New Era Begins at Dollar General
Shareholders of Dollar General voted to approve an offer by Kohlberg Kravis Roberts’ Buck Acquisition Corp. to take the retail chain private. In a related announcement, David Perdue, chairman and CEO of Dollar General, said he would resign upon completion of the deal.
Mr. Perdue said in a released statement, “This event marks a major milestone in the long and successful history of Dollar General. I believe that the merger is the right next step for Dollar General and I have confidence that KKR is committed to investing for the future competitiveness and growth of this great company.”
KKR takes over a Dollar General chain that has struggled in recent years as rising energy costs and other factors have hurt its core low-income consumer base. Last year, Dollar General announced it would close some 400 stores while slowing its expansion pace. It is widely believed that KKR will look to close even more stores while further paring the number of new units being opened.
Dollar General president and COO David Bere will serve as interim CEO of the company until a replacement can be found for Mr. Perdue.
Discussion Questions: What do you expect the future to hold for Dollar General now that KKR is taking it private? What do you see as the most immediate needs for the chain’s new owners to address?
If DG doesn’t learn how to tack away from WM, it won’t matter who owns them. The trick with a new CEO will be to find someone who loves and respects the budget shopper. The moment the customer and the associates get in line behind inventory management, efficiency measures and the like, wrong things happen.
This is one of the best things for DG to take it to the next level. KKR will come in and slash bloated inventory, stores and personnel. This will make DG leaner and more efficient, as the new owners bring a new perspective on the business end of DG. Additionally, KKR will have the funds to allow DG to maximize their growth, while ensuring that DG grows to its maximum potential. We can look for management changes, core competency focus and a move to higher profits. In the short term, “less is better” will be the mantra, as KKR will do the same things it has done for many of its other acquisitions over the years.
Going private allows companies which have grown rapidly–perhaps too rapidly–the luxury of rationalizing operations. I’d look to see some store closings and a general tightening of operational efficiencies.
While this is a good move for Dollar General there are a few very important issues that they need to focus on under a Private owner. Store assortments and maintaining in-stocks would be the first priority, as there are many items in the mix that do not generate the turns needed to make the store model work profitably. Out of stocks have to be eliminated, as their shopper base is time-starved working families who do not have the time or money to make multiple trips. The operations management needs better training and some wages paid on store profitability, as they are the real key to success. Finally, finding ways to add gas pumps in as many locations as possible, and selectively adding food products in those locations that have the space builds out a more complete destination shop for their customers.
The loss of Mr. Perdue is something they need to consider, as his leadership must be replaced with a person who can keep the plans on pace for store growth and keep the team motivated toward success.
Following the KKR format they will move to close marginal stores, slow their expansion, decrease the level of inventory and do everything possible to increase cash flow. This is all good news for their competitors as it means Dollar General will not be as much of a threat as in the past. Look for KKR to do an IPO on Dollar General within 4 years. Overall, this will have little impact on the long-term growth of the extreme value retail segment as it’s going to continue to grow with or without Dollar General.
Dollar General is an important player in the market. It is a good thing that they are taking steps to make sure the company is profitable and viable for the future. For the portion of America that Dollar General serves, this is a critical player. The retailer is a huge part of the lives of the consumers’ who shop their stores. This is generally true because many of those consumers have limited disposable resources and depend on the value offered by such chains. I know, I’ve see it first hand!
As for the announced store closings, they are unfortunate, however no doubt necessary to bring the company’s operating statement to an acceptable level. KKR will infuse the necessary capital into the organization to get this retailer back on track. Now they just need to find the right CEO to make the thing work. They would be wise to find not only a competent business person, but also one who understands the market and most importantly understands the people who shop in their stores. This is free advice that I hope they will consider. For consumers’ sake, Dollar General needs to be a viable player in their market segment. I hope they will.
Our tours of Dollar General stores in recent years have brought us to the conclusion that the chain needs to reinvest in cleaning (we mean that literally) up current stores before moving on to open new locations. Hopefully under KKR, Dollar General will begin to address the issues that face it before moving on to create new ones. Also, we fully expect to see many more store closings than previously announced as KKR looks to eliminate marginal stores.
Walking a Dollar General store nowadays finds them generally quite messy, compared to the Dollar Stores or Family Dollar, so KKR will need to devote considerable time cleaning them up, as someone else already has observed. Shrinkage has to be very substantial, as messy as the stores are. How can they tell what went out as a paid-for item and what went out as an illegal freebie?
KKR will optimize its profits if they can merge Dollar General with Dollar Tree, Family Dollar, and any other major competitors. Owning one chain is suboptimal. Merging competitors is the healthiest way to increase profits in the long run.
But guess what?
We don’t really care if it’s messy…if the prices are low.