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Dollar stores are forcing mainstream merchants, ranging from discounter Wal-Mart Canada to generalist Canadian Tire, to step up their own dollar promotions.Deborah Baic/The Globe and Mail

Retailers bracing for next year's arrival of U.S. discount juggernaut Target Corp. face a more immediate threat: the lowly dollar store.

The fastest-growing sector in Canadian retailing, dollar stores are forcing mainstream merchants, ranging from discounter Wal-Mart Canada Corp. to generalist Canadian Tire Corp., to step up their own dollar promotions.

"We've got very clear plans in place, and it does spread across the whole store to compete directly with dollar stores," David Cheesewright, head of the Wal-Mart Stores Inc. regional division that includes Canada, said at a conference earlier this year.

While dollar stores have been a looming threat for years, today they are becoming a bigger force as Canadian market leader Dollarama Inc. expands aggressively and U.S. rival Dollar Tree Stores Inc. ramps up its operations here after having scooped up a domestic chain.

Dollar stores are emerging as savvier retail players in their sourcing and breadth of offerings, attracting middle class and even well-off shoppers who once shunned the format, and prompting traditional chains to tout their own dollar deals.

The dollar store concern is real. Dollar store sales are rising by about 9 per cent annually – more than three times the average annual uptick in the overall retail sector over the past five years, according to CIBC World Markets estimates. Dollar store sales will hit $10-billion to $12-billion in a decade from $2.3-billion in 2009, it forecast.

Other retailers have tried to "latch on" to the dollar-merchandise trend, some by offering entire zones of dollar offerings and others by introducing smaller sections or occasional displays of them, said CIBC retail analyst Perry Caicco. But the results have been almost uniformly "brutal. … Dollar stores are a specialized business that is difficult to duplicate and impossible to blunt."

Dollar stores draw customers with low prices, convenience and simplicity, he said. Retailers such as Dollarama have honed the skills of responding quickly to customer demand with low-cost procurement. They are broadening their offerings, and even raising their own prices: This summer, Dollarama started to add items above $2, at $2.50 and $3.

Even so, mainstream retailers increasingly are trying to emulate the dollar formula. They're revving up their promotions of their dollar merchandise, often stocking the $1 items in the regular product aisles; they're developing smaller shops to introduce dollar-store convenience and adding dollar products in more categories.

Canadian Tire last week ran a prominent "dollar deal" promotion at the top of its website and in its flyers, featuring household products that are often purchased at dollar stores. A Canadian Tire spokesman wouldn't comment on the strategy or the frequency or timing of dollar deals.

Canadian Tire and Wal-Mart are trying to recapture shoppers who are drifting to dollar stores, said Doug Stephens, president of Retail Prophet Consulting. The retailers are counting on consumers coming in for a $1 item and at the same time purchasing other, more expensive, products.

Wal-Mart also has interspersed a growing number of $1, $2 and $3 items on its regular shelves in everything from home décor to hardware and food products.

"Do we really have an incredible dollar program? We do and we will," Shelley Broader, chief executive officer of Wal-Mart Canada, told the conference.

In the United States, the discounter is taking bolder steps to counter the dollar store invasion. Wal-Mart has launched smaller stores with a broader offering than at a dollar store, while encouraging customers to order online still more products that can be shipped to the store – generating as much as 20 per cent more sales, Wal-Mart has said.

In Canada, Wal-Mart is starting to test a smaller format and will do so even more as it begins to convert former Zellers outlets to its own banner, after having bought the Zellers leases from Target, Ms. Broader said. "Although you're not seeing us talk about an expansive rollout of a new small format, you are seeing a little bit of [a] glimpse into the future."

Still, not everyone feels the dollar pinch equally.

Loblaw Cos. Ltd., which touts "dollar days" at its stores, has seen a "minimal impact" from dollar stores, which are a bigger player south of the border, said spokeswoman Julija Hunter. The dollar promotions help the grocer bolster sales and "meet the needs of customers who like to stock up."