San Francisco/Los Angeles, June 29 - When it comes to buying food, Juan Bugueno is shopping around and finding bargains in dollar stores, a worrisome trend for supermarkets.
Bugueno, 42, shops the Albertsons, Ralphs and Whole Foods grocery stores in his Venice, California, neighborhood -- but prefers the dollar store for staples like vegetables and eggs.
"It's cheap and it's good," said Bugueno, who among other things was buying bagged spinach and garlic at a busy 99 Cents Only Store instead of at a Whole Foods next door.
In addition to heightened competition from top U.S. food seller Wal-Mart Stores Inc, grocers must also defend their turf against scrappy dollar stores that are using food to tempt shoppers like Bugueno, amid the recession.
Family Dollar Stores Inc has added 200 new food products, like Triscuit crackers and Kraft salad dressing, while Dollar Tree Inc is installing freezers and coolers to sell ice cream, sandwich meat and frozen dinners.
The retailers are trying to steal "fill-in" shopping trips from grocers, hoping consumers will pop into their stores mid week when they run out of milk or eggs or pasta.
"Dollar stores... are an increasingly daunting threat to especially regional and neighborhood-type independent grocers," said Gary Giblen, an analyst at Goldsmith & Harris.
With many consumers losing jobs or seeing their hours cut to part time, shoppers have more time and greater incentive to compare prices and scour a variety of stores for deals.
"People in that position have more time on their hands and have more time to seek the opportunistic buys at a dollar store," Giblen said.
TRYING NEW BRANDS IN NEW PLACES
Consumers have been curbing spending on nice-to-have items like clothes or jewelry and focusing on basics, like food.
While that should favor grocers, it has only intensified competition as warehouse clubs, like Costco Wholesale Corp , discounters like Wal-Mart and dollar stores are all wooing price-conscious shoppers with promises of cheap food.
Supermarkets ranging from Ralphs owner Kroger Co to Safeway Inc to upscale Whole Foods Market Inc are on the defensive. Among other things, they are investing in their own store brands, which often rival name-brand products in quality and sell for lower prices.
However, Richard Hastings, consumer strategist at Global Hunter Securities, said that strategy has its drawbacks.
"There's the risk that the shopper could swap over to private label anywhere else ... and buy private label at an entirely different company," he said.
Dollar stores are happy to be that different company.
Before the recession, they were expanding their selection of food, which shoppers need to replenish more often than other household items. The post-downturn payoff is higher traffic.
The average household made 13 trips to a dollar store in 2008, up from an average of 11 in 2001, the Nielsen Co said.
At the same time, shopping frequency at grocery stores is falling. According to Nielsen, the average household made 59 trips to supermarkets in 2008 -- 13 fewer visits than in 2001.
"There's no longer any stigma about 'Oh, you went to a dollar store'," said Britt Beemer, founder of America's Research Group, which tracks consumer spending. "Dollar stores in many markets are near or right next to supermarkets, so it's making it very easy for consumers to go to the dollar stores."
DOLLAR STORES SPRING UP BY THE THOUSANDS
As many retailers close stores, dollar stores are opening. From 2001 though 2008, the number of dollar stores grew 52 percent, or 6,823 locations, according to Nielsen, while the number of supermarkets rose by 1,622, or just 5.3 percent.
99 Cents Only is actively expanding in the western United States, while Dollar General Corp has outlined plans to add 450 new stores to its chain of 8,400.
Meanwhile Supervalu Inc, the owner of supermarkets like Albertsons, Jewel-Osco and Save-A-Lot, said earlier this year that it will close 50 stores. It warned last week that its quarterly profit would be "substantially below" analysts' estimates after it cut prices and boosted promotions.
Dollar stores will never fully replace grocery stores given their smaller selection, analysts said, but they are offering grocers a run for their money when it comes to convenience and pricing on dry food, like cereal or snack foods, and frozen items.
Supermarkets, on the other hand, can gain the upper hand by focusing on fresh food, Hastings said: "The big differentiator is going to be the quality of the fresh produce."