an easy, inexpensive and fun shopping experience. Sales and profits are up as a result. Big-box retailers are downsizing because of the number of shoppers going online for goods. Wal-Mart lost customers when it temporarily abandoned its low-price leader status. Food prices continue to rise. . “Dollar stores are on an uptick on sales and profit. Consumers are looking aggressively for the lowest price possible to get more bang for their buck. To them, a few dollars matters and it is more of a treasure hunt now.” . “Consumers are learning the hard way to save. Two or three years ago they didn’t save, but now it is fashionable to save and see how far your money can go. Once you learn that, you do not go back. For this reason, Dollar stores are gaining I think the dollar store trend will continue.” . “Dollar stores are so successful because they take leftovers. It is a customers. I don’t think our clever idea. You are not guaranteeing big quantities of anything. You economy is going anywhere are not guaranteeing all of the brand names. You are guaranteeing one soon, so I do not foresee a thing: the price. And you are encouraging people to come in every week down trend anytime soon. to see what is on the shelf.” . “Dollar stores are gaining customers. I don’t think our economy is going Chair of a University Department anywhere soon, so I do not foresee a down trend anytime soon.” Focused on Retailing . “Big-box retailers are starting to downsize because it is so expensive to have overhead, and yet consumers still want the convenience of one-stop shopping. Retailers need cost containment.” . “Consumers are shopping more online. We have had a gangbuster year for online sales. Big-box retailers are realizing that they do not need to carry so much inventory in their store when they have an online presence. You don’t need all that lighting, the pretty environment. Everything can be in a warehouse facility.” . “Big-box stores are not losing customers. They carry so much more than dollar stores do.” . “Target is doing great. They have a cult following, and it keeps getting better and better.” . “Wal-Mart confused the consumer on a lot of things. They had Everyday Low Pricing. Then they changed it to look more like Target, had wider aisles and eliminated a lot of products. Their sales plummeted. So they went back to Everyday Low Pricing and narrowed the aisles again and put more merchandise back.” . “I do not think Wal-Mart’s price cuts will hurt dollar stores. At dollar stores, you can just run in and not fight that enormous parking lot. At a big-box store you have to be ready to hunt down the savings and spend a lot of time doing it.” . “Clothing, toys, accessories, shoes are all going down in price. Home goods are also pretty good.” . “Food prices have just gone up. It costs more to manufacture food, and that is passed onto the retailer. Weather dictates a lot with food. Gas dictates food prices, shipping dictates food prices, transportation dictates food. It is tough to be a grocer.”

3) MANUFACTURERS IN CHINA These three manufacturers of products supplied to dollar stores said prices to dollar stores will not increase in the short term but likely will rise longer term. For now, sources are not passing on higher costs because of stiff competition. Dollar stores will maintain margins in the short term. Wal-Mart continues to have the strongest purchasing power and will threaten dollar stores if it lowers prices.

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 General manager of a Shanghai company that produces clothing, fragrances and other items Dollar stores have been able to maintain margins because prices on Chinese imports have been steady. However, manufacturing costs and export prices likely will rise during the next three to four years, threatening dollar stores’ margins. Wal-Mart receives lower prices for the same product. The source’s company posted very low sales growth and shrinking profit margins for the second half of 2011. The exporting price of products . “The exporting price of products supplied to dollar stores is steady this year, but the costs for manufacturing the products are rising.” supplied to dollar stores is . “Dollar stores can maintain margins for now.” steady this year, but the costs . “The gross margin for retailers is shrinking, relatively. There will for manufacturing the products eventually be some impact on U.S. dollar stores.” are rising. ... Dollar stores can . “Wal-Mart is taking price-cutting measures and offering a huge quantity maintain margins for now. of varied products. Wal-Mart will engulf dollar stores’ market.” . “The whole industry that manufactures products for dollar stores is General Manager facing poor market prospects. I have seen very low growth rate in Clothing Company shipment volumes in the second half this year and the profit margin is China shrinking too.”

 Sales representative for a small Chinese exporting company that manufactures accessories and jewelry Dollar stores’ margins would not change too much if prices were to increase. Price cutting by big-box retailers could threaten dollar stores. . “The gross margin for a dollar store won’t float too much as its low price and margin.” . “The dollar stores in the best position are those that focus on jewelry and daily living goods. Those that focus on clothes are worse off.” . “Dollar store products are starting to become diverse. … There is an emphasis on quality improvement.” . “The purchasing price for a big-box retailer is lower, and if it’s cutting prices, it will be a big threat to dollar stores.”

 Business director for a Chinese manufacturer of household commodities including hardware, hair accessories, stationery, sewing kits, gift items, and plastic products The prices for the dollar store Dollar stores will be able to maintain their margins because their prices for products are unchanged, but Chinese products are unchanged. Production costs might be rising, but this source cannot raise his prices because he would lose business to his numerous the expenses on our production competitors. as well as logistics are rising. ... . “The prices for the dollar store products are unchanged, but the The profit margin can be expenses on our production as well as logistics are rising.” sustained for dollar stores. . “The profit margin can be sustained for dollar stores.” . “The foreign trade sourcing from China is still robust and steady.” Business Director . “Price cutting in Wal-Mart will impact business for dollar stores, but it’s Household Commodities Manufacturer hard to measure how much will be impacted in the short term.” China

4) DOLLAR STORES Four of the five sources reported experiencing sales growth in the past six months; business and margins were helped by consumer demand for personal care products and cleaning supplies, and by the downsizing of packaging. The remaining source, representing a Family Dollar store in , said sales have fallen year to year because of difficult parking and competition from a nearby Aldi. Sources’ customers are seeking out holiday products and are selecting both private-label and name-brand merchandise. Customers also appreciate dollar stores’ large aisles and clean appearance. A Dollar Store manager in Florida said younger, more middle-class people are starting to frequent the location. Prices have been stable the last six months.

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Dollar Stores

 Dollar General store manager in Florida Sales and store traffic are up year to year, and the store is attracting younger and middle-class shoppers. Prices are higher year-to-year except for food, for which pricing is flat. Name brands are selling better than private-label products. . “Our store sales are up a lot from last year.” . “Customers notice it’s cheaper than Wal-Mart.” . “Overall sale prices have gone up compared to last year. Some items have increased in price, and others have gone down. Electronics have been increasing. Not food prices though; they have stayed the same.” . “People like that they can buy a name-brand product for less than anywhere else. Some shoppers just come here to buy their cleaning products and household items and shop other places for other things. They usually end up purchasing items from other departments while they stock up on their essentials.” . “A lot of our shoppers are on a budget, and we keep them loyal with low prices and value deals. With the economy the way that it is, a new wave of shoppers is buying here to save money. Younger, more middle-class looking people are shopping here.” . “There are both new and repeat customers coming into the store.” . “During the holidays, the private labels on toys, candles and paper goods experience an increase in sales.”

Reporter Observations: Store signs promoted 50%-off and BOGO offers. Customers ranged from 20 to 80 years old. Of the 20 shoppers present during our visit, 10 were women. Stock on toys was low.

 99 Cents Only store manager in Southern Package sizes have been decreased to make up for higher costs. Customers are not complaining; in fact, the customer base has broadened. The store runs through inventory, especially on food, faster than six months ago. Holiday items are selling well. Two-for-one offers are popular. . “I think most discount stores out there are doing well because of the economy.” Our sales are up a little from . “Our sales are up a little from this time last year, but the biggest change this time last year, but the is that things are coming in smaller packages.” . “We have not received any complaints about smaller sizes. The instant biggest change is that things coffees are coming in smaller packages; so are some of the specialty are coming in smaller food items, like spices and gourmet products. Shampoos, too.” packages. ... We have not . “The customer base is growing. We seem to run out of a lot more items received any complaints about more quickly, especially bread, some produce and frozen foods.” smaller sizes. . “We have a lot of repeat customers at this store; many of them are students and elderly people.” Manager, 99 Cents Only Store . “The one thing that keeps our customers coming back is price. They Southern California know that they will get a good value.” . “We also offer a lot of two-for-one items in the store, which makes up for size issues.” . “Holiday items are the best sellers right now. We have also done well with classroom supplies like notebooks, pencils and pads.”

Reporter Observations: The store was very busy, with shoppers mostly focused on holiday items. The shelves were a mess, but the food sections had been improved and expanded to include refrigerated items and produce.

 Dollar Tree night manager in Southern California Top sellers for this store, which opened in April, include cleaning supplies, personal care items and holiday merchandise. The store draws in many new and repeat customers who live within two to three blocks. The source has not seen any difference in the quality of food, home or personal care items but said food sales had dropped slightly. . “We have been open since April and have been getting progressively busier by the month, and this is probably going to be our busiest month with Christmas shopping sales.” . “We sell a lot of cleaning supplies, school supplies and personal hygiene products. Food is not the big seller in this store, and it may be down a little from when we opened.” . “There has not been any change in the quality of the items we get in stock. We carry many name-brand food items, and they do well. Rice, pasta and canned goods for food are selling, and so are energy bars, Kleenex and cold and cough care items.”

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. “We seem to have the same number of brand items on the shelves as we did when we opened. I see customers also going for lesser-known We have more new customers items, but we definitely sell more of the bigger brands, especially for cleaning supplies.” every week. Many customers . “We have more new customers every week. Many customers tell us we tell us we are more accessible are more accessible than the 99¢ Only store up the street because we than the 99¢ Only store up the are smaller. Many of our customers are Spanish speakers who live a street because we are smaller. block or two away and walk here, so we serve as a neighborhood discount store to them.” Manager, Dollar Tree Southern California Reporter Observations: The store was busy on a Tuesday at 6 p.m. but well- staffed and clean. Shoppers primarily were in the cleaning, personal care and holiday décor sections. We noted two aisles of food and one frozen food section.

 Dollar Tree store manager in Chicago Prices have remained steady, and the store continues to surpass its sales goals. Inventory does not last long. Customers prefer this store over other nearby dollar stores because of its cleanliness and customer service. Food sales picked up once the store started to accept coupons and food stamps. Dollar Tree does not offer its own store brand. . “For the last two years, we have met our goals. Since we are a busy store, they set higher goals for us, but we beat them regularly.” . “We do very well here. It is so busy on Sunday that you can’t even find a parking space in our large lot all day long.” . “Out of the four dollar stores in the immediate area, customers tell me all the time that they prefer my store. The main reason is we don’t keep freight and empty boxes on the floor. We are scared of our customers getting hurt. We have a lot of senior citizen and special needs customers that shop here.” . “It is hard to say that prices have increased since our model is built around a $1 item.” . “When I got here two year ago, the store was not doing too good. Now we are No. 2 in our area.” . “Our food used to not sell too well, but last year they opened it up to [food stamps] so now it is selling. We also started accepting coupons.” . “Our food sells well. So does everything else. I can’t say one category is outselling the other because it all sells.” . “Dollar Tree does not have their own store brand. Everything we have Our food used to not sell too here is a name brand.” well, but last year they opened . “We get a lot of promotional items and over-runs in the store; once we it up to [food stamps] so now it get it, it sells. We do have some items that get restocked, but most is selling. We also started don’t, especially with seasonal.” . “Customers do get frustrated that an item they saw here or bought accepting coupons. once is not around anymore. They often ask for something they saw Manager, Dollar Tree they week prior and it is no longer available. I tell them they have to get Chicago it when they see it.” . “We don’t offer big-ticket items, and we won’t. Customers have to want the products we have at the price we offer. Everything in the store is $1 unless otherwise marked.”

Reporter Observations: One associate was working at the cash register and had seven customers in line midday on a Tuesday. Four to five other associates busily opening boxes and stocking shelves. During our 45-minute visit, 25 to 30 customers made purchases; no one left empty-handed. Many customers were browsing and purchasing holiday items. Customers ranged from 20 to 75 years old. Promotional signs throughout the store advertised “Everything’s a $1” and “While supplies last.”

 Family Dollar store manager in Chicago Prices are stable, but package sizes have decreased. Store-brand products outsell name brands. The store has been a low-volume location for at least three years, and holiday sales are down year to year. Most customers’ purchases are of holiday merchandise at this time of year; otherwise, household and personal items are the store’s top sellers. Food does not sell well because of competition from a nearby grocery store.

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. “Our prices are pretty stable. We have to keep them that way since we are a dollar store. I can’t think of anything that has gone up Our prices are pretty stable. We dramatically this year. You get just less in the box or a smaller product have to keep them that way for the same price now.” since we are a dollar store. I . “Our store-brand products give the customers more bang for their buck. And with this economy, that is making a big difference. Any product we can’t think of anything that has have that has Family Dollar Boutique or our logo on it is doing very well. gone up dramatically this year. . “All the Family Dollar brand products are doing really well. They sell You get just less in the box or a better than the name brands. For example, Kotex panty liners are $1 a smaller product for the same box for 16. Or you can get the Family Dollar ones for a $1 but you get 30 of them.” price now. . “The only time the brand names outsell our own products is when they Manager, Dollar Tree are on sale.” Chicago . “Our store is not doing well this holiday season compared to last year. We are down as a store, but other stores are doing well. Our location is a low-volume store. It has always been that way for the three years I have been here.” . “This location does not do too well with food since there is a grocery store nearby. The food here only sells well when it is on special and deeply discounted.” . “Toys are selling the best now, but they are not selling as well as last year.” . “Before the holiday season, everyday household personal care and cleaning items sold the best. Items like toilet tissue, laundry detergent and dish soap are always good sellers.” . “Most of the customers here are older, say over 35.”

Reporter Observations: During our weekday visit, window signs promoted holiday deals. A sign on top of every rack stated “Buy 1, get one 60% off.” Staffing was composed of three register associates, two floor associates and the manager. Approximately 10 customers, mostly men in their 40s to 60s, were in the store. Almost everyone made a purchase.

5) BIG-BOX DISCOUNT STORES These five big-box retailer sources do not consider dollar stores a threat and have not noticed a slowdown in business related to local dollar stores. Target and Wal-Mart managers said their stores offer comparable pricing to dollar stores but a greater product selection. Their stores also offer price-matching programs.

 Wal-Mart manager in suburban Chicago Wal-Mart is a better alternative to dollar stores because of its large inventory and selection. Retail prices have increased slightly year to year but are stable compared with six months ago. Holiday traffic has picked up, especially during the overnight hours, which the store started to offer in April. Electronics are the strongest seller. . “We are doing fairly well compared to dollar stores. The main reason is we are a one-stop shop.” . “We carry the same type of items as dollar stores in some cases, but their selection does not compare to ours. You can find anything and everything you need at Wal-Mart.” . “Over the last year, it seems like the prices on everything have crept up Over the last year, it seems like a little. Nothing stands out as increasing dramatically.” the prices on everything have . “For the most part, prices have stayed the same in the last six months crept up a little. Nothing stands or so.” out as increasing dramatically. . “It has definitely picked up for the holidays, especially in the overnight hours.” Manager, Wal-Mart . “We are almost always busy, especially on the weekends. It is packed Chicago in here.” . “Electronics are doing the best now.”

Reporter Observations: The aisles were packed with merchandise and difficult to move through during our visit on a Thursday evening. Six of 20 registers were open, and eight to 10 people were waiting in each checkout line. One man

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with his kids had an entire cart full of groceries. Several customers purchased diapers. Other items in shoppers’ carts were holiday décor, cleaning supplies, toys, clothes, plastic storage bins and beer.

 Wal-Mart store manager in Prices are the same year to year and possibly are even lower for items like clothing and home goods. Dollar stores are not pose a threat because Wal-Mart offer low prices and a wide selection. Sales are brisk for the expanded food section that opened in October; the section has even attracted new customers. . “Prices in the store are about even, in fact, maybe even lower because we have such as big selection of some items like cleaning supplies and office goods. We always have sales going on for those items, as well as I have not heard anything other items throughout the store.” about a threat from dollar . “I have not heard anything about a threat from dollar stores. Our prices stores. Our prices are pretty are pretty much the lowest anywhere and if they are not the lowest, we much the lowest anywhere and offer a matching program. If a customer tells us they found an item if they are not the lowest, we cheaper somewhere else, we’ll match the price.” . “We have a number of $1 items throughout the store that seem to do offer a matching program. If a OK, but I would not say they are driving sales.” customer tells us they found an . “The biggest change in our store is the new food section. We opened it item cheaper somewhere else, in October. We added frozen foods and produce, and so far they are we’ll match the price. doing very well.” . “We have seen an uptick in customers since opening the new food Manager, Wal-Mart section, so I have to say grocery sales are up and adding to an increase Los Angeles in sales for us.” . “We are doing well with frozen foods and produce, which has put this store on par with local markets. We are not a Super Center, but we are certainly offering more than we were a year ago.”

Reporter Observations: Items selling for $1 were spread throughout the store rather than in a dedicated aisle. Customer traffic was heavy in the new grocery section, particularly in frozen foods and produce. The store was very crowded, especially for midday on a Wednesday.

 Wal-Mart store manager in Florida Wal-Mart views itself as a one-stop shop and low-price leader, distancing itself from dollar stores through its wider merchandise selection. Instead, competition comes from other big-box stores and grocery stores. . “We don’t base our pricing off of dollar stores. Our competition is with grocery stores and Target.” . “We are always busy, and I don’t think dollar stores will affect that.” . “Customers are happy with our prices. We have everything they need here in one store.”

Reporter Observations: This Wal-Mart location was very busy with shoppers at 10:30 a.m. on a Saturday. The parking lot was close to full. The store was holiday-focused. Signage at both entrances promoted the layaway program and a Holiday Credit offer, with no interest if paid in full in six months. About 20 checkout lanes were open, and four of them were express lanes. Shoppers had a mix of groceries, toiletries and gift items in their carts. The pharmacy had a line of five people.

 Target manager in Chicago Target competes well with dollar stores because of its competitive prices and ability to gauge customers’ demands. Sales are up year to year. Prices have been steady the last six months, but the source said prices on a few items have dropped recently. Toys sales have not yet reached their holiday peak. Food and household goods are this location’s top sellers. . “We do well against dollar stores. Everything in the store is priced very competitively.” . “Our business has increased this year over last year. Our store and the company are doing great.” . “I have only been at this store six months, and I can’t say that I have noticed prices increase during that time. They seem about the same as far as I can tell.” . “Some prices are actually dropping slightly now.”

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. “This company does a fantastic job of figuring out what sells best on the floor and what the consumer is looking for. They spend a lot of money researching products.” . “Our best sellers are food and household items. Anything for the house sells.” . “Toy sales are OK. We haven’t really had our rush yet. Toys won’t pick up for a week or so, and then they will fly out the door until Christmas.”

Reporter Observations: Five of 16 cash registers were open during a midday visit on a Tuesday, with six to eight people in each checkout line. Two associates were working at the customer service counter, and at least eight other associates were stocking merchandise.

 Target store manager, Florida Target’s grocery section creates a one-stop shopping experience for customers, something dollar stores cannot offer their customers. Wal-Mart and Publix Super Markets Inc. are more closely watched than dollar stores in terms of setting prices, which the source acknowledged were higher than dollar stores’ in exchange for an improved shopping experience. . “Our store’s prices are based on our competitors, like Wal-Mart and Publix mainly.” . “We offer price-matching with the advertisement to customers. I have not seen many ads from the dollar stores.” . “I don’t think the same kind of customer shops here and at dollar stores.” . “Shoppers buy fresh groceries here, and then they can buy clothes and electronics. We have everything.” . “Our customers are savvy and like our style. We provide an excellent shopping experience that I know dollar stores can’t compete with. We may be a little more expensive, but we are worth it and customers keep coming back.” . “Traffic and sales are great. We are a busy location, and the holidays have brought shoppers in as early as October for us.”

Reporter Observations: During our visit at 11 a.m. on a Saturday, the store was very busy, and many Target staff members were present. Ten checkout lanes were open, with two customers per line. Shoppers were doing a combination of grocery and gift buying. Six shoppers were stocking up on items from the $1 section.

6) CUSTOMERS Only three of the seven sources shop consistently at dollar stores, particularly for pasta, soups and cleaning supplies. Two sources have decreased their dollar stores visits and spending. A Target customer has stopped her dollar store shopping completely because she disliked the long lines, dirty aisles and substandard quality in some products. Other sources voiced concerns over product quality and said the shopping experience was better at big-box retailers.

 Dollar Tree customer in her 60s, Florida This source chooses dollar stores over big-box retailers because of the low prices. Dollar store prices have been steady, and package sizes do not appear to be smaller. She does not prefer one dollar store company over another, and primarily shops for household and personal items. Groceries at dollar stores are secondary purchases. She only visits big-box stores for larger-ticket items and will continue to shop dollar stores as long as prices remain low. . “Dollar stores have the best prices on household things, and the cleaning supplies are the cheapest. I buy toiletries and some cosmetics here too. I shop at all of the dollar stores in the area, not Dollar stores have the best just Dollar Tree.” prices on household things, . “Prices have gone up all around me, but the dollar stores stay pretty low and fair with prices.” and the cleaning supplies are . “As long as the prices stay low, I will keep shopping here.” the cheapest. I buy toiletries . “I haven’t noticed any package sizes getting smaller here.” and some cosmetics here too. I . “I don’t buy all my groceries here. I buy snack like items, sometimes shop at all of the dollar stores crackers or cookies, juices or soda and chips. I shop at grocery stores in the area, not just Dollar Tree. for the bulk of my food because it’s all there and I think its fresher food.” Customer, Dollar Tree Florida

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. “The variety of the items you find here is great. I really don’t need to shop at the bigger stores because the prices are unbeatable here.” . “I never go to Wal-Mart unless it is for a big item, like a TV.”

 Dollar Tree customer in her 30s, in Los Angeles This source shops at Dollar Tree twice a week for food staples and cleaning supplies. She chooses her shopping destination based on price. Her buying habits have changed to where she is less inclined to buy in bulk because of the immediate cost. Dollar stores offers the best deals on cleaning products and dry goods. She is open to buying private- label products over name brands. . “I come here about twice a week. I do not buy bulk groceries anymore. I used to go to Smart & Final [Inc.], but with the economy like it is I am finding that I save money buying smaller quantities of food and other items and just looking for sales and shopping more frequently than before.” . “I like this store better than the 99 Cents Only store because it is not as crowded.” . “The prices here are always the same to me except sometimes they offer two-for one discounts.” . “I will shop here as often as I can, and if they have something in the flier I want, it could be more. I am not committed to any one store now. I will shop for groceries at Target if I have to go there for other things. I also shop at my local Super A [Foods] and sometimes [The Kroger Co.’s/KR] Food 4 Less, wherever there are sales.”

 Middle-aged Family Dollar customer, Chicago This source chooses Family Dollar over big-box retailers because it is quick, convenient and offers lower prices than Target and Wal-Mart. Prices have increased across the board, so he is shopping less than a year ago. At Family Dollar, he purchases school and household items but not food, instead preferring Mexican supermarkets. . “I prefer Family Dollar over Target or Wal-Mart because it is quicker. I can get in and out a lot easier. I don’t have to deal with the really big store and all the lines to check out. I can just grab what I need and go. I I prefer Family Dollar over like the prices best here. They are cheaper than other stores I shop at.” Target or Wal-Mart because it is . “I am shopping less often at the Family Dollar than I was a year ago; Wal-Mart and Target too. The main reason is I have less money to quicker. I can get in and out a spend. Everything costs more now.” lot easier. I don’t have to deal . “The last time I was here was last month. I come about once a month with the really big store and all or more. That won’t change in the next six months.” the lines to check out. I can just . “I mostly buy school supplies here for my kids and anything else for the grab what I need and go. I like home that we need.” . “For household items, I also shop at [Supervalu’s] Jewel, [Sears the prices best here. They are Holdings Corp.’s/SHLD] Kmart and Wal-Mart.” cheaper than other stores I . “I don’t buy food here. I don’t feel it’s fresh.” shop at. . “For food, I prefer to go to the Mexican supermarkets. They have a good selection, and they are always getting stuff in. Their food is very Customer, Family Dollar fresh. There is a high turnover on their vegetables and fruits, so I feel Chicago they are fresher than even Jewel. The prices are also very good.”

 Target shopper in her 50s, Florida This source is willing to pay Target’s higher prices in return for a better shopping experience. Target is a one-stop shop while dollar stores offer lesser-known products. She has purchased more Target private-label items year to year, but primarily buys food from stores that offer more organic choices. . “I was told by a friend about the dollar stores and their low prices on cleaning products. I found it hard to find exactly what I was looking for. They have name brands but weird products from them. It was so busy and hard to get around in the store.” . “I won’t go back just for the prices. It was out of my way, and Target has it all. It is worth it to me to be able to find what I want at a little extra cost.” . “I have been shopping a little more at Target than last year. It beats going to three different stores when you need something. The cleanliness and friendly staff make it a great store. It is never too busy, and I can pick up groceries if I need something I forgot.” . “I shop mostly at Whole Foods [Market Inc./WFM] or Publix GreenWise for my food.”

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. “I have noticed a lot more sales than last year, so prices seem to be going down on some items and up on others.” . “I have bought things from Target dollar section here. I usually cruise through to see what they have there. It’s never anything I need, but little seasonal items and gifts for friends, kids or dogs.”

 99 Cents Store customer in her mid-40s This source is shopping less at dollar stores because she can find bargains and better quality at Target. She still shops at dollar stores for holiday items and I shop more at Target, some food. She does not expect to increase her dollar store visits. especially since they added a . “I am not a regular here like I used to be. I shop at this store about once or twice a month.” food section. Of course, they . “I shop more at Target, especially since they added a food section. Of don’t have as many $1 items, course, they don’t have as many $1 items, but they do have more but they do have more selection and better quality when it comes to certain things.” selection and better quality . “I used to buy eggs and cheese and some produce at this store, but I when it comes to certain like the Target stuff better. I don’t buy bread here anymore either. I got a bad loaf a few months ago and had to bring it back.” things. . “Prices seem to be going up everywhere, even Target. But we have no Customer, 99 Cents Store choice but to pay them.” . “I buy whatever is on sale, and often that means brand-name items. I also buy nonbrand items too. It just depends on what I need and what is cheapest.”

 Senior citizen Target customer, Chicago This source prefers Target’s food prices, frequent sales, variety and location. He shops at dollar stores occasionally, buying a small number of items each time. He also shops at Safeway Inc.’s (SWY) Dominick’s but no longer goes to Jewel because its number of sales has declined. He has not noticed any price increases. . “I am shopping here the same amount as I was a year ago.” . “I shop at a dollar store a couple times a year. I just get a few things.” . “Today, I purchased some food items. I get a little bit of everything here. It just depends on what I need.” . “I have not noticed the prices go up since the summer. I usually purchase the sale items though.” . “The main reason I come here is the prices for food are good. They also have good sales.” . “The other reason I shop here is it is very convenient. I live in the senior home three blocks away, so I can just walk over.

 Target customer in her early 50s, Southern California This source is shopping for almost everything except electronics at Target. Until about a year ago, she used to buy more products at 99 Cents Only store, but tired of the long lines, dirty aisles and substandard quality of some products. She also found prices at Kroger’s Ralphs to be too high. . “I refuse to go into a 99 Cents Only store any more. I have found it just not worth the extra savings of a dollar here or there to have to put up with the messy aisles and parking lots.” . “I shop at Target once a week for staples like oatmeal, cereal, frozen food items, lunch meat, pet food, soups and canned goods to fill up the cupboards and the fridge. I get almost everything I need here except I refuse to go into a 99 Cents specialty items.” Only store any more. I have . “Supermarkets are getting more expensive. They rush you through the found it just not worth the extra aisles, and they often make you feel like they are doing you a favor by savings of a dollar here or there being there for you. Shopping for food is a little trickier at Target because people linger more and it is sometimes more crowded, but at to have to put up with the least I get good customer service and the prices are often lower if not messy aisles and parking lots. the same as the market. They also honor all my coupons.” . Customer, Target “For clothes, I would never buy at Wal-Mart. They are substandard.” Southern California

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Secondary Sources Three secondary sources discussed dollar stores’ new customer base and store expansions, Dollar General’s larger grocery section and Wal-Mart’s Express stores.

 Nov. 30 San Francisco Chronicle article Dollar stores are expanding internationally, fueled by consumers’ desire to save money. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/11/30/DDAJ1LV2D5.DTL . “Dollar stores, long the province of those looking to get the best bang for their buck, are gaining, new luster as Americans look to stretch their paychecks.” . “It’s a lot cheaper than shopping at grocery stores.” . “The rapidly expanding Japanese chain, , which has cornered the 100 yen market.” . “There are nearly a dozen outlets around the Bay Area.”

 Dec. 6 About.com blog post Food items are comprising a larger portion of retailers’ floors, as evidenced by Dollar General’s expanded grocery section and Wal-Mart’s new urban, grocery-oriented store offering. http://foodbeverage.about.com/b/2011/12/07/dollar-general-market-competing-with-walmart-express.htm . “People are buying fresh foods at Dollar General Markets, the grocery concept launched by Dollar General stores last year. According to an article in supermarket news, Dollar General Markets generate average sales of $4 million to $5 million per unit, vs. $1.4 million at the traditional Dollar General Stores.” . “Dollar General in a press release announced plans to open approximately 40 Dollar General Market stores for fiscal 2012. That is small potatoes in the $500 Billion retail food sector but it is a telling sign of what is to come in the small footprint retail food sector.”

 Dec. 10 Dayton Daily News article Dollar stores have improved their locations and shopping convenience, resulting in more store visits from new and repeat customers. http://www.daytondailynews.com/business/dollar-stores-win-customers-with-more-food-better-sites-1297215.html . “Dollar stores are a growing force in discount retailing, a new study shows.” . “The top four dollar-store companies now operate 21,500 stores in the U.S. And dollar stores are popping up in increasingly better locations as landlords become more enamored with their ability to draw people . “Dollar stores also have upgraded their appearance and merchandise presentation, making them more attractive to broader range of consumers.” . “In recent years dollar stores have revitalized their brands ... freshened up their images.”

Next Steps Blueshift’s next report on dollar stores will determine if these companies have maintained high margins and assess their relationships with and prices from suppliers and Chinese manufacturers. We will focus on customer traffic and purchasing habits, as well as competition from big-box retailers, including Wal-Mart’s Express locations. Finally, we will gauge the outcome of dollar stores’ expanded grocery sections.

Additional research by Cheryl Meyer, Lindsay Gadsby, Tina Strasser, Erica Franklin and Jacqueline Fox

The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any and all of the subject securities and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific recommendations or views in this report. The Author does not own securities in any of the aforementioned companies.

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OTA Financial Group LP has a membership interest in Blueshift Research LLC. OTA LLC, an SEC registered broker dealer subsidiary of OTA Financial Group LP, has both market making and proprietary trading operations on several exchanges and alternative trading systems. The affiliated companies of the OTA Financial Group LP, including OTA LLC, its principals, employees or clients may have an interest in the securities discussed herein, in securities of other issuers in other industries, may provide bids and offers of the subject companies and may act as principal in connection with such transactions. Craig Gordon, the founder of Blueshift, has an investment in OTA Financial Group LP. © 2011 Blueshift Research LLC. All rights reserved. This transmission was produced for the exclusive use of Blueshift Research LLC, and may not be reproduced or relied upon, in whole or in part, without Blueshift’s written consent. The information herein is not intended to be a complete analysis of every material fact in respect to any company or industry discussed. Blueshift Research is a trademarks owned by Blueshift Research LLC.

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