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Dollar General: Great things come in a small box

BY Michael Johnsen

 

What retail chain has more stores than any other U.S. company, with plans to open an astonishing 700 new locations this year alone, while approaching $20 billion in revenue and maintaining sales and profit momentum?

It’s Dollar General, the storied Goodlettsville, Tenn.-based small-box discount giant celebrating its 75th year in business in 2014. Nearly seven years after the induction of a largely new management team under new CEO Rick Dreiling and the launch of a top-to-bottom revitalization of the company’s core mission and merchandising strategy, Dollar General has attracted the attention of both the financial and consumer press that it deserves.

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In recent months, the fast-growing company also has gained a higher profile through its well-publicized battle to acquire small-box discounter Family Dollar. Whatever the outcome of that takeover fight, Dollar General has already become a formidable market force in the shadow of such larger and noisier big-box general merchandise discounters as Walmart and Target.

Dollar General is the quiet giant of American discount retailing. Its more than 11,500 U.S. stores are deeply embedded in suburban and small-town communities in 40 states across the country, and in 2015 the company expects to open its first stores in Maine, Rhode Island and Oregon.

Dollar General stores sell a broad but tightly controlled mix of discounted name-brand and private-label household necessities, health and beauty aids, basic apparel, seasonal items and food in small-box stores that drive customer traffic with convenient locations, everyday low prices, brand-name quality and a small-scale retail format that’s easy to navigate.

‘An amazing business model’

“We’ve experimented with Dollar General Plus, at 10,000 sq. ft., and Dollar General Market, with 15,000 sq. ft.,” Dreiling explained in an exclusive interview with DSN. “But the core store is right around 7,500 sq. ft. We’re trying to be the general store that our grandparents shopped in, and our goal is to make that box productive.”

The watchwords are fast product turns and shopping simplicity. “Dollar General stands for convenience, quality brands and low prices” along with “a truly hassle-free experience,” the company reported. “We design small neighborhood stores with carefully edited merchandise assortments to make shopping simpler.”

“We don’t carry every brand and size, just the most popular ones,” the company noted. The typical Dollar General store sells approximately 10,000 items.

Added Dreiling: “The beauty of this business is that you’re dealing with a relative handful of very basic SKUs — with products like Tide and Clorox and a private-brand program. You don’t have to have seven or eight versions of everything. And that allows us a tremendous amount of flexibility in the stores.”

The result is “an amazing business model,” with stores that are “inexpensive to build, inexpensive to operate, and we open our stores at 85% of our average store volume,” said Dreiling. “Find another retailer that opens at 85% of their average store volume.”

Expanding the customer ‘sweet spot’

At around 7,500 sq. ft., the model for the standard Dollar General store also is compact enough — and appealing enough — to allow for plenty of new growth potential across the country. The company still foresees years of expansion opportunity in untapped markets.

“Using our real estate software, we have identified over 14,000 opportunities for [additional] small-box discount retail stores in the United States today,” he said. What’s more, Dreiling added, the nation’s “bifurcated recovery” means that “the economy is continuing to create more of our core customers.”

For Dollar General, those core customers are in the low- to moderate-income groups earning $50,000 or less per year, according to Dreiling. “That’s our sweet spot,” he noted.

Nevertheless, Dollar General stores appeal to a broader swath of the consuming public than they did a few years ago, added the CEO. “The store we’re building today is much different than the store we built in 2006 and 2007. The model is more viable across a broader spectrum of economics,” said Dreiling.

Nevertheless, he and the rest of the team guiding Dollar General are determined not to stray too far from the company’s founding principles of selling “everyday basic items at extraordinary prices for our customers,” according to the CEO.

“This organization … has 75 years of serving others. And if you look back over the last seven years, the key driver of the success this company has enjoyed is we’ve never lost sight of who we are,” Dreiling said. “There has been a major change in how this company does business — how it looks at its numbers and its results — and yet we still talk about [founder] J.L. Turner and [former presidents] Cal Turner Sr. and Cal Turner Jr. here. And we have never lost sight of what [their] core goal was, and that is to serve customers in underserved areas.

“So we’ve been able to hold onto the past and meld it with the future, and the results speak for themselves over the last seven years,” he added. “The company is 80% bigger in sales volume than in January of 2008, and store count is up 38% to 40%. And all that happened not in a fledgling start-up business, but in an incredibly mature business and a mature channel.”

Plenty of growth potential

Mature or not, the dollar store business still offers plenty of growth potential, said Dollar General’s CEO. “We think organic growth represents a great opportunity for us,” Dreiling said. “We see the square footage growing 6% to 7% [per year].”

Dreiling said that aggressive growth strategy rests on a solid foundation, given the leadership provided by “one of the strongest teams in consumables retailing,” the rapid maturation of new stores and the high turns generated across product categories.

“We’ve gone from $160 per sq. ft. to over $220” in recent years, he said, due both to smarter and more responsive category management and product selection, and to a decision made soon after he arrived to raise the shelf height on store fixtures by 12 inches.

“The productivity on our new stores, and the returns we generate, are just excellent,” Dreiling noted. “I can’t predict what’s going to happen with the economy or any of that, but I see no reason to slow store growth in our channel right now.”

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