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Sharpening the focus in merchandising

BY Jim Frederick

Todd Vasos, COO , Dollar General

With their arrival in early 2008, the new leaders of Dollar General began a massive but methodical transformation of the chain’s critical merchandising and marketing functions. The goal: to tighten up and rationalize a store presentation and product mix that had drifted and lost focus, while boosting turns, shelf productivity and profitability.

(Click here  to download the full special report.)

Leading the charge were new CEO Rick Dreiling and his former, Longs Drug Stores veteran Todd Vasos. Armed with their combined experience in drug store and supermarket retailing, the new executives immediately launched an urgent campaign to apply new retail disciplines to Dollar General’s merchandising and marketing strategies.

“For example, when I got here, we had 16 ft. of candles,” said Dreiling. “Today we have four — which left us with 12 ft. for something else.”

Dealing in a limited mix of just 10,000 SKUs in stores averaging approximately 7,500 sq. ft. of selling space, Dollar General’s merchants have become adept at squeezing the most from the shelves. “What you learned in the grocery business was about SKU productivity,” said Dreiling. “And here, SKU productivity has to be right. If a SKU doesn’t produce, you’ve got to be smart enough to get it out and get in something that does. We do a really good job of turning things fast.”

Even before Dreiling arrived, he told then KKR principal and Dollar General director Mike Calbert that it was critical that the chain rein in and rationalize its merchandise mix with the kinds of retail disciplines he had sharpened at Duane Reade, Safeway and other companies. “That was one thing I told him we had to get done,” he said. “We had allowed a very eclectic store base, in terms of its size and shape, to turn into an eclectic offering. Merchandise selection was inconsistent across the store base.”

In the previous era, “While there were planograms being done, there were really no analytics attached to it. It was the old category management style of vendor-managed categories, driven by category captains,” Vasos explained.

“We called it the treasure hunt, but what that really meant was you didn’t know what you were going to get,” Dreiling added. Some of the items on the shelves, he said, “were in one store and not in another. And 25% of every store was what was called flex space, meaning it was up to each individual store manager on how to merchandise,” said the CEO.

“There was a lot of flex space in the store, and not everything was programmed,” Vasos agreed. “So the [new] team brought a real discipline into category management, and instituted what we would consider some best-in-class category management systems and tools, leveraging company-specific movement data from Nielsen, as well as our own analytics.”

“What’s really important about that [Nielsen] data is that it’s only based on our history; it doesn’t take into account a lot of other segments,” said Vasos. “We’re really better off, especially in a limited-SKU environment like ours, to hone in on our core customer. What does he or she really want? We rate that a 10 on a scale of 1-to-10.”

To get the answers, Dollar General also has invested heavily in information systems and powerful analytical software to not only track item-by-item and store-by-store product movement, but to give its buyers and category managers the tools to respond to — and anticipate — its customers’ purchasing preferences far more effectively and quickly.

Rethinking health and wellness

Under Dreiling’s and Vasos’ leadership, Dollar General also has dramatically redefined its approach to merchandising health, wellness, personal care, beauty and food. “In ’08 and ’09 we only had 3 ft. of health-related items in our store. It was an end cap,” said Vasos. “And beauty was only around 12 ft., including products like shampoo and deodorant.”

“We recognized right away that we had to gain legitimacy with the consumer, especially in the health arena, but also in the beauty arena,” he continued. “We brought in lines that would give us legitimacy, but also enhance our private-brand program.”

Across categories, private brands specific to Dollar General have become critical to the company’s success and renewal in recent years. “In private brands, we now have over 3,000 everyday SKUs,” said Vasos. “It’s a big piece of the mix, and we’ve more than doubled our private-brand sales in the last six or seven years.”

A major component of Dollar General’s expanding private-brand business is the Rexall line of health and beauty aid products, which Vasos called the “cornerstone” of its efforts to expand and legitimize its commitment both to wellness and private label. “We were able to obtain that Rexall brand and really make it a stand-alone brand on its own. And it’s now an over $200 million brand at Dollar General.”

“That’s how important the health mission is to us for our consumer,” he added. “And the reason we saw that as a real opportunity and went after it — and we did it very methodically, not right away but 4 ft. here, another 8 ft. the next year — was that [our consumer] doesn’t go to the doctor as often as [consumers in higher income brackets]. The doctor is a last resort because it costs money.”

Also undergoing significant expansion at Dollar General under Dreiling, Vasos and other new leaders since 2008 has been the consumables category. Vasos called Dollar General’s food mix “very aggressive,” and compared it with the mix of consumables offered by Longs Drug Stores. “We copied the playbook from there as we went into the food business here,” he offered.

In consumables, as well as wellness, private label has become a key component of the mix, said Vasos. Indeed, private brands now account for 24% of total food sales, according to the COO.

Those store brands help keep prices down. So, too, does Dollar General’s expanding ability to source product globally.

“Today, we’re importing out of 27 countries, whereas seven or eight years ago we were sourcing out of just four countries. We have … a main office in Hong Kong and a Dollar General sourcing presence in more than 10 other countries. We continually bid for items in these countries.”

‘She knows she can trust us’

At its core, said the COO, Dollar General strives to be “a convenient general store” offering consistently low prices storewide. In terms of its overall pricing, said Vasos, “we’re at par with mass, on average 20% or so lower than grocery every day on the shelf, and 40% lower than drug every day on the shelf. To do that, we have to keep our costs down.”

“The company is 75 years old, and it’s always been built on serving the underserved,” Vasos added. “Everything we do is to deliver the right product at the right value at the right time to the consumer. And we hope that as she walks into our store, … she knows she can trust us.”

“Yes, she might be able to find Tide cheaper somewhere on sale during that week, but she knows she is not going to overpay when she has to come in to buy something to take home tonight,” said Dollar General’s top merchandising and operations executive. “When she walks into the store, we want her to be able to find what she needs, at the price she feels comfortable in paying, and also knowing that that is a seven-day-a-week, 365-day-a-year promise that we make, to keep those prices low.”

To maintain that low-price, low-cost operating structure, “the No. 1 thing we all talk about day in and day out is that we have to keep it simple,” Vasos added. “That’s the mantra around here, because as you layer in complexity, you layer in costs. It never fails. Everyone falls into that trap. So at all costs; keep it simple.”

“We have a relentless focus on making life easier for our stores,” he added. The company’s collaborative command structure is also key, said Vasos. “This company has no silos. We do everything in collaboration with each other. While there’s always a healthy tension, there’s not a combative tension between marketing, merchandising, operations and supply chain — everyone works together. That helps us achieve the goals we need to achieve and keep those prices low.”

Meanwhile, Dollar General continues to expand its access to consumers through a mobile app that debuted recently. Roughly half of the company’s core consumers already use smartphones, and that number is expected to rise to 75% within two to three years, according to Vasos. In addition, with the difficult economic environment continuing “to add to our core customer base,” he said, Dollar General also continues to explore new potential revenue streams as it builds hundreds of new stores each year. Last October, the chain opened a fueling station with gas pumps at a Dollar General Market store in Hanceville, Ala.

“We are very pleased with the volume. It’s doing the volume you see out of a convenience store,” said Dreiling. “The challenge for us is to figure out how to entice the consumer from the pump to the store, and from the store to the pump. It’s still very much in test.”

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Dollar General Foundation champions education, literacy across communities it serves

BY Jim Frederick

Mary Winn Pilkington, VP investor relations and public relations, Dollar General

In September, the Dollar General Literacy Foundation awarded nearly $4 million to fund youth literacy and education programs at more than 800 schools, nonprofits and literacy organizations across the United States, supporting the company’s mission of “Serving Others.”

(Click here  to download the full special report.)

That brings the total amount awarded by the Dollar General Literacy Foundation over the past 21 years to $97 million. Those funds have helped more than 5.8 million individuals “take their first steps toward literacy or continued education,” according to VP investor relations and public relations Mary Winn Pilkington.

“We try to make sure we have a grant to every community where we have a store; that is our goal,” said Pilkington. Those grants support programs like youth literacy, local libraries, summer reading programs, family education reading programs and English as a second language programs.

“If you can consolidate your giving behind one topic, you can really make an impact,” she said.

Dollar General’s commitment to literacy really took root in 1994, when former CEO Cal Turner Jr. began the foundation. “His grandfather, Dollar General founder J.L. Turner, had a third-grade education and was functionally illiterate,” said Pilkington.

The company’s literacy efforts are the largest but by no means the only way in which the company funds local organizations. “Serving others is part of the culture, and it’s what this company was founded on,” said Greg Sparks, EVP store operations, who now oversees the foundation.

That commitment also extends to the company’s own. Through its Employee Assistance Foundation, Dollar General workers can get financial help in times of personal crisis.

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Taming the ‘wild frontier’ of discount retailing: Dreiling leaving his mark as Dollar General CEO

BY Jim Frederick

Rick Dreiling, Chairman and CEO, Dollar General

When Kohlberg, Kravis and Roberts approached the much-heralded chain drug store and supermarket veteran Rick Dreiling to run Dollar General some seven years ago, the move signaled the investment firm’s determination to return its huge but somewhat floundering retail holding to fiscal health and public ownership as quickly as possible.

(Click here  to download the full special report.)

Hiring Dreiling as Dollar General’s new top executive was a success. The company staged an initial public offering in 2009, just two-and-a-half years after KKR took the company private in a buyout, and years ahead of its own turnaround plan and IPO schedule for the Goodlettsville, Tenn.-based discounter.

Dreiling credits then KKR investment partner and turnaround specialist Mike Calbert as “very instrumental in the journey” of returning Dollar General to full fiscal health and independence. But the choice of Dreiling as CEO was the critical factor that set the stage for what was to be a sweeping business and cultural transformation at the 75-year-old small-box discount chain.

“When I came to this channel, this was the last wild frontier of discount retailing,” Dreiling recalled. What was critically needed to restore the company’s momentum, he told DSN, was to apply “all of that discipline that you learn in the grocery business and drug business and big box [retailing]” in areas like “labor control and category management.”

Dreiling brought with him a long and distinguished career in food and drug retailing. Before joining Dollar General as CEO in January 2008, he served as chairman and CEO of Duane Reade Holdings, the dominant drug chain serving the metropolitan New York market. Prior to that, he was EVP and COO of storied West Coast drug chain Longs Drug Stores.

Dreiling joined Longs in 2003, after garnering broad expertise in food and combo store retailing as EVP of marketing, manufacturing and distribution at Safeway Stores, and as president of Vons, a Safeway division serving Southern California.

He began his career in 1969 as a part-time clerk with Safeway in Kansas, working his way up the ranks and earning a degree in industrial relations before being promoted in 1998 to president of Vons. “I started off bagging groceries in a Safeway store,” he remembered. “My first promotion was sorting bottles, … and I thought that was the greatest job in the world.”

Under Dreiling’s leadership, Dollar General has regained its sales and profit momentum, fundamentally retooled its approach to merchandising and category management, and harnessed the power of its information technology to transform and smarten up its marketing, merchandising and expansion strategy.

“We used to generate a ton of data, but not a lot of information,” said the CEO. “And now we can look at that data and turn it into something that’s actionable.” Equally critical, Dreiling and his executive team have knocked down old departmental silos to unify Dollar General’s management and decision-making under a common vision and go-to-market strategy.

“Merchandising and operations have to function seamlessly together,” the CEO asserted in an exclusive interview with DSN. “When I first got here, I said to the [former management] team, ‘Show me a store.’ And the supply chain operator, the merchant and store operations couldn’t even agree on a store for me to see.”

When he arrived, Dreiling launched a rapid overhaul of the executive team, keeping valued decision-makers but bringing in a slate of retail, wholesale and supply-chain veterans from such companies as Duane Reade, Longs Drug Stores, Vons, Safeway, Eckerd Corp. and Starbucks to fill many key management slots. “The wealth of experience they brought to the table was in channels [such as] grocery and drug.

To their credit, said Dreiling, “that’s exactly what they did.” The new management team set about learning the techniques, processes and appeal of value-driven general merchandising in a smaller store format with a broad but concentrated mix of convenience, personal care, household and consumable items.

“Rather than coming in here and trying to change the world … everybody took their time,” he explained.

 Also critical to Dollar General’s recent success, said Dreiling, was its operational flexibility. “When you have to come in and be a change agent, it’s a heck of a lot easier when the organization is changing with you, rather than fighting you. And particularly if you look at ’08 and ’09, when we drove north of 9% comps [same-store sales gains] two years in a row, that’s the organization coming with you. It’s executing a plan.”

The CEO also credited “the culture and the road work that had been laid by the Turners” prior to the modern era of Dollar General. That era culminated with the retirement of Cal Turner Jr., son of founder Cal Turner Sr., in 2003, and the hiring of David Purdue to the top spot.

After taking the reins in early 2008, Dreiling quickly made his mark. He eschewed top-down hierarchical decision-making in favor of consensus-building through regularly scheduled cross-functional meetings — and through a culture that encourages mentoring and career-track advancement in the field and stores.

“There’s not a lot of politics here,” said the CEO. “I eat lunch down in the cafeteria; I don’t eat it up here. And my team and I … do our best work over a glass of wine.”

That flattened-out, informal management style epitomizes the culture at Dollar General, and is clearly one of the factors in the company’s meteoric rise in American retailing.

“I think that attitude has worked its way down the organization,” said Dreiling. “We will disagree with each other and fight each other, but we are family when we go home. And I think that’s pretty unique in an almost $20 billion company.”

Dreiling is also a firm believer that “one of the most important things a CEO does is to make sure he or she isn’t the smartest person at the table. That means you’re bringing in good people with new thinking and new ideas.”

Supplementing that management muscle are “a tremendous number of people who have been here for 10, 12, 15 years, and we’re very blessed,” said Dreiling. “We’ve got a tremendous amount of talent here. I think what we’ve done is a much better job of listening to that talent and giving them a chance to lay their cards on the table and get things done.

“So we did it together,” he added. “It wasn’t just a bunch of new people who just showed up with all these great ideas. The new people listened to a lot of the ideas that never got a chance to be heard.”

 

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