Growth Strategies

Betting on the Dollar

Battered by the recession, consumers are seeking refuge at deep discounters. But will they stay inside once the storm passes?
Josh HyattJune 12, 2009

When it comes to retail pricing, could $9.98 be the new 98 cents?

Gary Cino thinks so, and he’s been right before. Twenty-five years ago he founded 98 Cent Clearance Centers, a 66-unit chain where the top price was, as the name suggests, less than $1. He sold that business for about $80 million in 1998.

Last year, with one eye on the sagging economy and the other on the expiration date of his noncompete agreement, Cino introduced an updated version of the concept. At WiseBuys Liquidators, his 44,000-square-foot store in Sacramento, California, nothing costs more than $9.98.

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Cino, 54, calls it “a dollar store on steroids.” He’s betting that the  price point will create the same “treasure-hunt atmosphere” as 98 cents once did. While dollar stores originally kept their prices below a buck, research shows that only 23% of the products they sell are actually within that range today.

Cino believes that setting — and sticking to — a price maximum encourages consumers to shop a little more freely than they typically do. So far, he says, shoppers are loading up mostly on staples they can quickly wear, eat, or use. He wants to earn their loyalty now, making sure they develop a habit that won’t stop when their discretionary income returns.

“They aren’t throwing [items] in the cart like they used to,” admits Cino, who devotes part of his day to chatting with customers in the parking lot. “But our traffic is growing monthly, and we are gaining market share.”

That’s not surprising. In a weak economy, established deep discounters like Dollar General, Dollar Tree, and Family Dollar Stores are posting strong sales. Same-store sales rose sharply for all three retailers in the latest quarter, ranging from about 13% (Dollar General) to about 6% (Family Dollar Stores). Last year, Family Dollar Stores was the top-performing company in the S&P 500. All told, some 65 million U.S. consumers shopped at dollar stores in 2008, according to The Nielsen Co.

Low- and middle-income shoppers customers account for 92% of dollar stores’ sales, Nielsen says, but they are broadening their appeal to consumers across the income spectrum. Households with incomes of $100,000 and above spent 18% more at dollar stores in the second half of 2008 than they did during the same period in 2007, according to Nielsen. 

At WiseBuys, the popularity of some categories, such as pet supplies and picture frames, has surprised Cino. Lately discretionary items like beer and wine have also been selling briskly. “Are those discretionary? Maybe not,” muses Cino. “Perhaps in recessions, they are medicine.”

The risk for WiseBuys (and any other price-constrained retailer) is that it can’t easily pass on any cost increases to consumers. Given the unpredictability of such inputs as labor, fuel, and materials, more leeway would ensure that the company could maintain its margins. “The more you can differentiate pricing, the better opportunity you have to increase profitability,” says Andre Weber, a partner at consultant Simon-Kucher & Partners.

Not long ago, for example, Apple Computer replaced its flat iTunes song rate of 99 cents with a three-tier approach, recognizing that customers are willing to shell out $1.29 for some artists (Lady GaGa), 99 cents for others (Ella Fitzgerald), and 69 cents for the less well known.

But Cino has no intention of abandoning his $9.98 concept, which, he points out, is only a maximum and still leaves him plenty of wiggle room. “The retail landscape is littered with failed retailers who attempted to be all to all,” he says. “We want to be most to most.”

It’s a strategy that lives or dies based on Cino’s ability to operate the company with utmost efficiency. What’s critical, he says, is to focus relentlessly on buying, making sure the profit is built in. Much of the merchandise he and his small staff swoop up was originally destined for retail chains that no longer exist. “There is an abundance of it now,” he says.

It’s all part of the same formula that paid off so astronomically the first time around. As with his earlier venture, Cino has offered key vendors ownership in the business. “When they have a truckload of a great bargain, who do you think they will give it to?” he asks.

He even has the same management team. And his goal hasn’t changed, either. “I’d like to see everybody go to the cashiers’ window with as big a ticket as possible,” he says.

Cinco talks of “stepping on the gas” by rolling out more than a dozen stores in and around northern California in the next five years. And why not?  “There is an abundance of space available for below market rate,” he sayd. “That’s a bargain I can’t resist.”