Online dollar store Hollar is giving these old-school shops a makeover

Here's a statistic: Over a five-year period, the equivalent of more than three dollar stores opened in the U.S. each day.

And they're not done growing yet.

With the dollar store segment reaching nearly 30,000 locations at the end of 2015, a forecast from Conlumino research firm predicts another 3,800 of these shops will open by 2020 — making the space more crowded by the day.

Yet as the $45.3 billion dollar-store industry matures in the U.S. — making annual revenue growth more challenging to come by — two entrepreneurs have found what they consider to be a gap in the market: the internet.

While dollar stores were once rebuked by shoppers who had the means to spend their money at more well-to-do places, many Americans traded down to them during the throes of the recession.

But after noticing that none of the major dollar-store players had their websites well configured for online retailing (Dollar Tree, for example, sells items by the caseload), serial entrepreneurs David Yeom and Brian Lee hatched up the idea for Hollar, an online dollar store that launched late last year.

The idea was simple: Create a digital flagship where nothing costs more than $5, so shoppers don't feel guilty scooping up extra items on impulse. The execution, however, is where things get tricky. Namely, there's an inherent mismatch between selling low-cost items online and footing the bill for packing and shipping them.

Now, following eight months of nearly 50 percent sales growth and $1.5 million in revenues, Hollar's Yeom is making the case that the company has figured out how to profitably bring the dollar store into the digital era. At the crux of its strategy are two tactics: playing into consumers' love for a treasure hunt, and finding ways to ensure the orders they ship are additive to its bottom line.

"A space this massive, an opportunity this big … we wondered, are we crazy?" Yeom said.

Yeom and Lee met while working at The Honest Company, a consumer goods company that Lee co-founded. Their combined resumes also include stints at HauteLook and ShoeDazzle. One day last year, while grabbing lunch at a Carl's Jr. in Santa Monica, California, they started to wonder why the rapidly expanding dollar-store segment was virtually absent from online selling.

Yeom reached out to his friend of more than 10 years, John Um, who was heading up strategy at 99 Cents Only Stores. His short answer to Yeom's question: The company's supply chain was never built for the web, and it was more focused on growing sales by expanding its physical store footprint.

"I asked him, can you actually make this work?" Yeom said. Um's response was something along the lines of, "If we could use a stick of dynamite and do it all over again, we would," Yeom recalled.

Hollar got off the ground in November with $5.5 million in seed funding and a well-seasoned team of e-commerce veterans. That team included Um, whose connections from 99 Cents gave them access to hundreds of reputable vendors. To date, Hollar has raised $17.5 million.

Most akin to Five Below, a concept that skews toward more fun, discretionary items than its traditional dollar-store competitors, Hollar's merchandise favors nonessential products. Its latest best-seller, for example, is a $2 light-up pillow pet fashioned after a unicorn. Though it does sell certain household essentials including small bottles of laundry detergent, Hollar caters mostly to millennial moms who want to stock up on party supplies or toys for their child's birthday.

Consumables and household products are "definitely complementary to the real reason why people want to come [to Hollar] and why it's so fun," Yeom said.

Steering away from these bulky items, which can be costly and difficult to ship, is one strategy Hollar uses to make sure each order it ships is profitable. As an additional safeguard, the retailer requires shoppers place a minimum order of $10, with a free shipping threshold of $25.

Those backstops are rarely necessary, as the company's average order value has held steady at roughly $30, Yeom said. That compares with roughly $10 to $15 per order at traditional dollar stores, according to separate data from Kantar Retail and Checkout Tracking, a data service of NPD Group.

Keeping that average order value at or above $30 is essential for Hollar, as it likely needs to ring up $30 or $40 per order to break even, said Reid Greenberg, senior vice president of e-commerce and digital retail insights at Kantar Retail. The company's plan to launch private-label goods in a few months should also boost its margins.

Though the company is profitable on a per-order basis, Hollar itself is not yet profitable, as it continues to invest in growth, Yeom said. But as it expands — including plans to open a second, East Coast distribution center to speed up its shipping times — it will likely become even more difficult for the company to operate profitably, said Neil Saunders, managing director at Conlumino research firm.

"It's a very difficult business model to make work online," Saunders said.

Yeom, however, is confident the financials behind Hollar can work, as the online-only company is not saddled with the high costs of operating a brick-and-mortar store. And because the website is designed to replicate the "treasure hunt" experience that has recently powered dollar stores' revenues, the volume of products that shoppers order will tilt the numbers in its favor, he said.

"We were confident that that sort of [impulsive] behavior would translate online, and it's a pretty cool thing to actually see that happen," Yeom said, adding there's been "virtually no blow-back" to the $10 minimum spending requirement. He added that Hollar's longer shipping windows have likewise not caused shoppers to abandon their shopping carts.

However, Saunders said, he expects delivery times of less than a week to the West Coast and seven to 10 days to the East Coast are at the "outskirts of what people are willing to accept."

Similarly, many of the impulse purchases made at dollar stores are done so for immediate gratification, which would be taken away by ordering these items online.

"The waiting takes some of the excitement out of it in a way," Saunders said.

Hollar's entry into the marketplace comes as dollar stores' images are receiving a major makeover. Once regarded as rundown retail locations selling consumables and other essential goods on the cheap, many of these shops are now brighter and sell a broader swath of low-price discretionary merchandise.

These reworked formats and a value-focused consumer base have both led to a broader swath of shoppers visiting these stores. That includes millennials. On Dollar General's latest earnings call, for instance, CEO Todd Vasos told analysts that female millennial shoppers account for roughly 12 percent of its shoppers and 24 percent of its sales.

Millennials' interest in dollar stores is not limited to low-income shoppers. Data from Checkout Tracking found that millennials with annual incomes of $100,000 or more make purchases at these stores nearly 13 times a year and spend more than $135 over that time frame. That compares to millennial shoppers who earn less than $25,000 and shop these stores nearly 23 times a year, and spend more than $217 during that period.

"These shoppers are very value oriented because [it's] what they've grown up with," said Mike Paglia, who leads the value discount analysis team at Kantar Retail. Their openness to trying out new brands and private-label goods is a departure from the previous generation of middle-class and affluent shoppers, and "signals a larger shift in the shopper base that is open to dollar stores," he said.

Indeed, Hollar's Yeom called millennial moms its "champion" customer base, saying that toys account for nearly 30 percent of its revenues.

This new wave of dollar-store shoppers is likewise rewriting the expectations for traditional players in the space. Whereas in the past these stores were reluctant to invest in the web because it seemed "outside of the bounds of relevancy for their shopper … what we're seeing now is online truly getting to a point of ubiquity," Paglia said.

"The longer that the brick-and-mortar players wait, the more of a liability it becomes to not have some kind of an online e-commerce presence," he said.

While — barring an acquisition of Hollar — it would take years for these traditional retailers to catch up digitally, their physical presence does give them a few advantages over their online-only competitor.

Namely, many of the shoppers who frequent dollar stores go there not only because of the low prices, but because they are easy to shop and conveniently located, Conlumino's Saunders said. What's more, because Hollar is limiting the amount of consumable goods on its site, it's likely to miss out on the repeat, replenishment trips that drive traffic into dollar stores.

Yet for Yeom, who has been part of some "pretty amazing rocketship start-ups," Hollar's comparatively rapid growth proves the company is onto something, he said.

"It is a very personal thing for both me and [Brian]," Yeom said, explaining that they each grew up shopping at dollar stores. "We've just got to keep working hard on it."