Dollar General News: Store Closings and New Prez/COO
The retailer with the most stores in the U.S. has decided it could use a few less.
Dollar General announced yesterday it was closing 400 underperforming locations, stepping up its efforts to upgrade existing stores and adding a new president and chief operating officer to lead the company through it all. The company also announced it was doing away with its “packaway” inventory management plan that kept slow-sellers on the shelf while the company marked down prices. Analysts claimed that the “packaway” approach failed to move product and kept Dollar General stores cluttered with stale merchandise.
David Perdue, chairman and CEO of Dollar General, said in a press release, “These strategic changes are designed to enhance the shopping experience for our customers and put the company on a solid foundation for profitable and sustainable growth in the future. Fiscal 2007 will be a year of transition for us as our team will be highly focused on executing this plan. We expect these changes will ultimately strengthen our store base, improve our long-term profitability and create value for our shareholders.”
David Bere’ will be in charge of leading Dollar General through its transition period. The new president/COO most recently served as executive vice president of Ralcorp Holdings and has been on the Dollar General board of directors for the past four years.
Dollar General operates roughly 8,000 stores in 35 states.
Discussion Questions: Has Dollar General and the dollar store industry reached the point of saturation with the number of stores in operation? What do
you see as the keys for growth for the industry and top operators (Dollar General, Family Dollar, Dollar Tree and 99 Cents Only)?
This trend will continue — as some of us predicted — while the value of the U.S. dollar drops. First, cheap Chinese items that sustain Dollar-type stores become more expensive to import. Second, American-made products become more affordable and domestic manufacturers will hire more employees. These employees, once employed, will be able to afford to shop in stores other than Dollar-types.
Dollar General, Family Dollar and other dollar stores all have a lot of locations. Many of them are in distressed shopping centers or difficult neighborhoods where the real estate is almost free. They know going in that there are going to be risks. Naturally, we would expect them to have a higher failure rate compared to larger retailers. For this type of format, I consider this to be quite normal and as a part of their business model.
We need to remember that one of the foundations of the extreme value format is its function as an outlet for distressed inventory. In many cases that means the product is a failure in other channels. It should not be a surprise that some inventory ages even at these appealing prices.
Just how many outlets are needed to relieve this pressure? And how much distressed inventory can be expected to exist on a regular basis? The rapid growth of this channel and its recent assimilation of more traditional products indicates that we may be at or beyond a point where capacity can be fully utilized. I think this is different than store saturation, which would be a demand-side issue. I think it’s more of a supply-side issue.
There are way too many dollar store locations in America. Even when a low-volume location is profitable, there’s a point where the return on investment is just too low. And the most precious resource, time, gets used on a low-profit venture. Every chain store company, whether it has 2 or 2,000 locations, has to have a minimum requirement for profit potential. It isn’t worth the time and energy supervising a location that can only make a few bucks a year. There’s a minimum wage for workers and there’s a minimum profit for owners.
Over saturization? Store closings? Is this a trend? There are more retailers selling the same products at the same prices than one can imagine. The push had been for more and more market share. So more and more stores opened. But being open doesn’t mean additional PROFITABLE business. Aren’t profits the reason we are all in business? The differentiating factor for retailers is the customer experience. Until retailers deliver on the promise of superior customer experience, there will be severely underperforming stores that require closing. Retailers need to measure whether or not they are actually delivering what they say they are delivering.
The news about Dollar General’s direction does not surprise me nor do I believe it will be the last in weeding out the under-performing value-format operators.
Is the market saturated? I don’t believe so, but I do feel confident that we have too many “weak” and “ineffective” outlets. That is to say that new management efficiencies and better business practices will be required to ensure continued success with this type retailer. It is my belief that merchandising standards, customer service training and promotional support will become standard operating procedures in the very near future.
This slowdown in expansion makes sense, and it comes on the heals of Wal-Mart’s recent announcement about slowing new store growth. Saturation is partly to blame, but the consumer is getting older and wealthier, too. This older, richer customer base does not align with a price-focused, no frills format.
To piggyback on what Mike Richmond wrote, take a look at the Five Below chain. Here is a business that goes the extreme value route (everything priced at $5 or below) and marries that with a consumer focus on teens and tweens. The chain, according to its web site, currently operates 51 stores in Pennsylvania, New Jersey, Maryland, Delaware and Virginia.
Yes, we are close to saturation with current format and all the competition. It is time to do something new – Consumers are always looking for a deal and they have found them at Dollar Stores over the years. How about developing new promotional items for these formats, e.g. sample sizes of larger and or new products? How about Five Dollar Stores. Do not look for continued growth in this channel without bringing new news.
And while we are at it, note as well that these stores do not operate at 100% efficiency or service taking into account the money they spend on supply chain management/logistics and staff. The actual number is 26% efficiency and 52% service. Without spending any more money, they could significantly upgrade their margins and service levels. What a concept — low prices AND great service! We’ve heard this as a slogan, but our data shows that there is yet a retailer who has actually done this to the extent that it shows in objective data.
Dollar General is making the right move in cleaning up their under-performing stores and changing their merchandising strategy. With the recent revelations from Wal-Mart about their inability to attract a more upscale consumer means Wal-Mart will now be forced to go after the lower income segments even more aggressively and in particular, those customer types most likely drawn to the dollar format. Dollar General’s move is a pro-active one to solidify their customer base ahead of any moves by Wal-Mart.
To chime in on the “no” vote with regard to store saturation being an issue for Dollar General, we should not forget the vast, untapped wilderness called “inner-city locations.” The first value retailer to figure out a winning inner-city format is going to clean up big.
Since there are still many rural and distressed areas that can use a Dollar General or Family Dollar store, I don’t think that we have oversaturated the market nationwide. These are today’s 5 & 10 cent stores with the wide variety of items they carry.
I do think that in small town locations there are just too many of them; where I live there is a Family Dollar in almost every little town and the towns run into each other, so you actually end up with 5-7 stores in a 10 mile stretch. That’s too many.
Where I see continued major growth is in the actual “Dollar” store such as Dollar Tree…anytime you can purchase an item there for $1.00 when the same or like item is even at Wal-Mart for $1.99 or $2.99…these stores will thrive.
Dollar stores help families stretch their available money and have many devotees who are frugal but not necessarily low income. And, word of mouth is creating even more customers all the time. Immigrants from many lands seem in particular to seek out bargains and are often less influenced by the marketing of prestige brands or the lure of glitzy, spacious mainstream stores. From my observation, location spacing issues may cause more of the profit problems of dollar stores than true over-saturation however. In one area I drove by recently there were a Dollar General and a Family Dollar store within a mile of each other. Then, I drove about 20 more miles before I saw another dollar store of any type.
It seems to me that in the race to secure new locations across this country the Dollar Stores are going to make some mistakes in their real estate selections. Some have mentioned locations abandoned by others and I see these operators moving into locations that appear to have less than a desirable population and location to support the store. I live near a village of 1200 that has a supermarket, a hardware/lumber yard, and a McDonald’s, but I’m not sure the new Dollar store on the Eastern side of town is in the right location to succeed. In the summer the tourists and boaters go by the grocery, the hardware, and McDonald’s on their way to the lake but come no where close to the Dollar store. Maybe the lease cost was right but in my opinion it will take a long time to get the volume where it probably needs to be!
8000 stores in 35 states is clearly too many. We will probably see more closings as DG more closely examines its profit picture. The key to DG’s success is offering products which are affordable and offer the velocity to keep the store shelves “fresh.” DG is missing this mark, and needs to become more focused on representing just their best moving products, while changing their representative mix to keep the consumer excited with new SKUs. Price is important as well as product velocity in DG’s model which reflects an earns and turns business. Doing all of this while managing the business’ logistical needs, and producing a profit between 8000 stores is clearly difficult to do. In DG’s case, less is more.
Five Below is a great example of a premium “dollar” store. It is well stocked and has a great shopping atmosphere. IT could easily expand 5 fold.
The key is the kind of merchandise and the location. Dollar General usually competes with Family Dollar head on. Then they compete with Big Lots, which now stocks perishables and frozen foods, like Dollar Tree.
And don’t forget the supermarkets like Food Basics, The Bottom Dollar and Save-A-Lot, which incorporate the dollar store concept into their stores.
Everyone seems to be getting into the act. This leads to over saturation, a trend that Dollar General has recognized, so it has decided to pull back and close stores.
Makes good business sense to me.
Let’s not forget they also announced they would be opening 300 new/relocated units. So, a net loss of 100 stores isn’t exactly shattering news. As to retail saturation, when has logic ever had anything to do with the number of units one operates or where you locate them?