Dollar General Looks Good Today. Will Tomorrow Be Different?

So far Dollar General’s success has ostensibly evaded Amazon and Walmart infringement, but could possibly fall victim to the retail giants at any economic turn. However, with a P/E ratio approaching 20, investors are betting on continued growth.  Will it happen?  I asked my Pricing Strategy students this question.  And, to make it personal, I asked if they would invest their cash or career there.

Nicholas Doerner “Dollar General is Rural Store of (and Only) Choice”

Over the past few years the retail landscape has contracted from a plethora of brick-and-mortar options, to a select few online vendors and stores who’ve withstood the e-commerce surge. Amazon and Walmart have been crowned as retail’s “winners,” frequently lauded in the media for their ever-increasing market shares.

The two combined recently captured an estimated 64% of all online transactions for Black Friday 2017. The losers, in contrast, are peppering headlines with bankruptcies as they are abandoned by their customer base—and continue to close their brick-and-mortar stores at a feverous pace. One retailer has not only weathered the storm, they have actually grown for 27 straight years, with plans to build thousands more stores. Dollar General has been largely successful because their strategy of “[going] where [others] ain’t”.

Dollar General has identified an underserved demographic that is America’s rural population. As the rural economy struggles, the few grocery and general merchandise retailers that were present have diminished, forcing rural customers to drive increasing distances to the nearest “large” towns that can support mega-stores like Walmart. By placing a Dollar General store (which by comparison is much smaller and less expensive to run) right outside of small towns, and along highways leading to town hubs that can support a Walmart and other large chains, Dollar General has provided a closer and more convenient option. Likely unbeknownst to most customers, this convenience has a cost.

Dollar General focuses on small pack sizes that have low price tags, but high margins. Dollar General’s target shoppers come from households earning $40,000 or less, so DG capitalizes on a demographic that may not be able to afford bulk packages—which generally offer a better value to consumers, and a lower margin for retail sellers. Dollar General’s small pack sizes, priced under $10 and around five and 10 cent increments allow customers to easily estimate the cost of their total trip. This also increases the likelihood that the customer is going to run out of the product—and prompts them to return for a repeat purchase, sooner.

In addition to having a smaller and nimbler store than Walmart, the Amazon threat is not as severe for Dollar General as one would think. Amazon has built-in barrier-of entrances for customers with the prime subscription, as well as free shipping with a minimum $35 order requirement for non-prime customers. As identified by Dollar Generals Chief Executive Todd Vasos, their target customer used up the last of a product the night before and is stopping in their store to pick up a replacement (1). Their demographic is not one to plan a shopping trip or an online order around household items that are running low. Their target customer is making a purchase as a direct response to an immediate need.

In terms of challenges that Dollar General faces, imitation would seemingly be a large one. Dollar General’s differentiating factors are its locations, size, and price points, which are all duplicatable. However, when Walmart attempted to imitate this model with their Walmart Express stores, they were unsuccessful. Their express stores were often located too close to a supercenter, carried multiple brands of the same item which ate up floor space, and carried perishable fresh foods. This is in direct contrast with what Dollar General has done.

Despite Walmart’s failures, a potential threat for imitation could be developed by a regional gas station who could expand their convenience store sizes and merchandise to match Dollar General. Dollar General is successful because most of the towns they operate in don’t have a direct competitor, however most of these towns are likely to have a gas station. Dollar General may have considered this threat when purchasing some of the closed Walmart Express stores who sell gasoline, which has allowed them to ease into this market.

An additional threat, Amazon recently reduced its barriers of entry for low-income customers. On March 7^th, Amazon announced it will expand its prime membership discounts ($5.99 a month) for customers on government assistance to also include those on Medicaid and those with EBT cards. While a large portion of Dollar General’s customers do receive some sort of government aid, Dollar General purchases are based around the convenience of getting an item immediately, compared to driving a long distance to the nearest Walmart.

Additionally, their low-priced items are often a financial necessity for shoppers as managers have described themselves as “outreach managers,” who help shoppers piece together meals for a few dollars each. With customers in such challenging financial situations, it will be interesting to see if this gains Amazon any ground on Dollar General’s target demographic.

Over the past five years Dollar General has fended off direct imitation from Walmart Express and they (at least in this example) provide an overall better shopping experience than a direct competitor, Dollar Tree, who focuses on the suburban market.

From a financial perspective, they currently have the largest market cap (23.6 B) compared to small-store discount merchandisers: Dollar Tree (21.98 B), Fred’s Inc (122.33 M) and 99 Cents Only Stores (Private). While their P/E is higher than Dollar Tree (19.26 to 12.87) their rural positioning and continuing expansion plans should provide continued growth, and could be appealing to potential investors.

From a business strategy standpoint, Dollar General has positioned themselves to avoid direct competition with Amazon and Walmart, having successfully demonstrated a way to deal the duopoly’s  increasing presence in the retail market.

Tina Al-Saigh “They will eventually hit a peak for growth in rural areas…”

Dollar General flourished during the recession due to its convenient locations, and its everyday low price strategy. Despite being several years into an economic recovery, residents in rural America are still struggling for a number of reasons. Typically in a recovery, incomes increase and unemployment numbers decrease thereby giving people a larger discretionary income. However, in this recovery, incomes have mostly remained stagnant, and while unemployment rates are low, that doesn’t account for the amount of people who are underemployed or no longer in the workforce.

The reason this benefits Dollar General to a certain extent is that people with more discretionary income would be more likely to move to the big box stores like Walmart or Target since they wouldn’t be as price sensitive. However, since this didn’t happen in this recovery, Dollar General has still been showing strong performance.

Considering the fact that recessions are cyclical and we’re already in one of the longest periods of expansion, it appears Dollar General doesn’t have to worry about their target market moving on to their competitors since customers’ economic status isn’t likely to improve. While on the one hand this is beneficial to Dollar General as they won’t lose customers to the competition, it also means that the customers often can’t afford to increase spending at Dollar General, thereby limiting the company’s profit and revenue.

Due to the above cost saving measures, they are able to offer highly competitive prices compared to most food and drug retailers. They also price most of their items below $10 and 25% of them are offered at $1 or less. These low prices and smaller packages increases the frequency of customer visits. They also offer and advertise nationally known brands at everyday low prices thereby attracting potential customers.

Ultimately, Dollar General has a strong business model. They’ve managed to serve an underserved market that most other companies can’t make profitable. They know their customer base well, and can play to their wants and needs with pricing strategies, products, and location. Where the risk comes in, and why I would hesitate to invest my money or career with them is their lack of a clear plan for growth in the future. As of last year, their plan for growth was to try to move into the suburban and urban markets. However, their attempt to purchase Family Dollar failed and they’ve yet to have any success entering that market on their own.

If they can’t find a way to expand into new markets, they will eventually hit a peak for growth in rural areas. Furthermore, while nothing seems to be a direct competitive threat at this time, there could be something in the works with the potential to completely disrupt Dollar General’s market.

David Lee “50 Steps Ahead”

In today’s world, when people hear the word retail, they either think of the success of Amazon/Walmart or the “struggles” of retailers that aren’t Amazon/Walmart. With the threat of an Amazon/Walmart duopoly, what are other retailers supposed to do? Fortunately, Dollar General is one of the rare retailers that have developed a successful plan to grow and combat the threats of the retail behemoths.

While many large retailers are closing locations due to poor sales, Dollar General plans to build thousands of more stores. Is this strategy succeeding? Of course it is. Dollar General marked its 27^th consecutive year of sales growth in 2016. Since Dollar General is in lower-income markets, their products are lower priced. Now when people hear low price, again they think of Amazon/Walmart. However, these lower-end markets are protected from Amazon/Walmart who target wealthier shoppers compared to Dollar General’s target demographic.

Dollar General’s CEO Todd Vasos stated that their typical shopper “doesn’t look at her pantry or her refrigerator and say ‘You know, I’m going to be out of ketchup in the next few days. I’m going to order a few bottles.’ The core customer uses the last bit of ketchup at the table the night prior, and either on her way to work or on her way home picks up one bottle” (Nassaeur). The small quantity packages of items that Dollar General offers allows them to keep their prices low, which appeal to their core shopper while yielding higher profits per items compared to bulk goods.

While the higher profits are good for Dollar General, the lower priced items are even better for their shoppers. These lower-income consumers often have to provide for their entire family and Dollar General has the assortment and offering that they can afford on a compromised budget. Dollar General is also attracting more customers through their unique product offerings.

By understanding their core customer, providing various camouflage products have been a win-win for both the retailer and their customers. They seem to be sending a message to their shoppers that they care about what they like, and they are here to help them and their families. As a consumer, it’s nice to know that a company cares for you.

While Dollar General’s strategy of store location focuses on their customers, it also focuses on what competition such as Walmart is doing. During the time Walmart experienced their high store growth, Dollar General made sure to enter markets where Walmart wasn’t close. By doing this, they were able to meet the needs of the surrounding community, and save people from the far drive in order to find low priced goods. Of course, Dollar General’s strategy doesn’t stop here.

With customer behaviors changing, Dollar General had to adapt with the environment to make sure they can be a 1-stop shop for their customers. This meant that their bare-bones stores had to come with more specifications such as refrigerators so they could provide frozen and chilled foods. Compared to Walmart, Dollar General is a smaller format store. Walmart tried to replicate Dollar’s Generals rural format strategy by opening Walmart Express, but that failed and ironically enough, Walmart sold dozens of their closes stores to Dollar General last year.

Dollar General’s main competitor is Dollar Tree who also purchased Family Dollar in 2015. Dollar Tree is different compared to Dollar General as everything in the store is priced at $1. This strategy seems to attract shoppers browsing for fun versus Dollar General Customer shopping for what they need. Although Family Dollar has a similar pricing strategy as Dollar General and are already in rural markets, Dollar General understands the potential threat and has sped up their rural expansion. Again, this is another example of Dollar General being well aware of their competitors and moving swiftly and strategically.

I would invest my career here and would also convince investors to put their dollar in Dollar General. Dollar General has proven that retailers can survive and grow in an era dominated by Amazon/Walmart. They have developed a strategy that focuses on untapped customers in communities around the country and have met their needs through product offerings and convenience of location. Dollar General’s CEO Todd Vasos is heading the company in the right direction, and as long as he continues to adapt to the market and their customers, Dollar General will continue to succeed. Family Dollar is a similar retailer who can replicate Dollar General’s strategy, but they would need to move faster than Dollar General who always seems like they are 50 steps ahead already. Walmart tried and failed. Who else does Dollar General have to be afraid of?

Victoria Coffee Claims ”Future Proof”

The American dollar store serves a unique and impenetrable purpose for many communities, even when competing against the emerging retail duopoly of Amazon and Walmart. For many people, dollar stores represent places where anyone is welcome to shop, regardless of their socioeconomic class; access to credit or bank accounts; or, even, physical proximity to major towns.

Even in the face of Walmart, Amazon, and other dollar store competitors, Dollar General’s success will be very hard to disrupt.

Several factors have helped Dollar General thrive as other retailers have struggled.

First, and foremost: price. Generally price $1-$10 an item, the seller even undercuts Walmart (Sharma). For its target market, “Best Friends Forever, “with household income under $35,000 and a dependency on government assistance — saving every dollar matters.

Second, unlike online retailers who require payments using bank accounts or payment cards, Dollar General accepts cash. This is hugely important in rural and poor towns (Dollar General strongholds), where many do not have access to credit or checking accounts. Requiring non-cash payments is one of Amazon’s primary weaknesses and a reason they have historically had trouble reaching low income shoppers.

Finally, Dollar General specializes in setting up storefronts in areas that other retailers often ignore. Communities that are underserved (due to low incomes of their residents, sparse populations, or distance from major markets, etc.) are perfect partners for dollar stores. Residents of these areas are receptive to the convenient, affordable merchants. Dollar stores, likewise, are well suited for these areas.

Unlike a large format store like Walmart, which needs a huge workforce, substantial monetary investment to open, and lots of revenue to succeed, Dollar General requires a fraction of the inputs to be profitable, making it a much less risky investment. According to Bloomberg, a Dollar General location can open for $250,000; a Walmart supercenter could cost more than $15 million. Dollar General, therefore, can better reach its target market than Amazon or Walmart, since it can service these customers in ways the duopoly simply can’t.

These factors have compounded over time to lead the chain to one of its most successful and active time periods ever. Unlike retailers who have struggled to remain profitable and competitive in the age of the retail duopoly, Dollar General has remained attractive for consumers and made money for corporate and investment stakeholders.

The chain has 14,000 locations in 44 states; 75% of Americans live within five miles of a store (especially important in areas otherwise considered retail or food deserts). In 2017, its shares appreciated in value over 25%, and revenues were up over $1 billion from 2016 (Dollar General Corp…). Net profit was also estimated to be between 5 – 6%. With over 900 new stores planned for 2018, the company is showing no signs of slowing prosperity.

In fact, Dollar General is thinking of ways to make itself future proof.

Many plans for new stores involve fresh produce offerings, and the chain has already forged the way amongst its competitive set by licensing the private label brand Rexall from healthcare giant McKesson. The retailer is also optimizing its assortment by incorporating more branded items and re-merchandising segments of its offering that are uncompetitive (beauty, wellness products, etc.) (Saunders). If the chain can be successful in these aims, it can improve same store sales significantly and increase its bonds to the communities it serves.

Many rural areas that house Dollar Generals have been left behind by retail, grocery, and pharmacy; being able to better substitute for these stores is a clear differentiating factor versus other dollar stores.

It is unlikely, at this point, that new dollar store entrants will be able to capture the level of market share established players already have. The dollar store strategy relies on being located in specific communities and leveraging operational efficiencies to provide ultra-low prices, something that would be difficult for a new company to do on a mass scale.

The only true competitors that Dollar General has are other existing dollar stores, such as Dollar Tree, Family Dollar, and Five Below. The most threatening competition so far is clearly Dollar Tree, who owns Family Dollar. Together, the brands represent an essentially equal number of stores versus Dollar General and, like Dollar General, Dollar Tree has large expansion plans alongside impressive performance.

Since both brands are extremely well positioned with the same demographic, and have similar performance and total footprint, a key component of success will be opening stores on a selective basis. As of now, the two giants survive without cannibalizing each other because they win one community at a time, where the other most likely does not exist. If Dollar General follows this strategy and continues its impressive merchandising improvements, it should survive the retail duopoly.