Dallas does discount—now at 99 cents; new market opens growth possibilities for hot dollar chain - "99 Cents Only" store

DSN Retailing Today,  Feb 9, 2004  by Debbie Howell

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GARLAND, TEXAS -- A flier lured Lucy Fitzgerald to the new 99 Cents Only store near Dallas around rush hour on a Wednesday evening. She and eight other bargain hunters spent the night in the chilly Texas weather to be the first nine customers to receive 19-inch color television sets for 99 cents at the store's grand opening.

Despite the cold and lack of sleep, Fitzgerald was all smiles as she paid a little more than a dollar--including sales tax--for her new TV. The next 99 shoppers in a line of at least 400 that snaked across the parking lot then came in to buy scooters for 99 cents as part of a promotion implemented each time a store opens.

Well into the afternoon, the line to enter the store continued, which did not surprise ceo Dave Gold, who founded the chain more than 20 years ago near Los Angeles.

"People want bargains. The products we sell are items people use all over the country," said Gold, an unassuming retail executive and multimillionaire who flew in with his wife Sherry for this first store opening in the Dallas market on Jan. 29.

The hoopla and public interest surrounding each store opening is part of a larger trend of phenomenal growth for dollar stores. Customers of all income levels have become loyal and passionate customers, according to Gold, drawn to unbelievable deals such as ahi tuna steaks or $30 value cell phone accessories for 99 cents. Everything sells for 99 cents or less, a concept shoppers often can't fathom.

The store opening in Garland is the first of 45 stores 99 Cents Only plans to open in the Dallas-Fort Worth market and followed the chain's entry into Texas in the Houston market last summer, where 18 stores are now open. Next up are San Antonio and Austin in 2005, followed by filling in of smaller cities throughout the state.

The bulk of the chain's 190 stores are in its home base of California, with smaller clusters in Arizona and Nevada. Gold said the purchase of a former Albertsons distribution center in Texas permitted entry into the state earlier than planned.

"After Texas, we really don't know at this point" where the chain will go next, Gold told DSN Retailing Today. Gold

did say the DC could support expansion to nearby Oklahoma and Louisiana and that the company would consider opportunities if they arise to open a cluster of stores in a new urban market.

The move to Texas hasn't been without a few growing pains. Houston residents weren't familiar with the company, so sales haven't mirrored those typical in California. Still, Gold said he was satisfied with the Houston stores' performance to date, despite less traffic and lower per-store sales than the chain's average.

"You just don't know when you go into a new area," Gold said of customer response. "I'm not disappointed. The traffic is less, but it's getting better."

The company also stands behind its decision to do limited advertising, which for a store opening involves distributing fliers to the immediate neighborhood. The chain has tested some print ads and radio spots in the Houston market, but Gold insists the best advertising for the concept remains word of mouth."

Though the assortment changes regularly based on deals the buyers can secure, the layout and merchandise of the Garland store followed the chain's latest prototype. It included a gourmet fancy foods section, frozen and refrigerated doors along a back wall and long-running parallel aisles from front to back.

The 25,000-square-foot store adjacent to Office Depot had formerly housed a craft store. The location is on a major thoroughfare in Garland and a block away from a highway that loops Dallas. The neighborhood is low to moderate income, heavily ethnic and a value retailing mecca, with nearby competitors that include Family Dollar, Dollar General, Big Lots, Target and several independent dollar stores.

With a heavier food assortment than its rivals, 99 Cents Only has basked in the highest sales-per-square foot metrics of value retailing despite an average $9 transaction. Revenue has continued on a strong growth curve; sales grew 23% to $862.5 million for the fiscal year that ended Dec. 31, 2003 while net income through the first three quarters grew more modestly. Same-store sales for the year rose 4.5%.

Analyst reaction to the chain's expansion has been mixed, with some concerned about sales productivity and low comparable-store gains for the fourth quarter. The Texas DC is adding expenses, though that should lessen over time. In a January report, analyst Dan Wewer of CIBC World Markets expressed concern over these results yet viewed the Texas entry as a short-term factor that should improve.

"We expect growing consumer awareness, expansion in merchandise selection and an improving value proposition to drive sales gains in Texas," Wewer wrote.

Considering that only neighborhood fliers and small newspaper news items heralded the Garland store's opening, the large turnout bodes extremely well for 99 Cents Only's future in Texas. Had the chain implemented an advertising blitz, a riot could easily have ensued with shoppers from the greater Dallas area scrambling for 99-cent TVs and scooters. And Fitzgerald might have come away frowning and empty-handed, having to fight off other all-nighters for her beloved new TV.

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