Dollar General nips at big box market share

Dollar General is off to the races recently reporting stellar same-store sales growth of  5.1% in its second quarter ended Aug. 2. These gains are linked to increased traffic and average tickets rising steadily for 22 consecutive quarters.

The Goodlettsville, Tenn-based small box discounter, has become a staple in rural America with nearly 11,000 stores and growing its real estate footprint at 6% to 7% annually. The retailer will open 650 new stores this year while also remodeling 370 older stores adding coolers for dairy and meat perishables as well as frozen foods.

CEO Rick Dreiling, said the company is taking market share in multiple categories, quarter after quarter as more shoppers are flocking into their local Dollar General stores. He described the consumer demand for refrigerated and frozen items as “insatiable," saying “the more items we put in, the more we sell.”

Kantar Retail analyst Mike Paglia said Dollar General is benefiting from changes in shopper behaviors that 10 years ago, favored stock-up, one-stop destinations like Wal-Mart. He said “convenience” is not just about one-stop shopping, it also about time and value, two aspects that Dollar General is providing to its growing customer base.

Wal-Mart is trying to answer to this challenge, especially in more rural markets where Dollar General is flourishing. Walmart U.S. CEO Bill Simon was recently asked what Wal-Mart’s strategy was to capture the small basket convenience trips, which is the fastest growing trip mission in retail. Suck quick trips typically include purchasing fewer than six or seven items with the customer looking for time savings and alues.

“It’s tough, I mean supercenters is a stock up occasion, it’s a commitment … the minute you decided to put your blinker on, turn into the supercenter you’ve got to be committed because it’s a big store, a big parking lot and it’s always crowded, thankfully,” Simon said in response on Sept. 11, at the Goldman Sachs retail conference in New York.

He said that doesn’t lend itself naturally to convenience. Simon also noted that Wal-Mart is keenly aware of the abundance of small stores that have popped up over the past few years that offer basic items. He said Wal-Mart has chose to leverage its digital prowess to help with better assortments and prices online, which can be shipped to homes or picked up in stores nearby.

Wal-Mart still boasts the No. 1 spot in retail in terms of revenue with $340 billion in U.S. sales annually with a compounded annual growth rate of 2% between 2008 and 2013. Dollar General ranked No. 23 with $18.4 billion in sales last year has compounded revenue growth rates of 12% since 2008, according to Kantar Retail.

The expected growth outlook for Dollar General is 8% through 2018, while Wal-Mart’s growth projection is 3%, according to the Kantar rankings. Wal-Mart is struggling with negative to flat same-store sales, while Dollar General predicts 5% growth through rest of this year.

RURAL REWARDS
“It’s a fact that Dollar General and Dollar stores in general are taking a bite out of Wal-Mart’s business and it will only get worse,” said Jason Long, CEO of Shift Marketing Group in St. Louis.

He said it looks like Wal-Mart might have taken their eye off the ball and their core consumer when they pivoted to all things digital to fend of Amazon, particularly in rural America, where founder Sam Walton made his mark in retail.

“Rural America used to drive 20 minutes to the closest Wal-Mart to do their shopping — but now it's a two minute trip to the Dollar General instead," Long said.

He believes Wal-Mart’s competitive advantage as a one-stop shopping destination will remain, but they will be continue losing a few items here and there to Dollar stores and this adds up over time.

Kantar's Paglia said the Dollar General strategy to be the “fill-in trip” has paid off and now that these stores also sell tobacco and fresh dairy, meat and frozen foods they are apt to steal away more share.

Long said Dollar General is blanketing the country with rural stores, while Wal-Mart is still in the first inning of its Walmart Express format, which began in rural areas but more recently has been gravitating toward denser populated regions.

Dreiling said during the Dollar General earnings call that while rural areas have been the core of the business, more recently stores in denser, high net income areas are also performing well. He credited that to internal merchandising efforts to offer a broader assortment of named brands at very competitive values.

Paglia said it only takes 1,500 families to support a Dollar General, where as it take many more to support a Neighborhood Market, the grocery format Wal-Mart is focused on at the time being.

“There is a long runway in front of us for expansion,” Dreiling said. “There are 10,000 or more opportunities that we have marked for potential stores.”

He said it takes more money to run an urban store, and even though it will net higher sales, at the end of the day rural stores are just as profitable for Dollar General.

BASICS SELL
Dollar General recently saw an uptick in discretionary spending, though it’s average ticket is somewhere around $10.75.

Dreiling said adding tobacco has been a huge traffic driver over the past two quarters and 65% of those buying tobacco also pick up other items while in the store. He said Dollar General focuses on the basic products people need every day and is not the place where consumers spend the bulk of their wallet.

“We are not fashion forward, we are a fill in shop,” Dreiling said. “Retail is an $800 billion industry, we are taking a little market share from a lot of players, grocers and mass retailers.”

Paglia said the assortments in Dollar General are edited, but surgically precise in that many are consumables that are apt to drive traffic into small box, such as milk, cereal, bacon and eggs. He said for years before the coolers were put in consumers saw Dollar General as a place to buying cleaning supplies, laundry detergent and paper goods. But now within a very small footprint shoppers can also buy popular soda brands and plenty of food variety from fresh to canned to frozen.

Paglia said Dollar General’s brand strategy has been to establish trust with its growing customer base as a reputable place to get better values in a quick trip format. Long said this is resonating well with the boomer generation as well as young professionals looking to save time and money. He said it’s no wonder more consumers are finding favor with Dollar General.

“A trip to a Walmart Supercenter is a commitment, but a Dollar Store trip is quick and easy with a little bit of a treasure hunt mixed in,” Long said.

VALUE PROPOSITION
A Kantar Retail study last fall looked at 20 categories across edible grocery, non-edible grocery, and health and beauty aid segments. Kantar compared the items in a basket study across drug stores, mass retailers, traditional grocers and small box discounters like Dollar General.

The study looked at opening price points of seven retailers that would be important to lower-income shoppers seeking the best overall basket savings. Last year was the first time Kantar included Dollar General in the study. Among the seven retailers surveyed, Kantar found Dollar General had the least expensive total basket by far; driven by lower opening price points in its edible and non-edible baskets.

At a total cost of $23.81 the basket savings were 18% more at Dollar General than their closest competitor — Wal-Mart, with a $28.12 basket total.

The other store results in the study include:
Family Dollar $32.45
Aldi $34.70
Target $37.59
Walgreens $48.13

Wal-Mart seeks to be the low cost leader in retail and offers price matching, with a massive basket comparison marketing campaign with grocery competitors like Publix. The retailer has not aired a head-to-head basket challenge against Dollar General.

In last year’s study, Wal-Mart ranked fifth out of seven in price savings in the edible grocery segment. But it came in 52 cents cheaper on heath and beauty aids than Dollar General

Paglia said the next installment of that study is due out in a couple of months and it will be interesting to see if Wal-Mart’s investment in price has a better showing this year.