Hy-Vee has made headlines with its trendy new scaled-down formats, including a meal-focused convenience store (Fast & Fresh), a health foods outlet (HealthMarket) and an urban market (Fourth + Court). Altogether, they make up a retail toolbox the grocer is using to solve evolving customer demands.

Lesser known is a fourth addition to Hy-Vee’s set that addresses the many rural markets the company operates in, which become battlegrounds for low-price competition in recent years.

Dollar Fresh is just what’s its name implies: A supermarket with elements of a dollar store woven in. The store — the sixth of which opened this week in West Point, Nebraska — has discount departments filled with "Hot Deal" promoted items and That’s Smart! discount private label offerings. It also carries items like bags of chips and cans of tuna that retail for one dollar, as well as general merchandise like clothing. Low-price signage with phrases like "Low Price Lockdown" hangs from the ceiling and calls out to shoppers from shelves.

At the same time, Dollar Fresh offers a full range of perishables, including produce, prepared meals and a full-service meat counter carrying six grades of beef. Each location has a pharmacy, and one location in Creston, Iowa, even has a diner inside.

According to reports, the stores — which are remodeled Hy-Vees and former Shopko department stores — have expanded departments like produce and cold beer that are popular with local customers. A location in Toledo, Iowa, that opened last month has a 52-foot-long display of Hispanic foods and 65 feet of chilled beer. There are also bakery items delivered from a nearby Hy-Vee location, according to a local report.

"Instead of expanding space devoted to fast-moving products, they've devoted space to fast-growing categories," Bill Bishop, chief architect at Brick Meets Click, told Grocery Dive.  

Frank Beard, an analyst with the fuel pricing service Gasbuddy who lives in Des Moines, Iowa, recently visited a Dollar Fresh store. He said it "has the best of both worlds," appealing to the chain’s legacy shoppers with its core departments as well as those who might otherwise frequent the local Dollar General.

He said the locations are appearing in communities with a median income of around $40,000, which is what dollar stores typically target.

"In some of these smaller towns, you have a lot of customers looking for more of a discount offer," Beard told Grocery Dive.    

Dollar Fresh is still in test mode for Hy-Vee. The first location opened in Osceola, Iowa, last fall, followed quickly by stores in Centerville and Creston, Iowa. Each was formerly a Hy-Vee grocery store. Beginning this fall, Hy-Vee opened three additional Dollar Fresh stores in former Shopko department store locations where the grocer had purchased the adjacent pharmacy and decided to take over the lease. The pharmacies were among six the grocer acquired from Shopko back in February. 

Hy-Vee spokeswoman Christina Gayman declined to say if the company is planning to build additional Dollar Fresh stores at this point.

"As we continue to innovate, we’re taking a look at the needs of our rural communities," she told Grocery Dive via email.

Bishop thinks Hy-Vee has plenty of room to expand Dollar Fresh. The brand provides a response to discounters and dollar stores that have retooled and expanded their fresh grocery assortment. It’s also cost-effective, he said, to slot stores into existing Hy-Vee real estate.

"I don't think Hy-Vee would traditionally say they have the best prices in town, but that's what they're saying at these stores," Bishop said.

Discount retailers' upmarket moves have forced many chains to adapt. Walmart recently introduced an updated layout for its produce departments and has added free grocery pickup to more than 3,000 locations. Dollar General sells produce in hundreds of stores now and self-distributes groceries to around a third of its footprint. Aldi has overhauled its small stores with fresh, on-trend products.

In an interview with Grocery Dive earlier this year, Hy-Vee CEO Randy Edeker indicated low-price competitors have become worrisome for Hy-Vee.

"What's interesting is there's more pressure in some of our small rural towns than in the cities," he said.

Dollar Fresh, Edeker noted, is a response to that competition.

"One of our stores is in a town of 2,000 that has a Fareway, a Walmart Supercenter and a Dollar General," he said. "So you have to be focused on price with that mix. We just decided we're not going to be the high-priced option, and we’re not."

Hy-Vee isn’t the only grocer deploying low-price store formats. H-E-B launched Joe V’s Smart Shop in 2010 and now has nine locations in the Houston metro area. Kroger operates 25 Ruler Foods stores in Indiana, Illinois, Ohio and Kentucky.

Others, including Publix, Giant Food and Target, have built small format stores that cater to quick trips and younger consumers.

Hy-Vee operates four Fast & Fresh stores and one Healthmarket. The company has said it could open dozens more small format locations, while Edeker said the company wants to focus on building one store at a time. Hy-Vee opened its Fourth + Court store in 2017 and has not revealed any expansion plans for that concept.

"There’s this general trend you’re seeing in physical retail where companies are asking, 'how can we personalize our store for the communities we’re in and not just drop a cookie cutter in?'" Beard said.