Thursday, November 6, 2008

The Rise of the Super-Discounters

The Rise of the Super-Discounters

As the U.S. faces a serious economic downturn, many Americans are seeking out the cheapest possible option when buying necessities. Enter ultra-discounters like Dollar Tree (DLTR), 99 Cents Only (NDN), and Family Dollar Stores (FDO).

All three retail chains have seen their stock prices surge this year, a rare bright spot in a stock market beaten down by the financial crisis and recession worries.

Shares of Family Dollar Stores are up almost 32% so far in 2008, while shares of 99 Cents Only and Dollar Tree have both risen 37%.

Another downscale option, Wal-Mart Stores (WMT), has also prospered as consumer trade down from pricier retail options to discounters. Wal-Mart shares are up almost 14% in 2008.

Luring the Most Cost-Conscious

But a dollar-store customer is "not the same shopper as at Wal-Mart," which appeals to a broader, higher income demographic, says Standard & Poor's equity analyst Jason Asaeda. Family Dollar Stores, for example, describes its typical customer as a woman in her mid-40s, the head of her household, who earns less than $30,000 each year.

By focusing on products priced under at least $10, and in most cases under $1, dollar stores aim at the most value-conscious customers in the U.S.

As economic pain increases, the ranks of dollar store customers seem to be growing. "It's great for consumers who are becoming extremely cost-conscious," Asaeda says.

Not a Lot of Leeway

A rise in commodity costs this year threatened to hurt both discounters' profitability and their typical customers' available cash. Low-income discount shoppers typically spend a larger share of their income on gas, and rising prices at the pump meant less was left over for even basic necessities bought at dollar stores like shampoo and cleaning products.

Plus, higher fuel and commodity costs raised the chain's costs. With set price points like 99 cents, the stores can't easily raise prices.

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