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September 3, 2024
Is the Dollar Store Channel Structurally Challenged?
Shares of Dollar General last Thursday tumbled by about 30% after a second-quarter shortfall raised concerns that dollar stores in general are losing share to Walmart, Target, ALDI, Temu, and others built around value.
“We believe the macro, competition, and underinvestment are taking a toll,” said Wells Fargo analyst Edward Kelly in a note following Dollar General’s earnings report, according to Seeking Alpha. Highlighting stronger competition, particularly from Walmart, Kelly believes Dollar General needs to make a major investment in labor to better compete.
“[Dollar General’s results] show the challenge of maintaining market share with Walmart winning in a slower growth environment,” Evercore ISI analyst Michael Montani said in a note, according to Reuters.
Same-store sales at Dollar General increased 0.5% during the second quarter as 1% growth in customer traffic offset lower average unit retail prices per item.
Dollar General’s struggles come as Walmart and Target both delivered stronger-than-expected second-quarter results as they’ve both brought down prices on daily essentials amid skyrocketing inflation in recent years. TJX, Ross, and Burlington Stores in the off-price soft goods space also delivered healthy second-quarter results.
On Dollar General’s second-quarter call, an analyst asked management whether they agreed with investor sentiment that “Dollar General and the small box value model is simply structurally challenged either because there’s too many stores, it’s not as sufficiently exposed to the online channel, or not attracting enough incremental customers perhaps due to competition.”
Ceo Todd Vasos answered, “We fundamentally don’t believe at all that the model is structurally challenged. But there are challenges to the business as this quarter indicated.”
Vasos said store openings are delivering “strong returns” and the retailer isn’t losing share with its core customers, which are households earning less than $35,000 annually.
The quarterly shortfall reflects continued softness in discretionary sales due to “a core customer that is less confident of their financial position,” Vasos said. He added, “The majority of them state that they feel worse off financially than they were six months ago as higher prices, softer employment levels, and increased borrowing costs have negatively impacted low-income consumer sentiment.”
Vasos explained that Dollar General is also gaining share “against all classes of trade in the consumable realm.” Declines in the quarter were particularly seen in seasonal home and apparel categories.
However, he admitted that Dollar General “didn’t get our fair share” of middle- and higher-income households trading down. He said, “At least in this quarter, the mass channel, especially those that are down south, actually did a lot better in gaining the share that was available in the marketplace.”
In response, Vasos said Dollar General is “on the offense, and we’ve done that very successfully here over the years.” During the call, Vasos provided an update on its “Back-To-Basics” initiative to drive in-store traffic. The program includes:
- Elevating in-store experience: Increasing employee presence at the front end of stores to deliver a “friendly, welcome, and elevated level of engagement.”
- Improving in-stock levels: Focusing labor hours on perpetual inventory management and enhancing the sorting process at distribution centers to improve on-shelf availability.
- Improving employee retention: Reducing the number of floor stands and the number of times displays are rotated on sales floors as well as simplifying in-store stocking procedures to help reduce staff turnover and enable store teams to spend more time engaging with customers.
Vasos also believes in Dollar General’s value proposition, which involves an everyday low pricing structure, including approximately 2,000 items at or below $1, complemented by promotions on sales events.
“We’re just going through a little bit of a transition period and a transformation,” said Vasos. “And it’s never usually a straight line to the top when you do these, right? And so, a few bumps in the road, but we feel that we know exactly how we can go about garnering that share that’s available out there.”
Discussion Questions
Do you think Walmart and other discounters have become bigger threats to the dollar store model?
Is Dollar General taking the right steps to revive sales and improve its competitive position?
Poll
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In broad terms, the dollar store channel is not structurally challenged in that it fulfils an important customer need and is financially viable. However, for many years growth was underpinned by massive physical expansion and supported by a solid economic backdrop. Both of these dynamics have now faded, and they are lowering expectations about what dollar stores can deliver. What dollar stores now need to focus on is sharpening their operations, including store disciplines. There is a sense that expansion has been pursued to the neglect of fundamentals. The balance is now tipping.
Also, it is worth adding a note on Temu. There is sometimes a temptation to blame sales shifts on whatever happens to be the latest trend. However, in the case of Dollar General, Temu has had only a minimal impact. The core customers of Dollar General are not massive shoppers on Temu and a lot of the things Dollar General sells in non-consumables are impulse purchases often wanted immediately. The main problems are not that spend as transferred to Temu but that core customers have less to spend on discretionary goods, that stores have become harder to shop, and that other physical rivals have upped their game. Walmart is more of a competitive threat to Dollar General than Temu is.
Many retailers, who have broader breadth and depth are in fierce competition with the dollar store category now with their ability to deliver low prices. Dollar stores will have to secure resonant differentiators in order to stay competitive. That could be becoming the best at digital, or it could be something assortment-related, or it could be both.
Very much like what happened in the airline business in the 1980s, when you had no-frills / no-service carriers like PeopleExpress with rock-bottom pricing. Lots of popular attention & they did pack the airplanes, but when Delta, American, United figured out how to dynamically price seats & still make decent profits overall, they could pull enough budget-minded travelers back that the new cheap carriers had no revenue cushion when fuel and financing costs went up. In the same way today, Walmart and Target are figuring out which pricing levers to flip to retain and pull back the middle-of-market consumers, exposing the dollar channel’s underlying operational deficiencies.
You knew that dollar stores were taking a bite out of Walmart and Target when they started adding dollar sections to their own stores. I think Walmart in particular recognized the threat of shoppers trading down and acted, with price discounts and other programs, to keep middle income shoppers from trading down to dollar stores. But something has to be said about the bad publicity that dollar stores have been garnering over the last few years – the increased awareness that what you get for $1 is a lot less than what you’d get if you could’ve spent only $1 at Walmart (just you have to spend $4 to get it in bulk there). And the stores infested with rats, and store staff walking off the job or Instagram posts of stacks of boxes of milk just sitting in the aisle. Maybe it isn’t so much about the “structure” as it is about the “execution”?
Agree that smarter consumers – trying to stretch their budgets – have realized that while the cost per item at a dollar store is low, the cost per ounce is higher. Buying slightly larger sized items elsewhere, that don’t fall into bulk sized items, is a better way to extend a budget.
My what a difference a few months makes: less than a year ago we were being sold tickets on the over-performing dollar stores train, with claims that even the mink-clad crowd wasn’t adverse to shopping there. So what happened? Basically the poor got (even) poorer, and as they are the core of dollar store’s customer base – broad appeal claims notwithstanding – the stores suffer. The ideas put forth don’t inspire confidence, as the first and last of them (elevating the shopping experience and reducing employee workload) seem to contradict each other.
Except for Temu, none of the competition cited is exactly new on the scene. Even so, Dollar General is being hit on all sides, particularly in grocery, a category that it seems to regard as key to its future. CEO Vasos mentioned discretionary categories as a sore spot yet, both Target and Walmart recently noted upticks in these businesses. Dollar General’s primary point of differentiation is location, location, location. However, as Walmart continues to refine its convenience proposition, proximity is no longer a barrier to wooing underserved communities. Walmart also operates smaller, easy-to-navigate formats that offer a wide range of categories. And yes, Temu has lowered the price floor and therefore consumer comparisons. Adding freezers and building more stores isn’t going to keep Dollar General ahead of this pack.
One analyst’s business model challenges are another’s quarterly business challenges, which is how the Dollar General CEO sought to redirect the narrative that consumed Wall Street’s price reaction. Past investments in store openings (growth) took precedence over ensuring up-to-date systems and processes such as supply chain and in-store investments such as inventory management, allocation, and distribution flows and improved in-stock shelf positions. The company highlighted the proper levers to improve the business, which are today’s table stakes. Walmart and other competitors are not standing still; they are attracting new customers and building a moat around existing ones. Moreover, reversing the drop in AUR requires a relook at the assortment, which is, by definition, challenging for this format.
With rapid scale and store expansions come greater complexity, increased operating costs, and more significant challenges driving outstanding execution at the store level. The Dollar Store sector, dominated by Dollar General, Dollar Tree, Five Below, and others, has experienced unprecedented growth over the past ten years. While Dollar Stores serves unserved communities, and there are plenty of options out there, the structure and foundations are in place to execute at scale.
However, the everyday low-price value proposition that Dollar Stores offers is now being challenged by Target, Walmart, and Costco operating models. Dollar Stores are being impacted by the breadth and depth of product offerings, better merchandising strategies, and optimized pricing models that these companies are offering. These challenges have required dollar stores to adapt and evolve by diversifying their product offerings, exploring new pricing strategies, and investing in technology capabilities to remain competitive in a changing landscape.
With significant store expansions comes great responsibility and accountability. By discounting the importance of execution at the store level, the Dollar Stores sector has to elevate its game.
There is no obvious, structural reason why Dollar General can’t be delivering positive financial results – even in a difficult competitive and economic climate. They should be brilliant at this, especially in challenging times. Dollar General has grown through expansion, and that works fine as long as your existing stores are positively comp’ing. Dollar General management need to focus their efforts on increasing the revenue from their existing store base. If store traffic is up, the question I have is, how are in-store conversion rates? Are they making the most of every store visit they get? I suspect not, and their intention of improving the store experience, stocking levels and employee retention should all help. But this can’t just be window-dressing for Wall Street. They need to focus on their stores and then execute.
Walmart and other discounters are winning by blending low prices with convenience and a broader product range, making them formidable competitors. To keep up, dollar stores must innovate, improve its store experience, and quickly adapt to this tough market landscape. Dollar General’s “Back-To-Basics” approach is a smart start, focusing on enhancing in-store experience, improving stock levels, and retaining employees. However, to truly revive sales, it must innovate digitally and better capture higher-income customers trading down. Balancing the traditional strengths with the demands of modern retail will be essential for long-term success.
I agree, Mohammad. Walmart’s combination of low prices, convenience, and a vast product range makes it a tough competitor for the dollar store model. While Dollar General’s “Back-to-Basics” approach is a step in the right direction, they’ll need to go beyond just the basics. Embracing digital innovations will be key to staying relevant in this evolving market.
First of all, Dollar General is not a traditional “dollar store.” The dollar store model fits better with 99 Cents, Five Below, Dollar Tree, and others, where every item is $1, $3, or $5. Those stores sell mostly closeouts, not necessarily national brands.
Providing customers with more flexibility and variety, Dollar General offers a wide selection of products at a variety of price levels. With this strategy, Dollar General can offer national brands and a wider variety of products.
Dollar General has a good leadership team. I worked with Todd Vasos at Eckerd Drug Stores, Longs Drug Stores, both acquired by CVS, and indirectly at Dollar General. I also met with him at NACDS Annual Meetings. His approach to business is very realistic, and he does not overreact or underreact. It will be a smooth transition at Dollar General.
Dollar General knows its customers, their demographics, and how they differ from other retail chains better than anyone else. No matter what they do, they remain true to themselves.
Technology plays a critical role in Dollar General’s operations by optimizing inventory management and enhancing supply chain efficiency. Advanced data analytics help the company understand customer preferences and tailor product offerings accordingly. Additionally, digital tools facilitate seamless communication and coordination across various store locations. Db
The inventory and labor challenges of dollar stores are nothing new – we’ve seen evidence of this, and acknowledged challenges from the retailers, for years. What’s different is they are being challenged further by Wal-Mart and other retailers, and consumers are being increasingly choosy with their spending, even at lower price points.
The operational challenges are solvable, but require spending on labor and improved planning and inventory capabilities. As dollar store retailers have gotten increasingly larger, they’ve suffered the same challenges as other growing brands – namely being able to collaborate across functions versus addressing pain points in silos.
Finally, one challenge of many dollar stores that is fundamental is their geographic distribution, which simply makes it naturally challenging for replenishment as well as frequency of field visits by district and regional management.
Many retailers are attempting to capture sales in what has been a normalized higher inflation environment over the last several years, which has hit dollar stores in their core focus area, price. So this has created a need for dollar stores to figure out how to become better operators, with compelling differentiators, and not just gain sales due to their expansion into innumerable markets that had minimal competition. Time will tell if they are able to do so.
A visit to Dollar General is likely prompted by a need. If the shelves are empty or in disarray, and it is unable to service that need, customers will start to look elsewhere. This has been an ongoing problem with operations at the chain. Meanwhile, mass merchants such as Walmart have taken strong inventory positions rather than running lean. This has paid off. You can’t sell what you don’t have.
First, the names are wrong. Many items are not close to a dollar (remember five and dimes?) so everyone knows the name is not literal. That makes it a big target for other discount stores. Will they survive? I believe they will, especially in underserved rural markets where they have little to no competition. Others will continue to eat into their revenue share over time, however.
This seems to be a classic story of initial “consumer sales lift” that is starting to normalize. Inflationary prices drove middle class consumers to explore additional savings and the idea of “trading down.” Some of those consumers will stay; and some will defect back to the likes of Target and Walmart given they enjoy those experiences better. What all the dollar stores need to do, is not mistake inflated lift for sustainable lift. That means not overshooting their shot and doing modest expansions. They also need to study the growth of their core customer – those making $35,000 and under which is largely tied to immigration patterns. But the greatest existential threat is likely TEMU and any future clones, that puts value shopping at the click of a button.