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Competitive Watch: Dollar General Hits Critical Mass

Chain maneuvers deeper into c-store territory with small-format expansion and more
Photograph courtesy of Dollar General

GOODLETTSVILLE, Tenn. -- In the military treatise “The Art of War,” Sun Tzu famously advocated that it’s not enough to “know thyself”—you also need to know the enemy to be successful in battle.

For convenience retailers, one of the fiercest competitors has been dollar stores, which have been making inroads into tobacco, immediate consumption, foodservice and lottery. Leading this charge is Dollar General. The Goodlettsville, Tenn.-based chain has the most locations, the strongest sales growth and the most ambitious plans among the major dollar chains.

In the spirit of Sun Tzu, here are some numbers about Dollar General that underscore its reach, drive and dollar dominance:

  • 15,227: The number of Dollar General locations as of November 2018.
  • 975: New stores slated to open in 2019; the company opened 750 sites in the 39 weeks ending Nov. 2, 2018.
  • 359: Number of traditional Dollar General locations converted to Dollar General “traditional-plus” (Dollar General TP) stores, which feature extra cooler doors to hold an expanded set of perishables. The chain now has 750 Dollar General TP locations, including 450 stores that stock fresh produce.
  • 10: How many more of its DGX convenience-focused stores Dollar General plans to open in 2019, bringing the total nationwide to 13. DGX locations are about half the size of a typical Dollar General store and feature a product selection geared toward “vertical-living customers,” CEO Todd Vasos said during Dollar General’s third-quarter 2018 earnings call.

Beyond the store openings, Dollar General has been waging retail war through new offers. This includes its Better-for-You initiative, which has added healthier food options to 2,700 sites and counting, and features Dollar General’s Good & Smart private-label snack brand. The dollar chain has more than 20,000 cooler doors across its network thanks to an expansion of the packaged-beverage category. And it has enhanced its checkout lines, offering more impulse purchase products in approximately 7,500 stores across the chain.

“They’ve created the excitement of a mini Costco without the membership fee or massive parking lot and warehouse.”

Then there is Dollar General’s expanded nonconsumable offer, its Dollar General Market grocery stores and, perhaps most timely, its new Dollar General DG Go scan-and-pay mobile app.

Make no mistake: Dollar General is steadily infringing on c-store territory.

“You go to convenience stores to buy your cigarettes, lottery tickets, quick snack or drink, or fill up on gas,” says Poonam Goyal, senior U.S. retail analyst for Bloomberg Intelligence, Princeton, N.J. “As Dollar General has introduced more tobacco, lottery and fresh food options, this becomes a threat to steal share from a 7-Eleven, Wawa or other c-stores in close proximity.”

Why the Chain Is Thriving

Donald Stuart, managing partner with Cadent Consulting Group in Wilton, Conn., believes three factors are driving Dollar General’s growth: agility, targeting and macroeconomic trends.

“Dollar General has a small footprint and a low cost structure,” Stuart says. “They have the ability to open in small, underserved  communities that would not support a Walmart or Target, and they also can close and reopen in superior locations when competition enters.”

Second, Dollar General has a huge presence in the South and middle America, areas typically with the lowest incomes. Third, Dollar General is benefiting from a strong economy, but one in which real wages have remained relatively stagnant and income inequality is increasing. “The fact that purchasing power has barely budged means that Dollar General’s core consumers continue to struggle as expenses have outstripped wage growth,” Stuart says.

Babs Ryan, vice president and director of consumer and retail consulting for Forrester in Cambridge, Mass., says it’s no secret why Dollar General is racking up retail victories.

“It’s their combination of staples and commodities—where price matters—high-frequency purchase items, and re-creating the treasure hunt with new offerings of electronics, appliances and fresh,” Ryan says. “They’ve created the excitement of a mini Costco without the membership fee or massive parking lot and warehouse.”

$23.5 billion

Dollar General sales in fiscal 2017

One example of this is within the Dollar General TP format stores, which offer fresh fruits and vegetables, bagged lettuce, freshly picked herbs and other veggies stocked in coolers. New produce sections will be added to about 200 locations being remodeled to the TP format in 2019. Dollar General impressively gets up to a 15% comp sales lift from its TP store remodels.

“They’re an easy place to go where you can get quick fill-in products like a gallon of milk at a reasonable price compared to a convenience store,” Goyal says of Dollar General. “These shoppers go to a Dollar General for a fill-in trip interweekly.”

Merchandising is also what makes Dollar General special, says Thom Blischok, chairman and CEO of Phoenix-based Dialogic Group. “They’ve upped their merchandising game tremendously over the past five years by fine-tuning assortments and bringing premium and superpremium into their stores,” he says. He cites premium pet foods such as Purina’s Bella and One dog food and Nutro Petite Eats as examples.

Stuart agrees, pointing out that consumables, which represent 75% of Dollar General’s overall sales, have been growing at a faster rate. This is being driven in part by the introduction of more health products, including items from its Better-for-You program, an initiative launched in 2018 that offers shoppers healthier and affordably priced food and beverage options in about 2,700 stores. This program will comprise more than 130 products rolled out over time, 75% of which will include SKUs from Dollar General’s Good & Smart private-label line of healthier snacks and beverages, including trail mix, snack bars, freeze-dried fruit and coconut water.

These better-for-you products and programs “all bode well for future positioning and growth,” Stuart says. “In addition, they know their shoppers, both Gen Z as well as the 45-64 group, with a general income profile skewing under $60,000.”

Crossing Boundaries

Dollar General’s aggressive plays into products such as beer, cigarettes, snacks and packaged beverages have brought it into straight competition with c-stores. Perhaps no example is more obvious than tobacco, which Dollar General began selling in 2013; it now represents approximately 30% of sales, Stuart says. For this category, Dollar General takes a low-price strategy, using tobacco as a lure toward more profitable categories.

“Their goal is not to sell more tobacco but to convert the tobacco customer into a total store shopper,” Stuart says. Dollar General has “been successful in selling more products to tobacco-purchasing customers,” he says.

Overall tobacco volume in dollar stores, including Dollar General, increased approximately 11% (as of late September 2018), according to data from Pittsburgh-based Management Science Associates (MSA). This makes dollar the only class in trade in which the tobacco category has been growing, says Don Burke, senior vice president of information management solutions for MSA.

28

Consecutive years same-store sales have increased

“Today, dollar stores represent about 8% of all stores in the U.S. and about 2% of total tobacco sales,” Burke says. “Convenience stores represent about 57% of all U.S. stores and around 71% of tobacco sales—which is a c-store’s No. 1 category. So convenience clearly is far outselling dollar stores in tobacco. But with dollar’s recent growth in tobacco, it stands as a concern and risk to c-stores.”

C-stores still have a few big competitive advantages over dollar stores: assortment and speed. “The dollar-store shopper is only interested in certain items, not the entire category,” Burke says. “And a dollar store is never going to be as convenient as a c-store to buy tobacco quickly.”

The company has also amplified its in-store digital capabilities; 20,000 customers now use the Dollar General DG Go app, which lets them scan SKUs via their phones as they shop and then bypass the register using a kiosk at about 250 stores. And more than 15 million subscribers clipped more than 700 million digital coupons in 2018 using Dollar General’s digital coupon program.

Pumping Up the Volume

Fuel is another area in which Dollar General has ventured into c-store territory. In 2016, the dollar chain acquired and converted 37 Walmart Express fueling sites in the South and Southeast. The company has not discussed plans to grow the fuel offer, but it’s a natural next step, Goyal of Bloomberg Intelligence says.

“They’ll look for more locations to add gas to going forward, as it’s a good idea,” she  says. “Everyone needs to fill up their tank, and fuel is an obvious driver of traffic into your store.”

It would be especially complementary to tobacco-seeking customers, Burke says. And Ryan of Forrester believes it would turn Dollar General into a true one-stop shop.

“In nonurban areas, many c-stores are perceived as gas plus a store. What Costco and Dollar General are selling is a store plus a gas station,” she says. “Where Dollar General wins by adding fuel is that we buy food more often than we buy gas. Think of Dollar  General as the place you top up everything fast.”

$12

Typical shopper spend per visit

However, there is risk in Dollar General moving aggressively into fuel sales, Stuart says. “Adding fuel brings a number of variables into play, including greater volatility in their sales and earnings due to the rise and fall of oil prices,” he says.

Some believe the greatest threat from Dollar General is yet to come—in the form of its slowly expanding line of DGX stores, which offer grab-and-go sandwiches, packaged snacks and candies, a beverage bar and coffee station. Three DGX locations have opened so far in Raleigh, N.C.; Philadelphia’s Northern Liberties neighborhood; and Nashville.

In the company’s third-quarter earnings call, Vasos said the DGX sites were doing “well vs. our expectations. We are excited to continue investing in this innovative concept.”

He has described DGX as a format designed to serve “busy city dwellers with everyday low prices on the essentials they need in a convenient, easy-to-shop format.”

In particular, it is targeted at millennials, “which is an emerging and important part of our customer base,” he said.

3 out of 4

Number of Americans who live within 5 miles of a Dollar General—a higher ratio than any other retailer

“DGX stores could be a concern. You can go pick up a sandwich or salad or fresh food there,” Goyal says. “But it’s going to take time to build a rapport where the customer feels the fresh food is of good quality, well-priced and better for you.”

“The DGX stores are smart,” Ryan says. “But this is a different business model that is more costly to run, due to different traffic patterns than their core stores. Cleanliness is a top driver of convenience-store visits. Keeping fresh foods and beverages on tap, clean and replenished is hard work.”

Neil Stern, senior partner with Chicago-based McMillanDoolittle, echoes those reservations. “The DGX target customer seems different, and it is difficult to get any low-cost uniform boxes, which is a hallmark of rural stores,” he says. “This suggests that this remains a test, for now.”

Retail experts interviewed for this story say Dollar General could become an even greater threat to c-stores with more DGX, Dollar General TP and remodeled stores, plus more foodservice, and fuel; more coolers and freezers; and morning programs with corresponding categories such as bakery and breakfast sandwiches.

“Not all these strategies will generate the most productive return on their investment. But continued expansion of existing and smaller-format, highly convenience-oriented footprints makes the most sense,” Stuart says.

Blischok’s formula for Dollar General’s success? “Continued intense focus on creating value for the shopper through product selection, merchandising innovation and supply chain,” he says.

Adding services would be another coup for Dollar General, Ryan says: “Since gotta-have-it-now is a driver for dollar stores, copying the Chinese local store-runner delivery model would give them an advantage.”

C-Store Counteroffensive

How can c-stores compete with Dollar General? Concentrate on quick sales of tobacco and convenience-oriented items, provide great service, offer a clean store and expand healthier/better-for-you snack options, Stuart says.

“Maintain the ability to make purchases easy and fast, especially tobacco,” Burke says. “Also, maintain preferred addresses. A dollar store is typically not located in as desirable a location as a c-store, particularly for people commuting to and from work.”

Prepare to play with prices, also. “Dollar stores are more competitively priced than c-stores,” Goyal says, “so convenience retailers will probably have to bring some prices down on key traffic-driving categories like grab-and-go beverages, for example. It can get the customer in the door with the potential to buy more.”

“C-stores need to make sure they revisit value. … They can’t afford to look like they are price-gouging.”

Bargain building is also crucial, Stern says. “C-stores need to make sure they revisit value, particularly in grocery and household items,” he says. “They can’t afford to look like they’re price gouging.”

Another area for differentiation: fresh, ready-to-eat foods. “If you improve your foodservice capabilities, you can better compete,” Blischok says.

Sources: Dollar General, The Wall Street Journal, Bloomberg, Cadent Consulting

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