Dollar & Varriety Stores in the US

WWW.IBISWORLD.COM Dollar & Variety Stores in the US September 2013 1

IBISWorld Industry Report 45299Dollar & Variety Stores in the USSeptember 2013 Natalie Everett

Top dollar: Thrifty consumers will enable growth for dollar stores, amid rising competition

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance4 Executive Summary

4 Key External Drivers

6 Current Performance

8 Industry Outlook

11 Industry Life Cycle

13 Products & Markets13 Supply Chain

13 Products & Services

14 Demand Determinants

15 Major Markets

17 International Trade

18 Business Locations

21 Competitive Landscape21 Market Share Concentration

21 Key Success Factors

21 Cost Structure Benchmarks

23 Basis of Competition

24 Barriers to Entry

25 Industry Globalization

26 Major Companies26 Dollar General Corporation

27 Family Dollar Stores Inc.

28 Dollar Tree Stores Inc.

29 Big Lots Inc.

32 Operating Conditions32 Capital Intensity

33 Technology & Systems

33 Revenue Volatility

34 Regulation & Policy

34 Industry Assistance

35 Key Statistics35 Industry Data

35 Annual Change

35 Key Ratios

36 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]


This industry retails general merchandise such as apparel, automotive parts, dry goods, hardware, groceries and home furnishings. Typically, industry operators

retail these goods at discounted prices. The industry does not include department stores, warehouse clubs or grocery stores.

The primary activities of this industry are

Retailing apparel at discount prices

Retailing food at discount prices

Retailing furniture at discount prices

Retailing home goods at discount prices

45211 Department Stores in the USOperators in this industry sell a wide range of products, which include apparel, furniture, appliances, hardware and cosmetics. Merchandise lines are normally arranged in separate departments.

45291 Warehouse Clubs & Supercenters in the USOperating via large stores, warehouse clubs, superstores and supercenters retail groceries as well as apparel, furniture and appliances.

45331 Used Goods Stores in the USOperators in this industry retail general lines of used merchandise, antiques and secondhand goods.

45411a E-Commerce & Online Auctions in the USOperators in this industry retail merchandise via the internet. The industry is differentiated by the medium in which retail is conducted.

45411b Mail Order in the USOperators in this industry retail goods via catalogs or television programs.

Industry Definition

Main Activities

Similar Industries

Additional Resources

About this Industry

For additional information on this industry

www.apparelandfootwear.org American Apparel and Footwear Association

www.nrf.com National Retail Federation

www.census.gov US Census Bureau

The major products and services in this industry are

Apparel and accessories

Consumables

Household products

Seasonal and other


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Per capita disposable income

SOURCE: WWW.IBISWORLD.COM

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Revenue Employment

Revenue vs. employment growth

Products and services segmentation (2013)

63.4%Consumables

14.3%Household products

14.1%Seasonal and other

8.2%Apparel and accessories


Key Statistics Snapshot

Industry at a GlanceDollar & Variety Stores in 2013

Industry Structure Life Cycle Stage MatureRevenue Volatility Low

Capital Intensity Medium

Industry Assistance None

Concentration Level Medium

Regulation Level Light

Technology Change Low

Barriers to Entry Medium

Industry Globalization Low

Competition Level Medium

Revenue

$59.8bnProfit

$4.2bnWages

$5.6bnBusinesses

10,703

Annual Growth 13-18

2.2%Annual Growth 08-13

4.8%

Key External DriversPer capita disposable incomePoverty rateExternal competition for the Dollar Stores industryNational unemployment ratePopulationTime spent on leisure and sports

Market ShareDollar General Corporation 29.4%Family Dollar Stores Inc. 17.0%Dollar Tree Stores Inc. 13.4%Big Lots Inc. 9.1%

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FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 35



Key External Drivers Per capita disposable incomePer capita disposable income is an important consideration for households, since it can be spent or saved. During periods of low disposable income, households often forgo quality products in favor of value products, leading to higher demand for dollar and variety stores products. Conversely, high disposable income increases the propensity of households to freely spend on high-quality, more expensive products, causing industry demand to fall.

Per capita disposable income is expected to increase slowly in 2013.

Poverty rateThis industry attracts low-income households, including those below the poverty line. These households have limited income to spend on discretionary goods. In fact, about 24.0% of the industrys customers have an annual gross income of less than $20,000, and about 55.0% have incomes of less than $40,000, according to Nielsens 2010

Executive Summary

The Dollar and Variety Stores industry is one of the fastest-growing industries in the retail sector. IBISWorld estimates that revenue will increase at an average annual rate of 4.8% to $59.8 billion in the five years to 2013. The industry has successfully passed lower prices, on a wide range of merchandise, down to consumers, enabling growth. During the recession, households began to pinch pennies with both consumer sentiment and disposable income falling. As a result, the industry has attracted new value-

focused, middle-income consumers who have not traditionally shopped at dollar and variety stores. From 2012 to 2013, revenue is expected to grow 3.8%.

With strong, rising sales, the industry has had rapid expansion in the five years to 2013. In particular, the industrys major players, which account for about 69.0% of the market share, have established new stores to capture a larger share of consumers dollars. As such, the number of industry establishments is estimated to increase at an average annual rate of 2.6% to 39,923 in the five years to 2013.

While depressed spending conditions have brought in new customers looking for value-priced food and sundries, households are reducing spending on discretionary items. Consumables generally have lower prices compared with nonconsumables, so average industry profitability has dropped slightly during the past five years. IBISWorld estimates that industry profit will amount to 7.1% of revenue in 2013, down slightly from 7.4% in 2008.

In the five years to 2018, industry revenue is expected to increase at an average annual rate of 2.2% to $66.6 billion, mainly supported by low-income households (the industrys largest market). Further, as a result of the recession, consumers in higher income brackets became more price-conscious, providing additional support to the industry. However, as the economic recovery gains traction, a portion of higher-income consumers will likely reduce their shopping at dollar and variety stores in favor of their prerecession habits of visiting discount department stores. Furthermore, increasing external competition from large-format stores, like Walmart, is expected to limit the industrys growth over the five years to 2018.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Price-conscious consumers will fuel demand, though improved incomes will cut into gains


Industry Performance

Key External Driverscontinued

Homescan data. Consequently, a rise in the number of households below the poverty line will boost demand for dollar and variety stores. The poverty rate is expected to decline in 2013.

External competition for the Dollar Stores industryFood and household essentials supplied by this industry compete with those offered by large-format retailers such as Walmart and discount department stores such as Costco. This competition exists because these other retailers typically offer higher-quality products, and discount department stores offer a wider range of general merchandise at discounted prices. External competition for the Dollar Stores industry is expected to rise in 2013.

National unemployment rateThe unemployment rate is positively related to demand for industry products. When unemployment rises, consumers will likely pinch pennies and shop at dollar and variety stores. The rise in unemployment caused by the Great Recession led to high demand for this industry during the past five years, but

the national employment rate is expected to decrease significantly in 2013, posing a potential threat to the industry.

PopulationPopulation growth is an important component of industry growth. As the population increases, so does the number of potential industry customers. Additionally, population growth in specific regions is an important indicator of future establishment growth, as the number of stores is generally related to an areas population. Population is expected to increase slowly during 2013.

Time spent on leisure and sportsA decrease in time spent on leisure and sports reflects a busier lifestyle, which heightens demand for convenience, and in turn, demand for dollar and variety stores. Industry operators have dodged some competition from discount department stores and large-format retailers by establishing many stores in urban and rural areas, capturing the dollars of time-poor consumers. Time spent on leisure and sports is expected to decrease slowly during 2013, creating a potential opportunity for the industry.

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Current Performance

The Dollar and Variety Stores industry has thrived during the five years to 2013, largely because of the recession. During this period, unemployment soared, disposable income dwindled and consumer confidence plummeted, causing many frugal households to turn to dollar and variety stores for merchandise at discounted prices. Because the industry is countercyclical, these factors have significantly bolstered industry demand; revenue is estimated to grow at an average of 4.8% annually to $59.8 billion during the five years to 2013. Nevertheless, falling disposable income has led households to cut back spending on higher-margin discretionary goods, like

toys, and has redirected their expenditures toward lower-margin daily consumables, like food. As a result, the industrys profit margin has fallen during the five-year period. In addition, dollar and variety stores have faced strong competition from large-format retail stores and discount department stores across the country, which has bogged down sales growth.

Slumping economy aids industry

Industry demand relies on unemployment, per capita disposable income and consumer confidence. Consumers tend to spend freely on high-quality goods when the economic outlook is strong, national unemployment is low and households have sufficient income. However, these healthy economic trends can impede demand for dollar and variety store products. The opposite is true when unemployment is high and consumers disposable income shrinks, as was the case in the past five years. In 2009, unemployment soared to about 9.3%, and per capita disposable income fell for the first time in two decades, causing industry revenue to grow 2.8% in 2009 and 9.5% in 2010. This growth mainly occurred because of greater acceptance; households that traditionally shopped at department stores and specialty shops began shopping at dollar and variety

stores to save money. To this end, Dollar General, the largest industry player, stated in its annual report that its stores attracted first-time customers who saw the potential savings and value in dollar stores during tough economic times.

According to the Bureau of Labor Statistics, unemployment peaked in January 2010, reaching a high of 10.6%. Since then, it has fallen, but at a very slow rate; unemployment averaged 9.6% in 2010, 9.1% in 2011 and 8.1% in 2012. With heightened unemployment, there has been limited disposable income growth and low consumer confidence. Consequently, cautious consumers continued visiting dollar and variety stores throughout the recession; however, as the economy has gained traction, fewer households are expected to shop at dollar stores, resulting in an estimated lower-growth rate of 3.8% in 2013.

As a result of the recession, many consumers began shopping at dollar stores to save money



Rising competition In the five years to 2013, the industry faced strong competition from large-format retailers like Walmart and discount department stores like Costco, which often sell similar or higher-quality goods than those offered by dollar and variety stores. In particular, Walmart has been a major threat to the industry because it provides various competing lines of goods (e.g. groceries), as well as a large selection of goods for customers to choose from; it also has a national scale, which allows it to offer heavily discounted prices. As such, Walmarts rapidly growing revenue has increased its competitiveness and eroded industry sales.

Nonetheless, industry players have been able to fend off some competition by adopting different strategies. Dollar and variety stores have reduced overhead costs by keeping bulk purchasing low and selling items individually, allowing for

greater cost savings per item and lowering the need for inventory space. Industry firms capitalized on this space-saving tactic by obtaining small, cheap real estate in urban areas (where Walmart has a low presence) and in sparsely populated areas (which are often neglected by other large-scale retailers). However, Walmart will soon challenge this strategy. The discount giant has announced plans to open additional urban stores in 2013 to capture a larger consumer base. They also plan on introducing smaller packaged goods, which will improve price perception and undercut dollar and variety stores. These changes are expected to heighten direct competition between Walmart and industry operators.

Changing buying patterns

As the recession increased visits to dollar and variety stores, it also caused consumers to reduce spending on discretionary items such as small electronics and apparel. Instead, consumers have increasingly purchased daily consumables such as food, paper products and cleaning supplies at dollar stores. As a result, operators have increasingly focused on consumable products. For instance, Dollar General added 700 low-price, private-label brands for consumables and fresh produce in some stores. Another major company, Dollar Tree, introduced frozen and refrigerated goods. Consequently, sales of consumables as a percent of industry

revenue rose from 57.3% in 2008 to 63.4% in 2013.

This shift in consumer shopping patterns has adversely affected profitability. Consumables typically have higher purchasing costs because they are often sourced domestically. Furthermore, because operators compete for the lowest prices, with many of them offering all items for one dollar, they are limited in their ability to raise price points and pass down additional costs to end customers. Consequently, the growing popularity of consumables has caused profit margins for dollar and variety stores to fall. IBISWorld estimates that margins will fall to about 7.1% of net sales in 2013, slightly down from 7.4% in 2008.

Stores are able to remain competitive by opening small stores in urban areas



Industry Outlook

In the five years to 2018, IBISWorld forecasts revenue for the Dollar and Variety Stores industry to grow at an annualized rate of 2.2% to $66.6 billion. The industry is expected to experience steady demand throughout the period, driven by low-income consumers who continue to seek discounts. However, improving economic conditions will encourage consumers to seek out higher-quality goods, leading some revenue to flow into department stores and large-format retailers, rather than into dollar and variety stores. Furthermore, competition, especially from Walmart, is expected to increase, placing a cap on the industrys growth potential. IBISWorld projects that revenue will increase 2.2% from 2013 to 2014, reflecting a lower growth rate than in the five years to 2013.

Low-income households primarily drive demand for the Dollar and Variety Stores industry, since they are the main consumers of industry products. According to Nielsens 2010 Homescan data (latest data available), about 55.0% of the industrys customers have an annual gross income of less than $40,000, and about 24.0% have an annual gross income of less than $20,000. These low-income consumers are drawn to industry operators by low

price points, since products sold by dollar and variety stores are typically priced from one to $10. In the five years to 2018, IBISWorld projects that the percentage of the US population below the poverty line will decline slightly, from 14.9% in 2013 to 13.5% in 2018, as the economy improves. Despite this decline, the remaining low-income households will continue to steadily drive sales, contributing to revenue growth during the period. Also, a portion of the wave of higher-income consumers who frequent dollar and variety stores will remain customers even as disposable income rises, further driving industry growth.

Expanding industry The Dollar and Variety Stores industry has expanded rapidly as opportunities for capturing more customers have increased. In particular, the number of establishments is expected to increase at an average annual rate of 2.6% in the five years to 2013, to reach 39,923. This increase in establishments has led to a need for new personnel over the

five-year period. IBISWorld estimates the number of employees to rise at an average of 1.0% annually, to 313,832 workers in 2013. With a rising number of employees, wages are also set to increase. In the five-year period, total wages are expected to increase at an average annual rate of 3.6% to $5.6 billion.

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Rising competition During the five-year period, competition from discount department stores is expected to intensify. Traditionally, dollar and variety stores have avoided competition from these stores by providing lower-priced products and using small store sizes that add convenience for shoppers. Further, smaller stores mean that dollar and variety stores can obtain cheaper real estate, allowing them to expand rapidly and enter untapped markets like inner cities and rural areas. However, Walmart introduced smaller-sized stores with lower-priced products in 2011 to improve price perceptions. Walmart intends to continue this trend, with the introduction of its smaller Walmart Express stores in 2012 and an

increasing number of its Neighborhood Market grocers, further challenging the industry. This change will strip dollar stores of most of their competitive advantage, providing Walmart with a competitive edge because of its broad range of products, including higher-quality goods, and its ability to provide the convenience of one-stop shopping. This strategy will likely allow Walmart to capture greater levels of consumer spending, limiting industry growth.

Improving economy In the previous five-year period, the industry achieved growth because the number of middle-class customers who shopped at dollar and variety stores increased as more consumers looked for ways to save money. In the five years to 2018, as the economic recovery accelerates, unemployment is anticipated to slowly return to prerecession levels, and some consumers will also return to their prerecession habits. Consumer sentiment and disposable income are both expected to increase during this period, as well. As consumers find themselves with heavier wallets, some middle-class households will increase their spending on high-quality, more expensive items. These renewed purchases will slowly move revenue from the Dollar and Variety Stores industry toward department stores and large-format retailers, since they traditionally provide higher-quality products and superior customer service.

While rising disposable income will cause the industry to lose some customers, this trend is also expected to improve profit margins. During the recession, many stores experienced a shift in purchasing patterns, as households of all incomes cut down on non-necessity items and purchased more consumables (with low profit margins). However, as disposable income rises, households will likely increase spending on nonconsumables like clothing and home products. This factor will be especially true for low-income households, since these families are often unable to afford higher prices at specialty shops and large-format retailers. Higher margins of nonconsumables will bolster industry profitability over the five years to 2018. IBISWorld projects that profit margins will increase from 7.1% of revenue in 2013 to 8.0% in 2018.

As Walmart starts to offer smaller products in urban areas, competition will increase



Industry expansion Even with rising competition, revenue and profit margins are forecast to rise for industry operators. Dollar and variety stores will likely expand to take on increased demand. Consequently, the number of establishments is expected to increase at an average annual rate of 1.3% to 42,580 in the five years to 2018. With a rising number of stores, employment is

also expected to grow by an average of 0.5% per year over the same period. Because the number of establishments is forecast to rise at a faster rate than employment, employees will be expected to take on more responsibility. As such, wages are forecast to rise faster than employment numbers, at 2.9% per year on average to $6.5 billion in 2018.


Industry PerformanceThe number of enterprises is expected to increase, heightening competitionThe industry is characterized by a stable market

The use of technology is limited and starting to slow

Life Cycle Stage


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DeclineShrinking economicimportance

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

MaturityCompany consolidation;level of economic importance stable

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Mature Industry

Revenue grows at same pace as economyCompany numbers stabilize; M&A stageEstablished technology & processesTotal market acceptance of product & brandRationalization of low margin products & brands

Department StoresSporting Goods Wholesaling

Warehouse Clubs & Supercenters

Toy & Craft Supplies WholesalingUsed Goods Stores

Dollar & Variety Stores



Industry Life Cycle The Dollar and Variety Stores industry is in the mature stage of its life cycle, despite the temporary growth that it experienced during the recession. During the 10 years to 2018, industry value added, which measures the industrys contribution to GDP, is estimated to increase at an average annual rate of 3.2%. Dollar and variety stores experienced a small amount growth in the five years to 2013, but this growth is set to taper off in the next five years. In comparison, domestic GDP is anticipated to rise an average of 2.1% annually during the same period. The trends of industry consolidation, a stable buyer market and slowing technology changes all depict the characteristics of a mature industry.

In the 10 years to 2018, the number of enterprises is expected to increase only slightly at an annualized 0.1%. Growth of enterprises to 2012 was primarily in line with the booming industry; as revenue rose, supported by households with lower income, new entrants entered the industry to capture some of this growth. However, in the five years to 2018, the number of new entrants is expected to decline at an average of 1.1% annually due to rising competition from large-format retailers. As the economic recovery gains traction, consumers with higher discretionary income will slowly seek out higher-quality merchandise, leading to falling demand for cheap goods sold by industry operators.

Consequently, businesses are expected make more mergers and acquisitions or exit the industry.

The industry has an established buyer market. Households in the lowest income quintile (i.e. below the poverty line) comprise the industrys core buyers, since these households have limited disposable income. These consumers utilize dollar and variety stores to save cash on household goods; however, the industry experienced temporary growth in demand from 2009 to 2011 from outside of this quintile. As the national unemployment rate rose during these years, many jobless Americans experienced a decrease in disposable income and turned to industry stores for cheaper goods. The number of these temporary buyers is expected to slowly decrease during the next five years as the economy recovers. By the end of 2018, the industrys main buyers will return to their prerecession composition of mainly the lowest income quintile.

The use of technology has been limited to the introduction and implementation of point-of-sale systems. While these systems have enabled operators to increase store efficiency and better manage inventory in the five years to 2013, further changes in technology are not expected in five years to 2018. This slowdown of technology reflects an industry in a mature stage of its life cycle.

This industry is Mature


Products & Services The Dollar and Variety Stores industry offers a range of general merchandise, which can be separated into four groups: consumables, home products, apparel and other miscellaneous goods. In the five years to 2013, the product market for the industry has experienced considerable change, primarily due to the economic downturn and a shift in consumer spending patterns.

ConsumablesStagnant per capita disposable income and rising unemployment have led to a severe slump in American household sentiment in the five years to 2013. Following the economic downturn, accelerated job losses have halted discretionary spending by households. Instead, households have focused spending on consumables like groceries, paper products, cleaning supplies, health and beauty aids and pet food. This trend has particularly benefited

the industrys consumables segment, as food aisle in dollar stores have become more popular. In 2013, this segment is estimated to account for about 63.4% of industry revenue, whereas in 2008, this category represented about 57.3% of sales. As consumers become equipped with higher disposable income in the five years to 2018, they will increasingly purchase nonconsumables, ultimately growing that product segment. However, some consumers may reduce their spending on consumables at dollar stores, returning instead to their prerecession consumer habits of shopping at conventional grocers. As a result, this segment is forecast to account for a smaller share of industry revenue in 2018.

Household productsProducts in this segment include various durable goods used at home, such as

Products & MarketsSupply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

99 Consumers in the US Low- to middle-income earning households form the dominant consumer group for dollar and variety stores in the United States.

KEY SELLING INDUSTRIES

42391 Sporting Goods Wholesaling in the US This industry supplies sporting goods and accessories to dollar and variety stores.

42392 Toy & Craft Supplies Wholesaling in the US This industry supplies games, toys, fireworks, playing cards, hobby goods and other related supplies to dollar and variety stores.

42421 Drug, Cosmetic & Toiletry Wholesaling in the US This industry supplies beauty products and toiletries to dollar and variety stores.

42432 Mens & Boys Apparel Wholesaling in the US This industry supplies mens and boys clothing and accessories to dollar and variety stores.

42433 Womens & Childrens Apparel Wholesaling in the US This industry supplies womens, childrens, infants and unisex clothing and accessories to dollar and variety stores.

42441 Grocery Wholesaling in the US This industry supplies a general line of groceries to dollar and variety stores.

42449 Soft Drink, Baked Goods & Other Grocery Wholesaling in the US This industry supplies soft drinks, baked goods and other groceries (e.g. snacks and coffee) to dollar and variety stores.

Supply Chain


Products & Markets

DemandDeterminants

Because of the inexpensive nature of products offered by the Dollar and Variety Stores industry, demand is largely countercyclical, increasing as

economic conditions deteriorate. For instance, a higher national unemployment rate, boosts demand for industry goods because jobless

Products & Servicescontinued

kitchen supplies, cookware, light bulbs and small appliances. Declining disposable income during the recession caused households to cut back on unnecessary spending, leading consumers to hold off on replacing cookware and small appliances. This caused the share of home products to decline as a percentage of revenue. In 2013, this segment is estimated to represent 14.3% of revenue, compared to 15.5% of revenue in 2008; further, it is forecast to fall marginally to 14.0% in 2018.

Apparel and accessoriesThis segment, which includes clothes, shoes and accessories for women, men and children, is estimated to account for 8.2% of sales in 2013. During the past five years, this segments share of revenue has declined as consumers cut back on discretionary spending. Furthermore, this segment has faced high competition from discount

department stores such as Walmart and Target, offering slightly higher-quality clothing and trendier apparel at discounted prices. As consumers become more confident with the economy, it is estimated that they will buy more discretionary products, including apparel. As a result, this segment is forecast to account for a larger share of industry revenue in 2018 than it will in 2013.

Seasonal and otherOther miscellaneous goods sold by this industry include seasonal decorations, small electronics, greeting cards, gardening products, auto supplies and toys. Poor economic conditions took a toll on this segment as well, with stagnant disposable income leading to decreased consumption of these products. In 2013, this segment is expected to account for 14.1% of total sales, down from 2008.

Products and services segmentation (2013)

Total $59.8bn

63.4%Consumables

14.3%Household products

14.1%Seasonal and other

8.2%Apparel and accessories



Products & Markets

Major Markets According to data from the US Census Bureau, households dominate this industrys market, accounting for an estimated 95.0% of revenue. Within the household segment, there are five main markets separated by income: consumers earning less than $30,000, consumers that earn $30,000 to $49,999, and consumers that earn more than $50,000. Since goods sold by dollar and variety stores are generally inexpensive, the market distribution is skewed toward those with lower incomes.

Penny-pinching consumersConsumers who earn less than $30,000 will make up the largest market in 2013, representing about half of industry revenue. The industry retails a wide range of products at lower prices than supermarkets and discount department stores; as such, operators have capitalized on this frugal market. In the five years to 2013, however, this segments share of revenue has declined in line with the economic downturn. As consumers in this category faced lower disposable incomes due to high unemployment, they have been forced to

DemandDeterminantscontinued

consumers have little money for discretionary purchases and want to save money on necessities like food and sundries. Further, the poverty rate is a reliable indicator of this industrys success because a rise in low-income households is highly correlated with increased industry revenue. This was exacerbated during the aftermath of the recession, especially in 2010, as dollar stores increased food offerings in response to growing acceptance because of low disposable incomes.

Demand for discretionary products sold by operators, such as small appliances and electronics, is generally procyclical, but to a less reliable degree. As the economy recovers, the national unemployment rate will fall, resulting in higher household disposable incomes. However, rather than increasing the amount spent at dollar stores, this rise in disposable income results in some consumers returning to their prerecession habits, reducing the frequency of their visits to dollar stores. Ultimately, this has a negative effect on revenue.

Industry demand is subject to external competition, especially from discount department stores such as Walmart and

Target. There is little differentiation between products sold by industry operators and those offered by external competitors as they both retail a general line of merchandise that includes national brands and private-label brands at discounted prices. Therefore, when these discount department stores offer lower prices with various price promotions, consumer spending can shift away from dollar and variety stores. Also, discount department stores generally offer a broader range of products, providing customers with a larger selection of items.

The need for convenience in the United States is another demand determinant in the Dollar and Variety Stores industry. Operators aim to provide consumers with a basic store layout that helps them locate and make purchases in the least amount of time. A location that is easy to access and typically remote from alternative food and merchandise retailers is also essential. Time-sensitive shoppers shop at these stores for location convenience, extended operating hours, one-stop shopping, grab-and-go food service, variety of merchandise and fast transactions.


Products & Markets

Major Marketscontinued

cut back on discretionary spending. These cutbacks include lower spending at dollar and variety stores (e.g. spending on small appliances, electronics and seasonal decorations sold by industry operators). Instead, consumers in this market have focused their expenditures on daily consumables, such as food, snacks, paper products and cleaning supplies.

In the five years to 2018, this segments share of revenue is expected to further decline. According to the New York Post, Walmart is expected to introduce more products in smaller units that have lower prices. Consequently, this activity will likely allow the retail giant to capture more of this segments dollar, leading to lower market share for the Dollar and Variety Stores industry.

Middle-class consumersConsumers that earn $30,000 to $49,999 are estimated to make up the second-largest market in 2013, accounting for 30.0% of total industry revenue. In the past five years, this segments share of revenue has increased as more middle-class customers began shopping at dollar and variety stores to take advantage of discounted prices. To this end, Dollar General (a major player

in this industry) stated in its 2009 annual report that it had increasingly attracted customers who had not traditionally shopped in its stores.

As the economy improves, consumers in this market will likely demand higher-quality goods as they become equipped with higher disposable income. Consequently, this group is expected to give more of its business to large-format retailers and specialty stores that operate outside of this industry in the five years to 2018, creating a decline in this segments share of the market. Even still, this segments share will still be higher than it was in 2008.

A large part of the reasoning behind middle-class consumers not frequenting discount and dollar stores is because of a perceived stigma attached to them. With the widespread effects of the recession, some of the negative sentiment toward these stores diminished. In addition, industry firms are giving stores facelifts in the form of better lighting, wider product offerings and cleaner environments, in hopes to further reduce any perceived stigma. For example, major player Dollar General (along with several other operators) launched a fresh produce line that it expects will draw in additional customers. This will also allow

Major market segmentation (2013)

Total $59.8bn

51.5%Consumers with incomes from

$29,999 or under30.0%

Consumers with incomes from $30,000 to $49,999

13.5%Consumers with incomes from

$50,000 and over

5.0%Other



Products & Markets

International Trade Dollar and variety stores do not directly import and export merchandise; rather, they stock items that have been sourced from international locations. Analysis indicates that a significant share of goods stocked by operators is imported

from global markets, particularly China, taking advantage of low purchasing costs. The majority of imported merchandise is nonperishable, including clothing and small electronics.

Major Marketscontinued

dollar stores with fresh produce to increase competition with supermarkets.

Consumers with incomes over $50,000Consumers with incomes over $50,000 are less frequent shoppers of dollar and variety stores. Consumers in this segment typically place a higher emphasis on quality of merchandise, while operators typically focus on value-oriented products. Consequently, items purchased by this group are typically limited to products that offer similar quality to pricier options, such as gift bags or stationary, resulting in a low segment market share. In 2013, this market is estimated to account for only 13.5% of

industry revenue. IBISWorld expects that more consumers in this segment are shopping at dollar and variety stores than in 2008; however, this group did not shift to these stores as much as other segments did, so it will account for a smaller share of industry revenue in 2013.

OtherThe industry also sells to a number of other markets including businesses and building contractors; however, dollar and variety stores are not main suppliers to these markets. In 2013, about 5.0% of industry sales will be generated through this segment.


Products & Markets

Business Locations 2013

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CA5.8

NV0.4

OR0.6

WA0.9

MT0.2

NE0.7

MN1.4

IA1.2

OH4.4 VA

2.8

FL5.2

KS1.0

CO1.1

UT0.6

ID0.5

TX8.8

OK1.8

NC4.4

AK0.2

WY0.2

TN3.0

KY2.3

GA4.2

IL3.7

ME0.6

ND0.2

WI1.6 MI

3.7 PA4.4

WV1.2

SD0.3

NM0.7

AR1.7

MS2.3

AL3.1

SC2.7

LA2.5

HI0.2

IN2.5

NY6.1 5

67

8

321

4

9


Mid- Atlantic

Revenue (%)

Less than 3% 3% to less than 10% 10% to less than 20% 20% or more

Great Lakes


Products & Markets

Business Locations SoutheastIn 2013, IBISWorld estimates that the Southeast region will account for 35.9% of industry establishments. In most retail industries, the establishment share correlates closely with population; however, there are a number of divergent trends among some key regions for this industry. In 2013, data sourced from the US Census Bureau suggests that the Southeast region will account for 25.4% of the population. The 10 percentage point difference between revenue and population share is significant, reflecting the regions status of having the lowest average per capita personal income level in the United States. Because the industry targets households with lower incomes, many establishments are concentrated in this region. Louisiana, Mississippi and North Carolina have a higher concentration of industry establishments because they have some of the lowest average per capita income levels in the United States.

Great LakesIn 2013, IBISWorld estimates that the Great Lakes region will account for 15.8%

of industry establishments. The regions establishment share will correlate closely with a population share of 15.0%, though the region will have an average personal income level below that of the national average. About 28.0% of regional revenue will be derived from Ohio, which accounts for about 24.9% of the regional population.

Mid-AtlanticIn 2013, IBISWorld estimates that the Mid-Atlantic region will account for 14.3% of industry establishments. The region is expected to have a population share of about 15.6%, implying that there will be fewer establishments per capita relative to the national average. This characteristic can be attributed to the fact that this region has the second highest level of average per capita personal income in the United States, behind the New England region.

SouthwestIBISWorld estimates that the Southwest region will account for 13.0% of industry establishments in 2013. Similar to the Southeast region, there will be a higher

%

40

0

10

20

30So

uthw

est

West

Great Lakes

Mid-Atla

ntic

New

Eng

land

Plains

Rocky Mou

ntains

Southe

ast

RevenueEstablishments

Distribution of revenue vs. establishments


%

40

0

10

20

30

Southw

est

West

Great Lakes

Mid-Atla

ntic

New

Eng

land

Plains

Rocky Mou

ntains

Southe

ast

RevenuePopulation

Distribution of revenue vs. population


Products & Markets

Business Locationscontinued

number of establishments per capita relative to the national average, as this region is expected to make up 12.1% of the total population. Data from the Bureau of

Economic Analysis suggests that this region has the second lowest average per capita personal income, which is this industrys key market segment.


Cost Structure Benchmarks

ProfitProfit margins vary between dollar and variety stores. Since larger firms can generally achieve cost savings through bulk purchases, they are able to enjoy higher profit margins. In the five years to 2013, changes in consumer spending patterns have impaired average industry profitability. Following the economic downturn and the subsequent decline in disposable income, many households were forced to cut back on their discretionary spending. Instead, consumers focused their spending on

daily consumables such as food, snacks, paper products and cleaning supplies at dollar and variety stores. However, because consumables are typically sourced domestically and have higher purchasing costs, their rising popularity led to falling profit margins.

IBISWorld estimates that industry operators will obtain profit (earnings before interest and taxes) equivalent to 7.1% of revenue in 2013, slightly down from 7.4% in 2008. While the four major industry companies can achieve double-digit profit figures, smaller companies

Key Success Factors Ability to control stock on handOperators need to have stringent stock control measures. They must ensure that popular items are reordered, low selling stock is disposed of and sufficient product lines are available.

Effective product promotionSuccessful players will drive revenue growth through effective advertising and marketing initiatives.

Ensuring pricing policy is appropriateThe major basis of competition in this industry is price, so players must

ensure that pricing is competitive and represents value to consumers.

Use of high volume/low margin strategyThe industry sells items at low price points. Thus, enterprises need to sell a higher volume of products to generate above average industry returns.

Having a wide and expanding product rangeSuccessful operators offer goods that include home decor, food and sometimes even pharmaceuticals and tobacco products. Greater variety leads to higher sales, and depending on the product mix, higher profit.

Market Share Concentration

The Dollar and Variety Stores industry exhibits medium concentration, with the top four players accounting for 69.0% of revenue. While the industry is concentrated at the top, the remaining share of the market is mainly composed of small- to medium-size players catering to local demand. IBISWorld estimates that more than 10,742 firms will actively compete for the remaining 30.8% of the market in 2013.

Industry concentration has risen in the five years to 2013. In 2008, the same top

four players, Dollar General, Family Dollar Stores, Dollar Tree Stores and Big Lots, accounted for about 60.4% of the total revenue. This growth of major players has been driven mainly by rapid store expansion; on average, these players have expanded their locations at an average annual rate of 2.5% during the five-year period. By adding new stores, these major players have capitalized on urban and rural markets, which their large-scale competitors, such as Walmart, have difficulty reaching.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization

Level Concentration in this industry is Medium

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive Landscape

Cost Structure Benchmarkscontinued

typically do not have the company size necessary to leverage lower purchasing costs. As a result, the majority of smaller companies are expected to achieve profit margins in the 3.0% range in 2013. As consumers become armed with higher disposable income to spend on discretionary nonconsumables in the five years to 2018, profit will rise to about 8.0% of industry revenue.

Purchase costPurchase costs are expected to remain the single largest expense for the industry in 2013, accounting for about 69.2% of total sales. This factor is typical of retail industries, as stores must obtain enough stock to retail to consumers. This figure has decreased slightly in the past five years, from 72.2% of industry revenue in 2008, as the aforementioned popularity of consumables has led to lower purchasing costs. In addition, there has

been an increasing volume of inexpensive nonconsumable imports from Asian countries, particularly from China. Furthermore, abolishment of quotas on selected industry products, including apparel, in 2006 and 2008, has slowed the purchases growing share of revenue.

WagesThe Dollar and Variety Stores industry is moderately labor intensive, since it relies on employees for daily operations. Operations include customer service, maintenance of store displays and inventory checks. In addition, key industry players often employ seasonal buying teams to successfully buy off-season merchandise for future sales. IBISWorld estimates that in 2013, wage costs will account for 9.3% of revenue (down from 9.8% in 2008), marking the second-largest expense for the industry.

Major industry firms are hiring

Sector vs. Industry Costs

Profi t Wages Purchases Depreciation Marketing Rent & Utilities Other

Average Costs of all Industries in sector (2013)

Industry Costs (2013)

0

20

40

60

Perc

enta

ge o

f rev

enue

80

100 3.7

6.23.02.21.4

74.1

9.57.1

9.33.4 0.51.2

69.2

9.3




Basis of Competition Internal competitionPrice is the strongest basis for competition within the industry because these stores are known for their value offerings. Price has become more important in the five years to 2013, as the economic downturn led to less disposable income to spend on industry goods. Nevertheless, the perceived price of products, rather than actual savings on products, may be more important to industry operators because the industrys main market is composed of low-income households that do not have much

disposable income to spend. While a bulk-package of goods might provide higher savings and value, low-income consumers without much money will likely purchase a smaller package of the same product that has a lower price tag (and potentially less product per dollar).

Operators also compete on the basis of store location. Stores that are located near high-traffic will generate higher sales through added exposure. Also, locations near prominent shopping centers reduce the number of trips that consumers need to make on a shopping

Cost Structure Benchmarkscontinued

employees at a faster rate than smaller companies, in an effort to improve store experience. However, as a whole, industry revenue is expected to grow slower than wages in the five years to 2018, giving this segment a larger share.

Rent and utilitiesPlayers in this industry require a physical location in order to operate their business. As such, rent costs include leases paid on store premises. IBISWorld estimate that rent costs have experienced a modest rise in recent years due to rapid expansion of new stores. In fact, the top four players have added new stores at an average annual rate of 2.5% in the five years to 2013, in order to capture more of the consumers dollars. However, some stores like Dollar General have sought to lower operating costs by establishing stores in low-population communities where real estate and rent are cheaper. Furthermore, analysis suggests that rent costs have risen slower than revenue, leading to a decreasing share of revenue in the five years to 2013. As a result, rent and utilities costs are estimated to account for 3.4% of revenue in 2013, down from 3.7% in 2008. Similarly, in the five years to 2018, revenue is forecast to rise at a faster rate than the number of

establishments, giving rent and utilities a smaller share of industry revenue.

DepreciationDepreciation costs are estimated to make up 1.2% of industry revenue in 2013. Depreciable assets include computer inventory systems, cash registers and other point-of-sale computer systems. This cost is estimated to have remained relatively stable in the five years to 2013 and is forecast to remain flat during the five years to 2018 because stores do not have the need to replace assets or install new equipment.

OtherIndustry operators also incur a variety of other expenses, including administrative, insurance, security and advertising costs. While most of these costs remain unchanged, marketing and advertising have increased during the past five years. As the economic downturn provided an opportunity for industry operators, players have increasingly engaged in print, radio and television advertising to raise consumer awareness of brands and highlight low prices. In 2013, IBISWorld estimates that marketing costs will make up about 0.5% of industry revenue.

Level & Trend Competition in this industry is Medium and the trend is Steady



Barriers to Entry The industry has a medium level of concentration because of its market share concentration. The top four players account for an estimated 69.2% of the available market share in 2013. Therefore, prospective operators planning to enter this industry may encounter strong competition from incumbent firms. However, the dominance of players fluctuates depending on the region; as such, the barriers to entry vary, depending on where an operator plans to launch new stores.

Like most retailing industries, the majority of operational costs are devoted to the payment of wages rather than to expenditure on capital equipment such as fixtures and fittings. Despite this, operators planning to enter this industry must consider the capital requirements of establishing a new store or purchasing an existing location. IBISWorld estimates opening a new store ranges in cost from

$45,000 to $300,000, depending on the amount of startup inventory, the stores square footage and its location.

Product differentiation in this industry is low, subjecting this industry to external competition from discount department stores that also retail a general line of merchandise. This competition may be extremely difficult for new entrants to overcome, as national retailers have established relationships with suppliers to source goods at minimal costs.

Basis of Competitioncontinued

trip, leading to higher convenience for consumers and subsequently greater sales for operators.

External competitionAside from competing with other dollar and variety stores, industry operators also face competition from discount department stores, such as Walmart and Target. These stores generally offer the same or comparable items at discounted prices, directly competing with the value-oriented business model of dollar stores. In addition, discount department stores often provide a larger range of products,

giving consumers a better selection of goods to choose from and potentially providing a one-stop shop, eliminating the number of store visits per outing.

Dollar and variety stores also face competition from big-box retailers and specialty stores such as Costco. These retailers generally offer higher-quality alternatives for products sold by industry operators. Consequently, when disposable income is high and consumers are able to spend more freely on goods, these stores can attract consumers away from the industry.

Barriers to Entry checklist LevelCompetition MediumConcentration MediumLife Cycle Stage MatureCapital Intensity MediumTechnology Change LowRegulation & Policy LightIndustry Assistance None


Level & Trend Barriers to Entry in this industry are Medium and Steady



Industry Globalization

Globalization has remained relatively stable for the Dollar and Variety Stores industry in the five years to 2012. Historically, the industry has been characterized by a large number of small independent retail stores operating locally or regionally. Even for large players, international operations are limited to Canada. Domestically owned companies continue to dominate this industry.

However, in terms of international trade, globalization for this industry has been increasing due to the influx of cheap merchandise imported from Asian countries, particularly China. However, the majority of the products are still sourced from US manufacturers, keeping trade levels relatively low.

Level & Trend Globalization in this industry is Low and the trend is Steady


Player Performance Founded in Kentucky in 1939, Dollar General is the largest US discount variety chain by number of stores. Asset management firm Kohlberg Kravis Roberts & Co. (KKR) owns an 85.0% controlling share of this public company. As with other industry players, Dollar General offers a variety of general merchandise at heavily discounted prices. In addition to national brands, the company sells a broad selection of merchandise, including food, cleaning products and home decor. The companys products typically sell for $10 or less, and about 25.0% of the companys stock-keeping units are priced at one dollar or less. As of March 2013, Dollar General had 10,557 stores in 40 states, primarily in the Southeast, Southwest and Mid-Atlantic regions.

Because of the discounted nature of Dollar Generals products, the company competes with discount department stores, such as Walmart and Target. However, the company has adopted several strategies to differentiate its stores from some of this competition. For instance, Dollar Generals stores are generally small in size (each location averages 7,200 square feet), allowing them to have low operating costs. In 2012, the company relocated or remodeled 592 stores and plans to do the same with another 550 stores in 2013, focusing expansion efforts in areas with populations of fewer than 20,000 people. These areas remain mostly untouched by large-scale retailers, giving Dollar General a location advantage.

Financial performanceDollar General has performed well in the five years to 2013. The companys low-priced products attracted many new customers to its stores when consumer sentiment fell. The companys revenue grew at an average annual rate of 11.0% from 2008 to 2013. In 2013, IBISWorld estimates that company revenue will increase 9.9% to $17.6 billion.

The firms focus on value-conscious customers drove much of its growth during the period; as unemployment soared, consumers sought new ways to save, including shopping at dollar stores for household necessities, particularly food. Dollar General focused on adding coolers and freezers to its large-format stores during the recession, capitalizing on consumers restricted incomes. In 2008, same-store sales rose 9.0%, while consumables increased 14.7%. Same-store sales increased again in 2009 to 9.5%, with a 15.3% growth in the consumables category.

Net income is also expected to have skyrocketed during the five years to 2013, to an estimated $1.7 billion. This growth was mainly due to increased sales volume, enabling the firm to lower its average costs from vendors and improve margins. The companys expansion of private-label brands also contributed to this growth, allowing the company to effectively manage costs.

Major CompaniesDollar General Corporation | Family Dollar Stores Inc.Dollar Tree Stores Inc. | Big Lots Inc. | Other Companies

31.1%Other

Dollar General Corporation 29.4%

Family Dollar Stores Inc. 17.0%

Dollar Tree Stores Inc. 13.4%

Big Lots Inc. 9.1%


Major players(Market share)

Dollar General Corporation Market share: 29.4%


Major Companies

Player Performance Family Dollar Stores, first established in 1959, is the second largest discount retailer in America. Operating more than 7,800 stores in 45 states and the District of Columbia, the company sells a broad range of merchandise. The corporation mainly retails goods at prices ranging from less than one to $10. These products include household chemicals, paper products, health and beauty aids, candy, clothing, towels and linens.

Family Dollar Stores targets low- to middle-income families; about 56.0% of its customers earn an annual income of $40,000 or less, and about 25.0% earn $20,000 or less. The companys customers also tend to purchase in small

quantities, as the average customer transaction was about $10 in 2013.

Financial performanceFamily Dollar Stores benefited from the economic downturn, as many households with less disposable income turned to dollar stores during difficult financial times. As such, the companys revenue is expected to have increased at an average annual rate of 7.8% in the five years to 2013. IBISWorld estimates that the company generated a 9.0% revenue increase during 2013 to $10.2 billion, as cautious consumers continued shopping at dollar stores to save money.

Player Performancecontinued Dollar General Corporation fi nancial performance

YearRevenue

($ million) (% change)Net Income

($ million) (% change)

2008 10,457.7 10.1 580.5 135.9

2009 11,796.4 12.8 953.3 64.2

2010 13,035.0 10.5 1,274.1 33.7

2011 14,807.2 13.6 1,490.8 17.0

2012 16,022.1 8.2 1,655.3 11.0

2013* 17,611.1 9.9 1,733.1 4.7

*EstimateSOURCE: ANNUAL REPORT AND IBISWORLD

Family Dollar Stores Inc. fi nancial performance

Year*Revenue



2007-08 6,983.6 2.2 233.1 -4.0

2008-09 7,400.6 6.0 291.3 25.0

2009-10 7,866.7 6.3 358.1 22.9

2010-11 8,547.8 8.7 388.5 8.5

2011-12 9,331.0 9.2 688.1 77.1

2012-13** 10,175.4 9.0 670.9 -2.5

*Year end August; **EstimateSOURCE: ANNUAL REPORT AND IBISWORLD

Family Dollar Stores Inc. Market share: 17.0%


Major Companies

Player Performance Dollar Tree Stores revenue comes from a network of 4,351 stores under the names of Dollar Tree, Deal$ and Dollar Bills. The company is the largest discount variety store operator that primarily offers merchandise at the fixed price of $1, which sets the companys stores apart from other major players in the industry. However, in terms of products, there is little differentiation between Dollar Tree and other players. Stores retail a range of consumable merchandise such as candy, food, health and beauty care products, as well as durables and seasonal goods, such as apparel, toys and decorations all for one dollar. A small number of stores sell merchandise for more than a dollar, allowing the company to benefit from higher margins on certain merchandise.

Financial PerformanceIn the five years to 2013, Dollar Trees revenue is expected to have increased at an average annual rate of 11.6% to $8.0 billion. As with other value stores in the industry, this growth has been a result of poor economic conditions that attracted value-conscious customers. Company revenue is expected to have risen 8.5% in 2013 and grown 11.5% in 2012, largely due to the opening of more than 500 stores nationally. Dollar Tree has been opening stores regularly throughout the past five years. The company also attributes strong growth to a rollout of consumables, particularly frozen and refrigerated merchandise, to more of its stores. Company officials have said that the addition of these

Player Performancecontinued

The start of the recession in 2008 had a negative effect on this company. Revenue fell that year, as consumer confidence dropped dramatically. As a result, customers shifted interests from higher-margin discretionary goods to low-margin consumable merchandise. Family Dollar responded in subsequent years by offering more consumable merchandise, as consumers became increasingly interested in buying food at dollar stores to save money.

Family Dollar Stores has easily rebounded from its 2008 revenue decline, with ever-rising revenues. Profit, too, has blossomed, rising an average annual rate of 13.1% to $670.9 million in 2013. Initiatives that have proven successful for Family Dollar include the expansion of global sourcing, increased investment in private brands, a store renovation program and the continued expansion of consumables, including tobacco.

Dollar Tree Stores Inc. fi nancial performance

YearRevenue

($ million) (% change)Operating Income


2008 4,644.9 9.5 365.8 10.7

2009 5,231.2 12.6 512.8 40.2

2010 5,882.4 12.4 630.0 22.9

2011 6,630.5 12.7 782.1 24.1

2012 7,394.5 11.5 920.1 17.6

2013* 8,025.4 8.5 1,032.3 12.2


Dollar Tree Stores Inc. Market share: 13.4% Industry Brand Names Dollar Bills Dollar Express Only One Dollar Only $One


Major Companies

Player Performance Established in 1967, Big Lots is the largest closeout retailer in the nation; the company purchases merchandise resulting from production overruns, packing changes, discontinued product lines, liquidation or returns from various vendors and then retails them to end-customers at heavily discounted prices. As with other variety stores, Big Lots also sells a range of merchandise, such as food, home decor, appliances, video games, garden supplies and apparel. The company separates its products into six segments: consumables, furniture, home, play n wear, seasonal, and hardline and other. As of January 2012, the company operated 1,533 stores in two countries.

Because the company can acquire many national brand-name products and offer them at low prices, Big Lots appeals to low-income customers and price-sensitive, middle-class consumers. This factor has kept the companys sales afloat during the recession when consumers heavily cut back on discretionary spending. However, because the companys inventory

depends on closeout merchandise, products offered in its stores vary considerably. This factor has made the company much more susceptible to competition from discount department stores, such as Walmart and Target, which consistently offer brand-name products at low prices. To an extent, this trend has limited the companys growth in the five years to 2013.

Big Lots current strategy is to focus on improving three business elements: merchandising, real estate and cost structure. Regarding merchandising, the company improves value and quality while increasing the number of recognized brand names in its product offerings. In terms of real estate, the company expands its store locations, though this method fell by the wayside during the recession.

Financial performanceIn the five years to 2013, revenue is expected to have grown more modestly than its industry competition, at an average annual rate of 3.3%. Big Lots


foods increased the number of visits made by customers. Consequently, same-store sales increased 5.0% in 2010 and 7.2% in 2009. Net income

also rose $91.0 million in 2009 as a result of lower fuel and ocean freight costs, which considerably reduced the costs of inventory.

Big Lots Inc. fi nancial performance

YearRevenue

($ million) (% change)Operating Income


2008 4,645.3 -0.2 254.9 7.8

2009 4,726.7 1.8 325.0 27.5

2010 4,952.2 4.8 357.3 9.9

2011 5,202.3 5.0 345.6 -3.3

2012 5,400.1 3.8 298.5 -13.6

2013* 5,452.5 1.0 246.9 -17.3


Big Lots Inc. Market share: 9.1%


Major Companies

Other Companies While the industry is highly concentrated, with the four largest players accounting for 69.2% of industry revenue, the rest of the industry is characterized by a large number of small and privately-owned variety stores that typically cater to a local community or region. In 2012, it was estimated that there are about 10,746 companies in the industry, of which about 10,742 firms share 30.8% of industry revenue. Due to this fragmented nature, the majority of industry players do not have a significant share of the industry.

Freds Inc. Estimated market share: 3.5%

Freds is a chain of discount general merchandise stores. The company operates 679 general merchandise stores plus another 21 franchised stores

in 15 states, mostly in the Southeast. Freds offers brand-name products, company-brand products and off-brand products at discounted prices. The company differentiates itself from other industry players by including a pharmacy department in its stores; as of April 2013, the company had 325 full-service pharmacies operating inside stores. Further, the company is set apart from other industry players by its tobacco sales.

As with many other players, Freds has also posted positive growth in the five years to 2013. Revenue is estimated to have increased at an average annual rate of 1.9% in the five years to 2013 to total $2.0 billion. The retailer performed especially well in 2010 with a 3.0% increase in revenue and a 2.2% rise in comparable-store


has struggled to find its footing as its merchandise competes with products that can be readily found at comparable prices at discount department stores; it does not focus on products in the $10 or less price range as a majority of the industrys major players do. As a result, Big Lots did not see strong revenue gains during the recession like its dollar-store competitors. Revenue is expected to increase 1.0% to $5.5 billion

in 2013. Profit, meanwhile, has suffered, declining 0.6% to $246.9 million in 2013. Profit is expected to decline 17.3% in 2013 alone. This is partly due to the store suffering from reduced spending in its seasonal and hardlines & toys categories. This reduced spending is attributed to a cool spring that delayed spending on hot-weather products like lawn water toys and patio umbrellas.

Freds Inc. fi nancial performance

YearRevenue



2008 1,798.8 1.0 16.6 55.12009 1,788.1 -0.6 23.6 42.22010 1,841.8 3.0 29.6 25.42011 1,924.3 4.5 30.8 4.12012 1,983.6 3.1 32.5 5.52013* 1,980.1 -0.2 33.2 2.2

*EstimateSOURCE: ANNUAL REPORT


Major Companies

Other Companiescontinued

sales; this growth can be attributed to the companys long-term strategy to focus on its five core product categories: home, celebration goods, pet products, pharmacy, and paper and chemical products.

99 Cents Only Stores Estimated market share: 2.9%

Founded in 1982, 99 Cents Only Stores is the nations oldest chain of single-priced general retailers. The store primarily prices its merchandise at 99 cents or below. Today, the firm operates 275 retail stores, mostly in California with some stores in Texas, Arizona and

Nevada. In January 2012, 99 Cents Only Stores merged with Number Holdings Inc. and Number Merger Sub Inc.

In the five years to fiscal 2014, the company benefited considerably from the recession. As consumers facing low disposable income began looking for affordable, essential goods for their families, 99 Cents Only Stores became an attractive option. Consequently, revenue is estimated to have risen at an average annual rate of 6.8% during the five-year period. In fiscal 2014, the company is forecast to generate an estimated $1.8 billion in total sales.

99 Cents Only Stores fi nancial performance

Year* Revenue (% change) Net Income (% change)

2008-09 1,262.1 8.9 2.9 -71.02009-10 1,300.0 3.0 8.5 193.12010-11 1,314.2 1.1 60.4 610.62011-12 1,376.5 4.7 57.8 -4.32012-13 1,620.7 17.7 68.3 18.22013-14** 1753.9 8.2 73.9 8.2

*Year end March; **EstimateSOURCE: ANNUAL REPORT AND IBISWORLD


Capital Intensity IBISWorld estimates that the Dollar and Variety Stores industry has a medium-low level of capital intensity. This trend is similar to other retail industries, which are generally labor-intensive. In 2013, for every dollar spent on wages, about $0.13 is estimated to be allocated toward capital assets.

This category includes expenditure on physical assets required to operate in this industry. The level of capital expenditure is influenced by the size and number of stores an industry player operates. Examples of capital costs include the purchase of fixtures and fittings (fit-outs) for stores and point-of-sale systems. Expenditures on store fit-outs has remained fairly stable in recent years, and these projects are

mainly undertaken when a new enterprise enters the industry or when existing stores are refurbished.

Alternatively, expenditure on technological equipment (e.g. computer scanning cash registers) has experienced considerable growth during the past 10 to 15 years. In its early days, only larger players undertook such expenditures, as implementation costs were high. However, technological changes have simplified this equipment and made it more affordable to smaller industry players.

The cost of a new store for industry operators can be extensive and depends largely on the store size, the products it plans to stock and location. IBISWorld estimates that the total cost

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


Labo

r Int

ensi

veCapital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and Real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Department Stores

Sporting Goods WholesalingWarehouse Clubs & Supercenters

Toy & Craft Supplies WholesalingUsed Goods Stores


Level The level of capital intensity is Medium


Operating Conditions

Revenue Volatility Changes in consumer confidence in the economy, unemployment and per capita disposable income drive consumer spending on goods supplied by this industry. As a result, revenue volatility has been at a low level that is uncharacteristic of the retail sector.

Since the industry typically retails products with low prices, sales reach higher levels during tough economic times. Competition among industry operators and retailers such as discount department stores and big-box retailers

also influence revenue prospects for this industry. In recent years, the industry has benefitted considerably from the economic downturn. As high unemployment and low disposable income forced households to pinch pennies, demand for low-priced items supplied by this industry significantly increased. However, competition from discount department stores captured some of this skyrocketing demand. Discount department stores offer similar merchandise at discounted prices and

Technology& Systems

Most operators in the general retail sector have installed point-of-sale (POS) systems across their network of stores. POS systems maintain online records of all transactions and allow management to track performance by region, store and individual sales. From the information gathered, in-store inventories are automatically replenished (by the regional distribution centers in most cases). The data is also used to assist with product buying decisions. When this technology was first introduced, small businesses hesitated to implement POS systems due to the associated high costs and

installation prices. However, recent advances have made the standard POS system affordable even for the smallest of businesses.

Many of the larger industry participants have invested heavily in advanced POS systems throughout the past 10 years so that analysis of sales by store, product and transaction sizes, and transaction values can be conducted. This factor helps to determine an effective stock mix, which may differ for each store. This has implications in inventory levels, which in turn affect markdowns and margins on items sold.

Capital Intensitycontinued

of a new store typically ranges from $50,000 to $300,000.

On top of these capital expenses, there is also the cost of hiring employees. Duties undertaken by employees include customer service and advice, processing consumer purchases, arranging store layout and replenishing store shelves. Wage costs are influenced by the number of people employed, the relative wage rate and the companys trading hours. Unlike capital costs, which can vary, labor costs are an integral and annual expenditure incurred by industry players.

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit


Retail TradeEconomy

Level The level of Technology Change is Low

Level The level of Volatility is Low


Operating Conditions

Industry Assistance This industry is subject to a number of import tariff duties. For example, the tariff rate for apparel can range from 0.0% to 25.0%; footwear from 1.0% to 10%; glassware from 3.6% to 26.0%; tableware from 3.2% to 16.0%; sporting equipment and accessories from 0.3% to 5.6%; and hardware from 0.4% to 9.0%.

While tariffs apply to goods supplied by this industry, they do little

at the retail level. Retailers purchase goods from importers and wholesalers after the tariff has been applied. However, a change in the tariff of a particular good can determine where the good is purchased from and may also alter the purchase price. A decline in tariff rates may result in falling purchasing costs, which can be passed onto consumers. This factor allows retailers to remain competitive.

Regulation & Policy There are no industry-specific regulations that apply to dollar and variety stores; however, few regulations govern the retail sector. Regulations relevant to this sector are generally covered at the state level. States have enacted their own antitrust laws to ensure that the general public is provided with the best prices, quality and choice. Companies must

comply with the Fair Labor Standards Act and various state laws governing matters such as minimum wage, overtime and other working conditions. Store owners must also comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which generally requires that stores are accessible to customers with disabilities.

Revenue Volatilitycontinued

have effectively attracted some consumers away from the industry.

This has kept industry revenue from expanding more rapidly.


Volatility vs Growth

Reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualized revenue growth (%)30 10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level & Trend The level of Regulation is Light and the trend is Steady

Level & Trend The level of Industry Assistance is None and the trend is Steady


Key StatisticsRevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand


($)2004 45,273.9 8,574.4 31,787 10,517 291,595 -- -- 4,726.1 N/A 31,1842005 46,364.8 8,616.1 33,199 10,632 301,725 -- -- 4,675.1 N/A 31,3182006 47,039.6 8,647.5 33,535 10,275 305,104 -- -- 4,649.1 N/A 32,3032007 46,988.3 8,576.3 34,063 10,003 294,783 -- -- 4,582.3 N/A 32,7492008 47,287.4 8,764.3 35,031 10,050 298,615 -- -- 4,697.6 N/A 33,2292009 48,629.4 8,986.6 36,316 10,387 303,990 -- -- 4,901.7 N/A 32,0202010 53,265.4 9,568.6 37,235 10,596 307,638 -- -- 5,094.4 N/A 32,3352011 55,566.5 9,568.7 38,042 10,746 309,484 -- -- 5,258.3 N/A 32,5292012 57,644.7 10,211.1 39,089 10,746 311,960 -- -- 5,426.6 N/A 32,7882013 59,840.9 10,567.0 39,923 10,703 313,832 -- -- 5,600.2 N/A 32,8972014 61,127.5 10,853.0 40,691 10,629 315,715 -- -- 5,779.4 N/A 33,9172015 62,698.5 11,176.0 41,307 10,535 317,609 -- -- 5,972.0 N/A 34,9692016 64,034.0 11,472.5 41,639 10,380 318,562 -- -- 6,157.7 N/A 35,6812017 65,199.4 11,704.8 42,058 10,247 320,155 -- -- 6,293.2 N/A 36,4532018 66,605.6 11,985.4 42,580 10,133 321,788 -- -- 6,457.1 N/A 37,249Sector Rank 20/140 19/140 35/140 56/140 20/140 N/A N/A 22/140 N/A N/AEconomy Rank 148/1309 246/1309 177/1308 293/1308 122/1309 N/A N/A 255/1309 N/A N/A

IVA/Revenue (%)

Imports/ Demand

(%)

Exports/ Revenue

(%)

Revenue per Employee

($000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2004 18.94 N/A N/A 155.26 10.44 9.17 16,207.75 0.072005 18.58 N/A N/A 153.67 10.08 9.09 15,494.57 0.072006 18.38 N/A N/A 154.18 9.88 9.10 15,237.75 0.072007 18.25 N/A N/A 159.40 9.75 8.65 15,544.65 0.062008 18.53 N/A N/A 158.36 9.93 8.52 15,731.29 0.072009 18.48 N/A N/A 159.97 10.08 8.37 16,124.54 0.072010 17.96 N/A N/A 173.14 9.56 8.26 16,559.72 0.072011 17.22 N/A N/A 179.55 9.46 8.14 16,990.54 0.072012 17.71 N/A N/A 184.78 9.41 7.98 17,395.18 0.082013 17.66 N/A N/A 190.68 9.36 7.86 17,844.58 0.082014 17.75 N/A N/A 193.62 9.45 7.76 18,305.75 0.082015 17.82 N/A N/A 197.41 9.52 7.69 18,802.99 0.082016 17.92 N/A N/A 201.01 9.62 7.65 19,329.68 0.082017 17.95 N/A N/A 203.65 9.65 7.61 19,656.73 0.072018 17.99 N/A N/A 206.99 9.69 7.56 20,066.32 0.07Sector Rank 68/140 N/A N/A 81/140 89/140 32/140 109/140 19/140Economy Rank 1086/1309 N/A N/A 823/1309 1048/1309 849/1308 1196/1309 246/1309

Figures are inflation-adjusted 2013 dollars. Rank refers to 2013 data.

Revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)


(%)2005 2.4 0.5 4.4 1.1 3.5 N/A N/A -1.1 N/A 0.42006 1.5 0.4 1.0 -3.4 1.1 N/A N/A -0.6 N/A 3.12007 -0.1 -0.8 1.6 -2.6 -3.4 N/A N/A -1.4 N/A 1.42008 0.6 2.2 2.8 0.5 1.3 N/A N/A 2.5 N/A 1.52009 2.8 2.5 3.7 3.4 1.8 N/A N/A 4.3 N/A -3.62010 9.5 6.5 2.5 2.0 1.2 N/A N/A 3.9 N/A 1.02011 4.3 0.0 2.2 1.4 0.6 N/A N/A 3.2 N/A 0.62012 3.7 6.7 2.8 0.0 0.8 N/A N/A 3.2 N/A 0.82013 3.8 3.5 2.1 -0.4 0.6 N/A N/A 3.2 N/A 0.32014 2.2 2.7 1.9 -0.7 0.6 N/A N/A 3.2 N/A 3.12015 2.6 3.0 1.5 -0.9 0.6 N/A N/A 3.3 N/A 3.12016 2.1 2.7 0.8 -1.5 0.3 N/A N/A 3.1 N/A 2.02017 1.8 2.0 1.0 -1.3 0.5 N/A N/A 2.2 N/A 2.2

2018 2.2 2.4 1.2 -1.1 0.5 N/A N/A 2.6 N/A 2.2Sector Rank 62/140 75/140 66/140 112/140 111/140 N/A N/A 59/140 N/A N/AEconomy Rank 480/1309 592/1309 430/1308 920/1308 848/1309 N/A N/A 458/1309 N/A N/A

Annual Change

Key Ratios

Industry Data



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the real growth or decline in industry metrics. The inflation adjustments in IBISWorlds reports are made using the US Bureau of Economic Analysis implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then sub

Dollar & Varriety Stores in the US

Documents

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ibisworld industry report

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