Dollar stores are competing with major discount retailers like Wal-Mart. The surprising thing is that dollar stores are winning. Investors are cooling on the retail giant and the sluggish economy is making dollar stores an attractive destination. Dollar stores are stealing Wal-Mart shoppers and forcing Wal-Mart into the uncomfortable position of trying to innovate. What’s changed since their brilliant ascendancy to the top of the retail food chain?

The Budget Landscape is Shifting

One of the major factors is price and shifting demographics. As the recession has moved more former upscale shoppers into the budget bracket, they are foregoing Wal-Mart’s in favor of dollar stores. They prefer the product mix and atmosphere. Now that dollar stores are offering more national brands and consumables, customers can barely spot the difference. In fact, informal studies have found lower prices than Wal-Mart, long the discount king. If they can’t win the price wars, Wal-Mart will have a tough time competing with discounters like dollar stores.

A Big City Problem

More dollar stores are also located in cities, where Wal-Mart’s supercenters would have a hard time fitting into available real estate and finding few patrons anyway. Their stores are seen more as a rural retailer, while dollar stores have used new designs and products to develop a more modern feel.

Warehouse's Lose Out on Convenience

Store size really is a huge issue. Wal-Mart actually appears to be fueling the growth of dollar stores. When a Wal-Mart Supercenter moves into town, it takes out nearly two supermarkets on average. But not all shoppers are interested in traversing the mammoth stores, which can often cost busy consumers more than 30 minutes to find parking and get through their purchasing even if they only need a few items. Dollar stores offer a much more convenient experience. Customers can usually park right out front and find their item in just a few minutes. The stores aren’t as crowded and the checkouts aren’t understaffed.

Wal-Mart Reacts

Wal-Mart is so bothered by this trend that they have started to experiment with smaller store sizes. Their neighborhood markets were the initial push to capture this market, and have seen some success for a while but the sizes are still too large to compete with dollar stores. A new, much smaller version, called Wal-Mart Express, is being tested and likely to roll out to several major areas. They plan to open more of the smaller footprint shops this year than supercenters. Target is getting in on the act too, but more slowly, and they don’t compete in the budget markets anyway.

I'll Buy That for a Dollar

While Wal-Mart likely isn’t going anywhere for a while, dollar stores are becoming more and more attractive to investors. The big franchises are planning major expansion in the next few years, and a continuing sluggish recovery should keep customers on tight budgets coming in. And once thrifty customers get used to the pleasant experience dollar stores offer, they may never leave.

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