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Dollar General is the leader in the dollar store retail business - DOC

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The Case of Dollar General
Dollar General Background
Dollar General is the leader in the dollar store retail business. The company has
been growing exponentially over the past ten years and doesn’t show any signs of
slowing down. The first Dollar General Store opened in Springfield, Kentucky in
1955.1 “At November 24, 2003, there were 6,653 Dollar General Stores spread
across half of the United States.”2 Through our research, we have analyzed many
different factors that may affect the performance of the company in the future.

Strategy
Dollar General is a leading discount retailer of quality general merchandise at
everyday low prices.3 Their target market is low-, middle-, and fixed income families
that typically live within five miles of the stores.4 The typical Dollar General store has
approximately 6,700 feet of selling space and the shelves are stocked with
everything from food to stationary.5 Most of the inventory consists of consumable
basic merchandise. The stores carry a wide selection of national brands as well as
Dollar General private label products, including DG Guarantee® and Clover
Valley®.6

The company is able to offer everyday low prices to its customers in large part
because its buying staff negotiates low purchase prices from suppliers.7 The
everyday low price strategy is a key point in the philosophy of Dollar General. Items
are pre-ticketed with even price points. More than 4,000 core items have fewer than
20 price points.8 The every day low price strategy eliminates the need for expensive
advertisements and circulars. Overall, Dollar General practices a focused low cost
strategy. For a more in depth analysis please see Management Appendix B. Rapid
growth is a key to the Company’s success as they look to open over six hundred
new stores over the next year. The business strategy of Dollar General not only
affects the Company but also society as a whole. Please see Management
Appendix C for an in-depth stakeholder analysis.

Target Market
Dollar General focuses on an often forgotten market in the retail industry. By
targeting a growing consumer base, low and lower middle income consumers, Dollar
General has experienced much success. This sector is the fastest growing sector of
the population.9 This demographic is often turned off by larger “super centers” and
can relate with the local market feel of a Dollar General store.

The dollar store industry is thriving in the difficult economy. According to ACNielsen
surveys, the percent of households shopping at dollar stores rose from 47% in 1998
to 62% in 2002 (Please refer to Chart Appendix C). While Dollar General focuses on
targeting households with incomes that are less than $30,000; the number of people
shopping in dollar stores might be a surprise. Independent research released in the
summer of 2003 shows that dollar stores are attracting value-conscious shoppers at
every income level.10 Between 2000 and 2002, households shopping in dollar stores
                                                                                          2


not only increased considerably in the $30,000 and under category, but every
category, including households with incomes greater than $70,000 experienced
double digit increases in the number of shoppers. In fact, households with incomes
greater than $70,000 were the fastest growing percentage of dollar store shoppers.11
Even with the growth in the higher income sector, approximately 55 percent of Dollar
General customers earn less than $30,000 a year, and approximately 36 percent
earn less than $20,000 per year.12

Industry and Competition
Dollar General competes in the discount retail industry. The retail industry is highly
competitive and sporadic. Dollar General has to take into consideration competitors
in the general retail industry and the dollar store industry. For a more detailed
analysis of Dollar General’s competitors, please see Management Appendices A
and E.

Competitive Advantage
Dr. John Schermerhorn Jr. describes an organization with a competitive advantage
as an organization that operates with an attribute or combination of attributes that
allows it to outperform its rivals.13 Growth is the key to success in most industries.
Sustainable success in the retail industry can be gauged by looking at the
percentage of growth in same store sales and growth in the number of outlets. As
displayed by Chart Appendices A & B, Dollar General leads the group in these
categories.

The competitive advantage of Dollar General needs to be looked at on two fronts.
The competitive advantage the company has over larger retail stores is clearly
different than the competitive advantage Dollar General has over other dollar stores.
The easiest way to view the competitive advantage of Dollar General is to view their
success versus their closest competitors in both categories, Wal-Mart and Family
Dollar.

Dollar General versus Wal-Mart
Dollar General is sometimes mocked as a low-rent Wal-Mart, an even cheaper
version of the world’s largest retailer.14 The truth is Dollar General’s business
strategy has allowed it to grow at a faster rate than the retail giant (Please refer to
Chart Appendices A & B). Instead of operating superstores with massive
inventories, Dollar General opens smaller, less expensive stores, in rural areas. “It’s
an excellent concept,” said Daniel Barry, an analyst at Merrill Lynch in New York.15

Dollar General’s biggest advantage seems to be the small size and location of its
stores. The standard Dollar General store is 7,000 to 8,500 square feet, which is
tiny when you compare it to Wal-Mart’s typical 190,000 square foot super center.16
With the small store sizes and convenient locations, Dollar General seems to be
filling the void left by all of the small family retailers that Wal-Mart has put out of
business. According to analyst Barbara Miller of BT Alex. Brown, people go into
these super centers and ask, “Do I belong here?”17 A small neighborhood
                                                                                         3


convenient store is perfect for customers who prefer a simpler shopping experience.
Anne Faircloth of Fortune Magazine compares the relationship between Dollar
General and Wal-Mart to that of 7-Eleven and Safeway – but she notes that “Dollar
General customers don’t pay a premium for the convenience.”18

The reputation that Dollar General has built is another advantage that they have
over a retail giant like Wal-Mart. Positioning is how a customer views your product in
terms of quality and image relative to the competition. Through its strategy Dollar
General has created the market position of being cheaper than larger retailers.
Dollar store customers think Wal-Mart is more expensive, according to Barbara
Miller.19 The truth is Dollar General is not cheaper than Wal-Mart. A recent study by
DSN Retailing Today, testing common branded items, found that prices were lower
at Wal-Mart in 17 of 21 categories.20 The fact that Dollar General practices even
pricing and an everyday low pricing strategy has led consumers to believe they are
cheaper.

Overall, Dollar General does not try to compete with Wal-Mart on its broad range of
products.21 There is plenty of money to be made by simply “living off the crumbs of
Wal-Mart,” says Dan Wewer, an analyst for Robinson-Humphry.22 Although Dollar
General’s total annual revenue equals one week’s sales for Wal-Mart, according to
Pat McCormick who covers Wal-Mart for BT Alex. Brown, our team has concluded
that Dollar General has a sustainable competitive advantage over large retailers.
The number of outlets that Dollar General has will be impossible for the retail giants
to match. By stocking a small variety of consumable basics, in convenient locations,
Dollar General has found its niche. The competitive advantage that Dollar General
has over larger retailers was best described by Nashville forklift operator Melton
Wilson when he explained why he shopped at Dollar General: “It’s close to my
house and cheap.” 23

Dollar General versus Family Dollar
At first glance Dollar General and Family Dollar seem like the same company with
the same strategy. In fact, in over half of the towns where there is a Dollar General,
there’s also a Family Dollar (Please refer to Case Study Appendix).24 Even so, over
the past few years Dollar General has emerged as the clear winner of the dollar
store battle in both number of stores and sales growth (Please refer to Chart
Appendix A & B). Dollar General has been able to establish a competitive
advantage over Family Dollar through a better business strategy.

Dollar General established its competitive advantage over Family Dollar in the early
nineties. By introducing an everyday low price strategy, Dollar General attracted
people to their stores in amazing numbers. According to a 1995 Wall Street Journal
article, Dollar General’s same-store sales were surging forward 17% annually since
it adopted the everyday low pricing strategy.25 Dollar General left Family Dollar in
the dust and has not looked back since, still showing higher growth in same store
sales (Please refer to Chart Appendix A). Family Dollar soon adopted the everyday
low pricing strategy but had fallen considerably behind in the industry.
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Dollar General has an advantage over family Dollar in their overall product mix.
Family Dollar focuses on apparel and seasonal items for a larger percentage of its
sales. According to Kenneth F. Smith of Interstate/Johnson Lane, the fact that
apparel and other soft-goods account for a higher proportion of sales can be a
weakness.26 In its annual report, Family Dollar discusses how they are focusing on
raising the quality of their apparel assortment and have even noted increases in
softline sales. Hanging apparel and shoes make up 12.4% of sales while, Dollar
General only relies on clothing for 9.5% of its sales mix (Please refer to Chart
Appendix D). 27 This situation proved costly to Family Dollar when unseasonably
warm weather curtailed sales of winter items. “Family Dollar went to great lengths to
move the merchandise,” says Merrill Lynch’s Peter Caruso.28 The fact that Dollar
General focuses on consumable basic will guarantee them continued success. The
items Dollar General is selling are items that people need to purchase on a regular
basis.

Dollar General was able to gain a competitive advantage over Family Dollar because
of Family Dollar’s poor business strategy. It has been concluded that Dollar General
has stepped forward as the leader in the discount retail industry and has a significant
competitive advantage in the industry. The positioning of Dollar General will
continue to give it an advantage over Family Dollar. While Family Dollar can
continue to copy the ideas of Dollar General, it is hard to believe that they will ever
catch them. The fact that Dollar General has greater purchasing power with more
outlets will allow them to negotiate for lower prices. Through discussions with
shoppers of both stores, we learned that most people think that Family Dollar is
simply a “copy cat” of Dollar General. Athens resident Sharon Conner stated: “I
would rather shop at Dollar General over Family Dollar because Family Dollar is just
a wannabe Dollar General.” In the competitive industry in which both of these
companies compete, the reputation of Dollar General is its biggest asset for long
term success.

The Future Outlook for Dollar General
Dollar General is a small firm with a competitive advantage that is constantly
growing and proving successful in the discount and variety retail industry. To
maintain this growth and success they must plan ahead and have organized goals
they wish to achieve in the future. Adding new technologies and skilled workers to
Dollar General stores will give their company a greater competitive advantage.

Dollar General is currently working on an automatic merchandise replenishment
program for all stores. There are currently 2,500 stores using this new program and
management is very satisfied with the results.29 This new technology allows Dollar
General to save time and cut labor costs, yet still efficiently distribute merchandise
(Please refer to the MIS Appendix). Dollar General also plans on reducing the
amount of shrinkage the company endures annually. The money saved from
reduced shrinkage will be used to lengthen the new managers training period,
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creating an educated management team that will lead successfully and keep
customers pleased.30

Dollar General sells a limited variety of products to create a predictable shopping
experience for customers. The stores always have the same products at the same
prices, which is convenient for the shoppers. However, these types of small firms are
missing out on other merchandising opportunities. Dollar General has just decided
that they will be integrating refrigerated coolers into their stores. On average a store
with coolers receives $13.00 per transaction, which is very high, when compared to
stores without coolers who receive $8.50 per transaction.31 The Value Line Reports
state that, “Other areas of focus include increasing the percentage of direct high-
margined-imported merchandise, as well as making more margin-boosting
opportunistic purchases.” All of these actions together may lead Dollar General to
double digit earnings growth over the next few years.32

Along with implementing refrigerated coolers within the stores, Dollar General has
decided to develop new stores called Dollar General Market stores. These stores
place heavy emphasis on food products, rather than a variety of consumable basics.
Only two Market stores have been established, but the company has been pleased
with the performance of the individual stores and has decided to build 20 more within
the next year. 33The refrigerated coolers will be placed in these stores and increase
perishables penetration to 80 percent of its stores. Dollar General Market stores are
double the size of standard Dollar Generals and provide the customer with dry
grocery items and produce.34

According to Dollar General’s annual report, the acceptance of debit and credit cards
was a promising change that was instituted in 2003. This type of technological
change could help expand Dollar General and open their business up to a new type
of customer.35 However, they are still seeking to deliver a new technology that will
allow customers to pay with electronic benefit transfer cards for those receiving
government assistance.36 This change will still target the low-income customers that
Dollar General has always relied on.

These future advancements of Dollar General are set in place to enhance their
competitive advantage and help expand this company nationally and internationally
(Please refer to Management Appendix D). Adding these new market stores,
developing electronic inventory systems, and fulfilling customer needs will greatly
augment the success of Dollar General and open new doors for other small discount
and variety stores. When looking towards the future of Dollar General, the ongoing
SEC investigation cannot be ignored (Please refer to Business Law Appendix). The
penalty that the SEC hands down could have a negative affect on the company’s
future. Although, many analyst believe the penalty will not hurt the overall
performance of the company.
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Future Recommendations
Looking towards the future of Dollar General one may have to ask “what strategic
changes can be implemented to increase future success.” As discussed earlier,
growth has been the key to success for Dollar General over the past five years.
However, this national growth is not infinite and will eventually come to a halt. To
ensure that Dollar General will not endure major loss, we must prepare new ideas
and technologies. With the installation of coolers in stores, the company is reaching
out to a larger consumer base. It is suggested Dollar General continue to look into
new consumer markets. Although it is not part of the current strategy, Dollar General
may increase the quantity of every day shoppers by developing an advertising
campaign that reaches out to more customers. Often times, individuals who do not
shop at Dollar General are unaware of the product mix Dollar General offers.
Overall, it is suggested that Dollar General continue the strategy that has led to its
success in the past. Dollar General has gained a reputation as a leader in its
industry and the company needs to be innovative in the future to sustain the market
positioning that is so crucial to their future success.
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Competition Between Small and Large Firms

Introduction
The discount retail merchandise business is a highly competitive industry. As small
retail firms, large retail corporations, grocery, drug, convenience, variety, and other
specialty stores consistently compete for the low income consumer, the constant
battle to be the best is a never ending fight. Large competitors, such as Wal-mart,
offer massive shopping centers, a diversified product line, and popular locations.
Small firms, like Dollar General and Family Dollar, compete by targeting a lower
income customer, offering quality products at every day low prices, and by having
smaller, more convenient stores. An in depth analysis of large and small firms will
give insight to how each maintains a competitive advantage in the discount retail
industry.

Large Firms
The explosive and continuous growth of large retail firms like Wal-mart has made
competition within this industry difficult for smaller companies who also compete for
the low income customers. Large retail firms attract low to middle income customers
who are looking for a one-stop-shop. The aggressive strategy of large retail firms is
to open colossal super-stores in city centers that offer discount prices that local
competitors are unable to match. The continued success of large retail corporations
has allowed these firms to expand nationally and internationally. Constant growth in
new markets has made them an unstoppable force in the retail industry. Large firm’s
consumer recognition, marketing power, and growth into smaller geographic areas,
have increased the difficulty for small firms to have any competitive advantage.
Ironically, small firms still do strongly compete with large firms and find success
within the industry.

Small Firms
Small firms create a competitive advantage by differentiating themselves from their
competitors. Low prices and convenient small store format attract customers that
generally earn an income under $30,000 and live within five miles of the store. A
smaller firm, like Dollar General, earns 80 percent of its annual income from repeat
business of loyal customers. These loyal customers enjoy the simplistic nature of the
store and find it easy to navigate. Prices are kept competitive because of a low-cost
operating structure and a limited assortment of products.37 Other expenses are kept
to a minimum by having fewer price points and relying on simple merchandise
presentation.38 Also, by locating stores in second tier locations with large
populations, property expenses are relatively low. 39 Implementation of inventory
control technology, such as computerized inventory replacement systems, allow
small firms to decrease their labor costs. Limited product assortment, strategic store
locations, even price points, and technological advances keep cost down and help
small firms compete in the discount retail industry.
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Competition
It is unrealistic to say that small firms, such as Dollar General, can directly compete
with mass retailers like Wal-mart. However, small firms generate business within a
market in which mass retailers rarely enter. According to Robert Berner, staff
reporter of The Wall Street Journal, “Small discount retailers’ success shows… room
exists for players with tightly focused niches.” 40 The recent economic recession has
resulted in increased sales in the discount retail industry. As a result of new store
expansion, same store sales gains, and strong customer appeal, sales for small
retail firms have grown at a rapid pace of 10.9 percent.41 A large portion of discount
retail stores success can be accredited to the fact that their target market, the low
income customer, is the fastest growing income segment in the American
economy.42 Dollar stores posted same store sales growth of 7.9 percent and are
estimated to be opening more than one store every day.43 Small firms, like Dollar
General, can compete for their share of the discount retail market by offering the
explained advantages that large firms, like Wal-mart, are unable to offer to their
customers. By investigating the case of Dollar General, it has been proven that they
have implemented the right strategy to compete with large firms.
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       1
          Scott Reeves, “Small packages – Dollar General’s growth outpaces
competitors,” The Daily Times, 3 December 2003.
        2
          “Low Prices, Treasure Hunts Build Dollar Empire,” DSN Retailing Today, 24
November 2003, 23.
        3
          Dollar General Corp., Annual Report, 2003, <http://media.corporate-
ir.net/media_files/irol/11/112150/reports/DG_2002ar2.pdf> (30 March 2004).
4
  Ibid
5
  Ibid
6
  Ibid
        7
          Datamonitor, Dollar General Stores Company Profile, 2003,
<http://web9.epnet.com/externalframe.asp?tb=1&_ua=adb+dmhco+fst+Dollar++Gen
eral++Corporation+lst+Dorel++Industries%2C++Inc%2E+md+B+op+scan+sd+Dollar
++General++Corporation+shn+1+ss+dollar++general+A7BD&_ug=dbs+buh+sid+EE
AC520D%2DE620%2D4E5C%2D8A22%2DE2F5093B053B%40sessionmgr5+EDC
5&_us=cst+0%3B2+dstb+ES+fh+0+hd+0+hs+%2D1+or+Date+sl+0+sm+ES+ss+SO
+7F31&_uso=db%5B0+%2Dbuh+hd+0+op%5B2+%2DAnd+op%5B1+%2DAnd+op
%5B0+%2D+st%5B2+%2D+st%5B1+%2D+st%5B0+%2Dlow++prices++treasure+tg
%5B2+%2D+tg%5B1+%2D+tg%5B0+%2DTI+D104&fi=dmhco_520_AN&tp=CP&bk
=T&tn=0&lpdf=true&pdfs=163K&es=cs%5Fclient%2Easp%3FT%3DP%26P%3DAN
%26K%3D520%26rn%3D%26db%3Ddmhco%26is%3D%26sc%3DL%26S%3DL%2
6D%3Ddmhco%26title%3D%26year%3D%26bk%3DT&fn=&rn= > (5 April 2004).
8
  Dollar General Corp
        9
          Family Dollar Corp., Annual Report, 2003, <http://media.corporate-
ir.net/media_files/NYS/FDO/reports/FDO_AR03.pdf > (30 March 2004).
10
   Ibid
11
   Ibid
12
   Datamonitor
        13
           John R. Schermerhorn, Jr., Core Concepts of Management (New Jersey:
Wiley, 2004) 84.
14
   Reeves
15
   Ibid
16
   Ibid
        17
           Anne Faircloth, “Value Retailers Go Dollar for Dollar,” Fortune, 7 July 1998,
164.
18
   Ibid
19
   Ibid
        20
           Debbie Howell, “Dollar Stores Fare Well Against Wal-Mart,” DSN Retailing
Today, 5 January, 2004, 4.
21
   Reeves
22
   Faircloth
23
   Reeves
24
   Faircloth
        25
           Laura Jerski, “Heard on the street: Money managers try to explicit the
differences they find in Family Dollar and Dollar General,” The Wall Street Journal,
31 January 1995, sec. C.
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26
   Ibid
27
   Family Dollar Corp.
28
   Jerski
         29
            Jerome H. Kaplan, Value Line Reports, Value Line Publishing, 2004.
30
   Ibid
31
   Ibid
32
   Ibid
         33
            “Dollar General Pleased With Market Store Performance,” Supermarket
News, 4 February 2004.
34
   Ibid
35
   Dollar General Corp
36
   Kaplan
37
   Dollar General Corp
38
   Ibid.
39
   Ibid
         40
            Robert Berner, “Penny Pinchers”, The Wall Street Journal,
<www.cob.ohiou.edu/~mgt300/cases/Dollar.htm > (1 April 2004).
         41
            Retail Industry, Retail Forecast, 2004,
<http://retailindustry.about.com/library/bl/02q3/bl_rf073002.htm> (30 March 2004).
42
   Berner
43
   Retail Industry

				
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