The Supply Side: Dollar General’s store focus goes against the grain

The U.S. retail sector is “over-stored,” according to analysts who continually point to numerous store closure announcements from Payless ShoeSource to Macy’s. No-frills Dollar General is bucking that trend, with plans to add 900 new stores this year, remodel 1,000 stores and relocate 100 stores.

Dollar General has more than 14,000 U.S. locations in 44 states, an increase of 35% over the past five years. More than three in four Americans will live within five miles of a Dollar General when the 900 new stores come online in 2018, according to the company.

That close proximity to the American public rivals Bentonville behemoth Wal-Mart Stores, which is opening far fewer stores this year and instead focusing on growing e-commerce sales. Wal-Mart said 90% of American consumers live within 10 minutes of one of its stores, which number around 4,470.

Analysts who favor the Dollar General growth strategy say the retailer has focused on rural America mostly ignored by other retailers such as Wal-Mart, which shuttered its 102 small formats located in rural areas two years ago. Dollar General has since seen its sales grow in rural markets.

Neil Saunders, an analyst with GlobalData Retail, said Dollar General has succeeded thanks to its lean business model. He said the smaller stores sell cheap day-to-day essentials in areas where it doesn’t make sense for Wal-Mart or larger retailers to open up shop.

“Dollar General is the closest and most convenient general merchant for millions, and while it does attract low-income shoppers, it’s also capturing a more significant share of spending from middle income and more affluent Americans,” Saunders wrote in a recent note to investors.

Saunders applauds the Dollar General expansion efforts. He also said many of the new stores planned will be located in metro areas, which is a slight shift in focus for the discount retailer. He said the retailer’s focus on more fresh foods, expanded beauty offerings as well as selling beer in some areas is helping Dollar General grow traffic counts and draw market share from competitors such as Wal-Mart and Family Dollar.

THREAT TO WAL-MART
Talk Business & Politics-Northwest Arkansas Business Journal asked retail analysts if Dollar General’s growth strategy is a threat to Wal-Mart. Spieckerman Retail CEO Carol Spieckerman said the retailers have different models given Dollar General’s smaller format. That said, she adds Dollar General does pose a market share threat to Wal-Mart and others.

“Dollar General’s primary strength, offering convenience through easy-to-shop stores, can also be seen as its weakness,” Spieckerman said. “Dollar General has massive physical scale working to its advantage — up to 75% of the U.S. population lives within five miles of a Dollar General store — yet, with the exception of its digital coupon program, it continues to lag in connecting those stores to an online marketplace.”

Spieckerman said it’s also difficult for Dollar General to keep up with Wal-Mart’s ongoing and aggressive clicks to bricks convenience innovation, yet it has recently signaled an intention to do so.

“Dollar General’s recent hiring of its first chief digital officer points to this gap closing, or at least narrowing, in 2018,” Spieckerman said.

She also said managing an immense store fleet could be enough to keep Dollar General distracted for the near term. She said the openings, remodels and relocations on the docket this year are a big undertaking. At the same time, the chain is also tweaking its assortments in ways that also threaten retailers.

“It [Dollar General] is expanding coolers in order to become more meaningful in grocery and emphasizing categories like beverages and snacks to such a degree that traditional convenience stores have something to worry about as well,” Spieckerman said.
“Dollar General is working to close the digital divide and that should be its top priority in 2018 given that Wal-Mart is doubling down on digital, and global disruptors like Lidl are also testing click and collect concepts to make the most of their physical footprints.”

PRICE COMPARISON
Dollar General customers and Wal-Mart customers overlap in many markets according to the most recent Kantar Retail pricing study. Consumables purchased at the two retailers indicate the retailers are close on price, but Dollar General wins the opening price point contest with its “$1 Deal” aisle which features everything from laundry soap to trash bags and dog food for $1 each.

In the Kantar study, Dollar General came in 99 cents cheaper than Wal-Mart on 11 staple purchases from eggs to milk and peanut butter and cereal. The ticket totaled $12.50 at Dollar General and the same items at Wal-Mart cost $13.49.

When it came to non-edibles such as paper towel and diapers, Wal-Mart beat Dollar General on the basket of five non-edible grocery items, which cost $7.24 at Wal-Mart and $8 at Dollar General.

Wal-Mart also edged out Dollar General on health and beauty aids with that basket of five items such as shampoo and toothpaste costing $6.27 at Wal-Mart, versus $6.50 at Dollar General. Family Dollar had the low prices in this category at $5.

DOLLAR GENERAL GROWTH
Dollar General recently reported third-quarter sales growth of 11% over the prior-year period. Total net income rose to $252.5 million, or 93 cents a share, up from $235.3 million, or 84 cents a share, last year. Sales revenue topped $5.9 billion in the quarter, and same-store sales rose 4.3% behind average ticket growth and improved store traffic.

“We continue to believe that investing in the business through our high-return new store growth is the best use of our capital to help drive long-term shareholder value,” Dollar General CEO Todd Vasos said in the earnings report. “Our new store growth is complemented with a significant increase in our store remodel program from fiscal 2017 that we view as an investment to enhance and consistently deliver on our brand promise to help our customers save time and money every day. … During the quarter, we effectively balanced our same-store sales growth while achieving gross profit rate expansion and continuing our planned investments in the business.”

For fiscal 2017, the company forecast net sales growth of approximately 7%, compared to its prior guidance range of 5% to 7% growth. It also forecasts same-store sales growth of approximately 2.5%, compared to its prior expectation that same-store sales would fall at the upper end of the range of slightly positive to up 2%.
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.