According to The Wall Street Journal, although sales are rising for the discounters, margins are not rising at the same rate.  “Bargain prices on food, drinks and other ‘consumables’ may get customers in the door, but discount retailers rely on higher-margin discretionary purchases for profit growth.”  So when everyone went to the dollar store this time around, rather than aimlessly wandering through the store and filling baskets with angel figurines, votives and gift bags, people were heading to the food aisles, checking off the list and walking straight out.  No glass candle holders for mom or random toys for the kids.

What should the dollar store do?  How do they connect?

Should they draw in, tighten expenses, and focus on increasing volume on low margin products?  That could work, however if they expanded their consumables categories, that would position them in direct competition with grocery stores and Walmart’s low cost leader position.

Or

Should they try to push the higher margin products more than they have in the past and tap into the emotional mind state of the shopper focused on cheap chips and soda?

Right now, these stores have the people’s attention.  But the reason that people leave dollar stores, and other discounters, in better times is because the stores don’t feel as good.  Everything about the dollar store concept, the fixtures, the lighting, the signage, the merchandising is a reminder of the fact that you really need to shop there because things aren’t so good.  When things are better, shopping there is like a savings adventure, a treasure hunt if you will.  But when you have to shop there it means something different.  So when finances improve and the rations are over, shoppers are eager to get to the nicer store.  It’s is a physical indication that things are on the rise – it’s worth the extra dollars for the indulgence that you have been deprived of for so long. 

But what if spending an extra dollar on a child’s toy is communicated as an indulgence?  Spending an extra two dollars on yourself or a friend could be a comforting indulgence when things are in wait and see mode.  Although, raising the retail design standard in a dollar store could take away the discount image that makes people feel like they’re getting a good deal, it could also make people feel inspired to spend just a little more to get that inspirational feeling that everyone needs when things are scary.

Connecting with shoppers now, in today’s buyer’s market, could be costly.  In-store communications is going to be the most cost-effective option.  However, stores need to decide if it’s worth it for them to examine the psyche of their shopper and then invest in adjusting to it while they have a captive audience.

The report interviewed Emily Shanks of Barclays Capital on retail.  Click here to read her analysis.

The spartan, discounted feel of Family Dollar works for now but when the economy turns around, shoppers may return to their favorite stores — which have likely been working on pricing, messaging, and design to get their customers back all the while. Family Dollar should take this as an opportunity to invest in an environment that will appeal to these shoppers before they lose them. Miller Zell’s most recent shopper study, shows that 67% of shoppers rate store experience important while 9% rate it most important in their purchase process. That said, investing in store design now, while new shoppers are giving your franchise a chance, is money well spent.  It’s been said many times, many ways — never waste a good crisis.

I think they’re on to something. The economy doesn’t appear to be improving anytime soon and could get worse before it gets better. In the meantime discount retail stores like Family Dollar and Dollar General can reap the benefits of shifting consumer focus. It’s their time to shine and Dollar General is already ahead of the curve. Over the past five years, Dollar General has more than tripled their marketing budget from $5.4MM in 2003 to $45MM in 2006. They pulled back a little in 2007, spending only $40.5MM. But as David Aaker put it, author of The New CMO Imperative, it’s not important how much you spend on marketing as it is where you spend.

Signage is valuable to help engage existing customers; however the greatest opportunity for Dollar General in this economy is overcoming the “pride factor.” Dollar General and stores like it should take this opportunity to invest their marketing dollars in interior design, visual communication, and aggressive shopper marketing. Make the stores and the shopping experience more appealing. Now is the time to snag shoppers who don’t typically consider Dollar General for regular purchases, but are forced to reduce their grocery budget.

In the video below, a bargain-focused shopper makes the best case for Dollar General to expand their target demographic and snatch market share from low-priced stores where prices just aren’t low enough.