NEW YORK CITY-With hopes of solidifying a growthvehicle, Family Dollar Stores Inc. is makingsignificant investments in its urban stores through anew program dubbed the “Urban Initiative.”

“The urban initiative is our greatest opportunity butit also has the greatest challenges,” said FamilyDollar chairman and CFO Jim Kelley during apresentation here at Bear Stearns investor conference.Realizing that urban markets are under-penetrated bydollar stores and have the potential of being highly profitable, Family Dollar embarked upon the Urban Initiative earlier in late 2004, after throwing around the idea for the past seven or eight years. <pKelley said that Family Dollar's urban stores offerthe highest return within the company's portfolio,typically doing a larger volume than non-urban stores.However, they require an efficient operating model tobe profitable. In particular, these stores need morerobust staffing to handle the volume. For example,urban stores require improved recovery – or clean up –to maintain an attractive level of store presentation. Additionally, urban stores need faster inventory replenishment, which means more stockers in the back room, Kelley noted.

In order to meet these staffing needs, Family Dollaris investing in technology for its urban units,Kelley said. Over the past 12 months, the discountchain has increased its core operating expenses toimplement new human resources technology that makes iteasier to screen employment applications. The program,which was three years in the making, has generated alot of applications for the chain.

While urban stores possess “legitimate” barriers,Kelley says, they’re worth it. “The retailer that’sable to develop the processes needed to operatesuccessfully in that environment will have asignificant competitive advantage,” he stressed. Hecontinued: “If we’re successful (in our urbaninitiative) – and we believe we will be, it augmentsour expansion capabilities.”

Currently, Family Dollar has 1,300 stores in urbanareas, but the chain is not looking to expand itsurban footprint much during 2006, Kelley says. “We’regoing to hold… and refine the process and let the techrollout catch up,” he explained.

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