Name-brand sales skyrocketing at dollar stores (and what the grocery industry needs to take notice of)

After last week’s article, “What is SuperValu doing to Jewel-Osco?” about changes to stocking, pricing and sales cycles at Jewel (which, if you haven’t read already, I encourage you to) a reader wrote to share another interesting shopping-related story with me.

Thursday’s issue of Business Week has a great article on dollar stores and the current economy. As consumers tighten their belts, many are understandably heading to the dollar store. Dollar stores have long been purveyors of inexpensive, privately-labeled house brands, but the biggest increase in sales at the dollar stores lately? Name-brand products.

While the parent company of Chicagoland’s largest grocer cuts inventory on its national brands, ultimately aiming for 20% private-labeled house brand penetration to fill that inventory gap, chains like Dollar Tree, Dollar General, and Family Dollar are enjoying an upswing in sales on name-brand groceries and household items, and they’re quickly moving to stock more of them:

Wal-Mart Stores (WMT) is beginning to lose its grip on cash-strapped Americans. Dollar General (DG), Family Dollar Stores (FDO) and Dollar Tree (DLTR)—three rivals that are the biggest of the so-called dollar store chains—have all seen traffic at their stores tick up this year.

Consumers also are being drawn to the stores by an expanding selection of name-brand products. Maria Wildrick, a kindergarten teacher in Carthage, Ill., says she now makes the 35-mile drive to a Wal-Mart in Macomb just once a month but visits her town’s Dollar General on a weekly basis, spending $75 on average. “I had thought Dollar General carried cheap stuff, so I was pleasantly surprised,” says Wildrick, 54, who stocks up on Nestlé’s Fancy Feast food for her cat, Marley.

Family Dollar began building up its stock of name brands during the recession. Its stores now give more space to food, health and beauty aids, and paper products—and less to clothing and other discretionary items. The Matthews (N.C.)-based retailer added more than 100 grocery items in the last quarter.

Campbell Soup’s (CPB) Prego pasta sauce, Kraft Food’s (KFT) A.1. steak sauce, and J.M. Smucker’s (SJM) Crisco shortening. “These are names that our customers recognize,” he says. “We are broadening our assortment to get more of what our customers are accustomed to buying.” Similarly, Dollar General is installing taller shelves so it can accommodate more national brands alongside its own private label food and sodas. [link]

I realize SuperValu is going to do what it feels is best for its stores, including Jewel-Osco. But isn’t it an interesting contrast that the largest players in the game are cutting shelf heights and name-brand inventory, depending on increased house-branded products to increase sales… while the dollar stores are doing the exact opposite, raising shelves to hold more name-branded product that its shoppers clearly want to buy?

With each dollar a consumer spends, they’re voting for a product they like. And they like name brands.

Another factor in the equation? More dollar stores are now accepting manufacturer coupons. Dollar General has long accepted them, and last month, the Dollar-Tree-owned Deals chain began accepting them too — because almost all manufacturer coupons issued are for name-brand products, and that’s what most shoppers still want to buy.