Dollar General Case Analysis

8 August 2016

Intuitively one might assume that Dollar General, the well-known extreme-value retailer, has an established competitive advantage versus other consumer goods retailers with respect to price. It would then follow that cost would be a defining characteristic of the company, and a cost analysis an appropriate analytical tool. However, the four distinct types of retailers within the dollar store retail segment (original dollar stores, close-out retailers, limited assortment grocers, and extreme-value retailers) all compete on price.

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Dollar General is very competitive in this regard, but this alone has not rendered the company successful; price is not Dollar General’s competitive advantage amongst its competitors. Therefore, a demand-side differentiation analysis proves far more useful in addressing the current issues facing Dollar General (only 6. 9% sales growth and 1. 5% net income growth in 2006, down from 23. 1% and 5. 5% respectively in 1997), and furthermore developing a plan for increased future profitability.

Dollar General currently commands ~24% of all sales in the US Dollar Store Industry. The company’s product, or more accurately the need that the company satisfies, is the desire for an accessible small-format retailer for purchases generally totaling $10. The store acts as a convenient, temporary alternative to weekly shops at grocery stores or minor goods retailers. Keeping in line with this are the average sizes of Dollar General stores (6,900 square feet), which allow goods to be sought out in an efficient, brisk manner with limited store traffic.

Where Dollar General locates their stores is essential to both satisfying current market needs, and to diversifying the company away from competitors. The company operates more than half of its stores in communities of 20,000 people or less; in these rural areas, Dollar General represents one of very few options with regards to small-scale basic consumable merchandise. Furthermore, Dollar General locates most of its stores in strip-malls (49%) or freestanding structures (49%) that bisect popular commuter paths, capitalizing on an ever-present demand for convenience as well as low price

in the marketplace. Dollar General meets the needs of American consumers with bargain-based mentalities, as well as those currently living on fixed/low-income salaries. The motivation for an increasingly large percentage of the American populace is convenience, coupled with a low price, rather than simply price. This motivation is coupled with a psychological change in American consumerism; there is a dichotomy in the marketplace, an “hour-glass economy”, wherein commodity goods are bought in discount channels, and luxury products are purchased in high-end channels.

The criteria for Dollar General customers can be simplified into convenience, speed of shopping experience, and variety of goods. Paper goods and small consumables have long been part of Dollar General’s market basket; they typify the type of good that sells at extreme-value retailers. Limited SKU’s (~4,900 per store average) are also part of Dollar General’s customer criteria; excess variety consumes shelf space and extends the time of a shopping trip, creating discrepancies between consumer preferences and the attributes of the products in-store.

Price premiums have not factored into Dollar General’s customer’s habits. However, this is not to say that the company’s convenience of access could not therefore allow a few select items to carry a price premium, particularly those that already have higher markups. This could only be done with a very limited selection of goods (likely dairy, frozen goods) before the ethos of Dollar General becomes compromised. This begins an analysis of the growth opportunities currently being discussed by management at Dollar General.

The extreme-value market segment is seen as one of the most under-saturated sectors in the US, and several plans of action are posited within the case, each with fairly clear pros and cons (EXHIBIT 1). Perhaps the most pressing concern for Dollar General is addressing how to grow without either stretching resources to an extreme, or compromising the company’s competitive advantages. I would suggest the company to carry out the following actions. First, the company should seek limited expansion within the continental United States (US extreme-value industry still growing at $1.5 billion/year), namely into California. However, expansion should be limited to this state only. Whereas development within the US had been the company’s growth engine for years, the company is now closing and remodeling stores with equal returns. As such, the company’s growth aims should be moved abroad (Europe), where extreme-value markets are well received, and stores with limited SKU’s fair better than larger discount outlets. Secondly, store merchandise productivity could be enhanced by eliminating seasonal items (costumes, summer toys) and adding more strategic grocery items.

Research suggests that same-store growth could be spurred by a heavier emphasis on fresh grocery items, and Dollar General appears to have the delivery capabilities to keep a fair supply of perishables on hand. A slightly larger store size for new shops might be necessary for this sort of development, as Dollar General seems to have slightly underestimated the ‘sweet-spot’ for its store size with the current store model. The stores would remain small enough to facilitate accelerated shopping, but large enough to hold a proper number of SKU’s, still in the 4900-5300 range.

Finally, Dollar General should expand into cash checking and wire transfer. Providing this service requires no additional manpower, and many people (particularly those on low annual salaries) need a convenient place to cash checks; they are then hugely likely to pick up a small bundle of goods before exiting the store. This service would tap into a market of 28 million Americans who do not yet have a bank account (particularly young men and women). Exhibit 1

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