Source: Facebook | Dollar General
Has Dollar General Lost Its Recession-Resistant Tag?
Dollar General slashed its outlook for the year after first-quarter results missed plan, raising concerns over the chain’s vulnerability to an economic downturn.
Dollar stores thrived during the last downturn as higher-income households traded down and lower-income ones spent more with the chains. Dollar General and other value-focused rivals, such as Dollar Tree, have reported better-than-expected results over the last year, even as inflation pressured Walmart and other retailers.
Dollar General’s same-store sales turned negative in April, however, and that trend continued in May.
CEO Jeffrey Owen said on an analyst call that Dollar General’s lower-income consumers are “under greater pressure than we have seen in quite some time,” citing that food inflation is still up nearly 20 percent on a two-year stack basis. Near-term pressures, including lower-than-expected tax refunds and reduced food stamp benefits, have exacerbated inflation.
“Unfortunately, our customers are saying they’re having to rely more on food banks, savings, credit cards. As we all know, credit card rates are at an all-time high,” said Mr. Owen.
Dollar General is lowering prices “even sharper within our established target range” and reducing costs to drive share gains.
“We’re positioned to serve our customer in times like this,” said Mr. Owen. “And with primarily 80 percent of our stores in communities that’s 20,000 or less, we’re uniquely positioned to be there for her.”
Dollar Tree and Big Lots likewise posted weak first-quarter results. The sudden weakening sales trend at Dollar General led to stock downgrades from Piper Sandler and Atlantic Equities amid fears further guidance cuts may be necessary.
“Q1 showed a steeper rate of change in the company’s core customer base,” Atlantic Equities’ analyst Daniela Nedialkova wrote in a note. “Demand had stayed resilient through last year, but with savings now depleted and incremental pressure from reduction in benefits and ongoing inflation, low-income consumers are retrenching.”
The Wall Street Journal also said middle-class consumers appear to be trading down foremost to Walmart while Dollar Tree has become more competitive since that last 2008 downturn. “Ironically, it may take a much deeper economic downtown to turn things around for Dollar General,” columnist Jinjoo Lee wrote.
Discussion Questions
DISCUSSION QUESTIONS: What do you think is driving the weakness at Dollar General? Have conditions become worse for Dollar General versus during the Great Recession?
Poll
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Keith Anderson
Founder, Decarbonizing Commerce
Neil Saunders
Managing Director, GlobalData
I was surprised by Dollar General’s results. If discount and dollar stores are seeing weaker demand, then I can’t help but wonder if they are the ‘canary in the coal mine’, or if these results are more reflective of the decisions/execution by Dollar General? Any way you look at it, these results are mildly disturbing, but I’m still bullish on the category.
Is there reason to be concerned in the near-term? Perhaps — especially if investors expected Dollar General’s earnings to continue unchecked. DG has experienced unprecedented favor among shoppers and ridden quite a wave. As with any organization experiencing growth trajectory such as theirs, mitigating circumstances (e.g., economy, pullback on government subsidies, competitive pressures, supply chain) can cause unanticipated adjustments to earnings.
Is there reason to be concerned in the long-term? I don’t believe so. DG has proven itself resilient, creative, and adaptive to changing shopper behavior. A small blip on a radar screen is no reason to panic — stay the course and the storm will surely pass.
DG had every advantage when consumers were his by inflation and job losses. Now wages are up and jobs are recovering big time. Shopping is finite. Walmart’s Q1 was up over 7%. My conclusion is that shoppers are trading up.
Although I agree on the surface, Gene, I am not yet convinced that DG’s recent results are indicative of a seismic market shift. The best way for any business to adjust their game plan and return to relevancy is through adversity. My instincts suggest DG will aptly modify their mix, their pricing, and their store operations to right their ship.
I don’t think their ship needs righting. They experienced outsized growth in the last several years, largely due to external conditions. As those conditions subside, they will return to a more normal experience. That isn’t bad. It is good. Retail growth is not infinite. When one retailer exceeds economic growth, another will come up short.
It is surprising as well as disappointing to see these results. I could have imagined lower profits do to higher than normal expenses, but not lower comparative sales. Are so many DG customers going to food banks?
It’s definitely worth watching but it seems premature to count DG out. Same-store sales for consumables were still positive in April and May, and overall comps are positive for the first three weeks of Q2. There’s clearly a shift in mix away from discretionary goods, and DG may not capture as many higher-income households trading down as they did during previous cycles, but they are still pretty favorably positioned for the next 12-18 months.
I wonder if Dollar General and Dollar Tree have lost more than the “recession resistant” tag. They may have lost consumer trust and love. This Axios poll of 100 brands has them near the very bottom at #s 83 and 89. https://www.axios.com/2023/05/23/corporate-brands-reputation-america
They’ve cut most of clothing and expanded home decor items and consumables. Their store resets are promising but many stores are a big mess. The DG Market format at least out in CA is just sad and forgotten.
The other issue I’ve been seeing in the past couple years is their pricing is creeping higher and higher on many items. They used to price within 5% of Wal Mart on many categories and that is no longer the case. In a lot of consumable categories their prices look like a grocery store now.
The challenge to the extreme value retailers is the reemergence of Walmart as a viable alternative during difficult times. Dollar General & the ilk used to own this space but now face competition from the big boy on the block. However, DG is a terrific retailer whose growth & resiliency has carried it this far. I expect more of the same as they reposition vis a vis Walmart, rather than their traditional competitors.
You’re spot on, @Richard George. Walmart has regained its appeal perhaps at the expense of Dollar General. However, not everyone wants to travel to a Walmart or traverse its massive footprint. I believe DG can right the ship with sharpened pricing, renewed attention to assortment, and its smaller, more convenient footprint.
Let’s put this in context. Compared to the first quarter of 2019, Dollar General sales are up by 41.1% or $2.7 billion in cash terms. That’s a massive increase both in actual terms and on a market share basis. The company made extensive gains during the pandemic and, like most retailers, saw choppiness in trading thereafter as habits reset. As for the first quarter, the numbers were solid but softer than some expected – especially on a same-store basis. However, you really can’t compare past economic downturns to present economic issues as a guide to Dollar General’s performance. Last time there was a downturn we did not have hefty inflation which has led some lower income-shoppers to pull back – especially on discretionary items (Dollar General home and apparel sales were down 1.6% and 8.1% respectively). It is also the case that Dollar General has expanded its share of middle and higher income shoppers over the past 10 years so it doesn’t have the same gains to make as it during the last downturn. All in all, Dollar General is A-OK.
Excellent analysis and assessment Neil. I agree that Dollar General should be ok and it is more about consumers tightening their belts than a shift in brand alliance. While Walmart may be stealing some market share from some of the dollar stores, it probably isn’t a huge threat.
A weakness in Dollar General may be a good sign of the overall economy. Q1 job growth exceeded 1 million. Wage growth exceeded 5%. Perhaps what we are seeing is simply a trade-up to Walmarts and Targets?
We need always keep open the possibility that these lower numbers are not recession related but are due to other issues in the stores. And, that would be my prediction here – not everything can be blamed on inflation.
I think that what is driving the weakness was articulated above. Perhaps shoppers are cutting out on those quick trips to DG to grab soda, chips, in-between things and doing a better job of shopping WMT on weekends for this items or finding other alternatives like Marc’s or whatever is in their local market. While messy stores have been in the news, I think if the price and conditions are right, shoppers will overlook that near-term.
Dollar General will continue to be an important choice for consumers. The softening of consumer spend is more a reflection of the broader economy than anything Dollar General-specific. DG’s core customer is much more vulnerable to inflationary pressures, and as a result, has less discretionary spending power during a cycle like we are in today.
DG is facing greater competition than ever, and its core customers are facing increased pressure on their pocketbooks.
On top of those two significant pressures, they also have stores that need to be cleaned up, merchandise, and better staffed.
The notion that Dollar General shoppers are “trading up” to Walmart seems odd at first, but may be true after all.
It’s an interesting situation. Wonder what the pricing spread is between DG and Walmart now and if that is translating to a shift. Dollar General will likely figure this out long term but it is a bit surprising.