Food companies see growth opportunity in dollar stores

Food manufacturers have been grappling with Americans' changing preferences. Fresh foods are in, processed foods — not so much. So it's no surprise food companies might be very interested in outlets where processed food still thrives and sales are rising: dollar stores.

According to the consulting firm Kantar Retail, dollar stores are an $80 billion business with tens of thousands of locations.

"It's got a 6.5 percent compound annual growth rate from the end of the decade, which is well above the 4 percent growth rate the conventional grocery store channel is running," says John Rand, senior vice president of retail insights at Kantar.

Dollar stores typically offer less expensive and smaller versions of core household items. (Despite the name, not all products are priced at $1, but they're still cheap). Rand says the food products at dollar stores tend to be what experts call "center of store" items — the non-perishables that are the hallmark of processed food companies.

"This is a channel that's been growing in itself and growing for General Mills," says Rick Krichmar, senior manager in Shopper Insights at the food giant General Mills, which enjoyed 8 percent growth in the dollar and drug store channel in 2014.

Even as General Mills responds to consumers' growing health obsessions by cutting artificial flavors and colors from Lucky Charms and offering organic products under its Annie's banner, Krichmar says there's still a market for items like Hamburger Helper and Chex Mix at dollar stores. Consumers who buy the smaller, discount store versions of those brands tend to be older people and those with limited incomes.

"While we see a lot of metrics of the economy improving from depths of recession from 2008, we know lots of people have employment but those jobs pay much less," Krichmar says. "And the future growth of the population — a large part of that is going to be the lower income household."

Dollar store shopper Shirley Senske sees her own household stuck in neutral. She's a school bus driver and mother of five, and she regularly shops at a Dollar General store in a Minneapolis suburb. She says she and her husband earn so little as to count among the working poor.

"Your paycheck is gone when you get it because you know you've got to pay rent," she says.

Senske knows she might pay more per ounce for the smaller-sized stuff at dollar stores. But she can't always afford the giant stock-up sizes.

"Sometimes it's cheaper to buy the little things, and then save up and get the big items," she says. "It's a matter of what you can afford that month."

But some analysts question whether food companies can afford to make the smaller dollar store products Senske wants.

"Can the production lines handle it, and can you get a decent margin on it?" asks Edward Jones stock analyst Brian Yarbrough.

Yarbrough says those are questions that big food companies will have to figure out. Nevertheless, as Walmart loses grocery shoppers to dollar stores, Yarbrough says it makes sense for food companies to go where the growth is.

Annie Baxter is a reporter covering agriculture and food for Marketplace