Dollar General is the leader in the dollar store retail business

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					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 seem to be showing
any slow 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 Looking towards the future of Dollar General 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 There 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 strategies elements the need for expensive
advertisements and circulars. Rapid growth is a key to the company’s success as
they look to open over six hundred new stores over the next year.

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 “supercenters” 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 ( refer to appendix ?). While Dollar General works to target
households with median incomes less than $30,000; the range 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 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 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% of the customers earning less than $30,000 a
year, with around 36% earning less than $20,000.12



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. The competitors of Dollar
General include:


Competitors
99 CENTS Only Stores                       Fareway Stores, Inc.
Big Lots, Inc.                             Fred’s, Inc.
BJ’s Wholesale Club, Inc.                  Kmart Corp.
Coles Myer Ltd.                            Retail Ventures Inc.
Costco Wholesale Corp.                     ShopKo Stores, Inc.
Dollar Tree Stores                         Target Corp.
Family Dollar Stores                       TradeCard, Inc.
                                           Wal-Mart
13



Competitive Advantage
Dr. John Schermerhorn Jr. describes an organization with a competitive advantage
as an organization that operates with an attribute or combination that allows it out
perform its rivals.14 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 (please refer to appendix $).

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, Family Dollar and Wal-
Mart.

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.15 The truth is Dollar General’s business
strategy has allowed to grow at a faster rate than the retail giant ( please refer to
appendix $ and #). 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.16

Dollar General’s biggest advantage seems to be the small size and location of the
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 supercenter.17
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 was responsible
for shutting down. According to analyst Barbara Miller of BT Alex. Brown people go
into these supercenters and ask, “Do I belong here?”18 A small neighborhood
convenient store is perfect for these customers. Dollar General is to Wal-Mart what
a 7-Eleven is to a Safeway – except that at Dollar General customers don’t pay a
premium for the convenience.19

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 expensive, according to Barbara Miller.20
The truth is Dollar General is not actually 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.21 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
goods.22 There is plenty of money to be made by simply “living of the crumbs of
Wal-Mart,” says Dan Wewer, an analyst for Robinson-Humphry.23 Although Dollar
General’s total revenue equals one week’s sales for Wal-Mart, according to Pat
McCormick who covers Wal-Mart for BT Alex. Brown, we have 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.” 24

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.25 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 (see appendix chart). 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 everyday low prices 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
every-day-low pricing strategy.26 Dollar General left Family Dollar in the dust and
has not looked back since, still showing higher growth in same store sales (see
appendix). Family Dollar soon adopted the everyday low pricing strategy but had
fallen considerable back in the industry.

Dollar General has an advantage over family Dollar in there overall product mix.
Family Dollar focus’s 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 still account for a much higher proportion of sales can
be a weakness.27 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 12.4%28 while, Dollar General only
relies on clothing for 9.5% of its sales mix (see appendix dsjfnksd). That situation
proved costly 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.29 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 overall strategy. The fact is Dollar General has stepped forward
as the leader is there biggest competitive advantage, we have concluded. We
discussed positioning earlier and 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 they don’t appear to be catching them any time soon.
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 gained the insights that people think that Family Dollar is 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 competitive advantage that is constantly growing
and succeeding 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 competitive advantage in the retail industry.

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
are very satisfied with the results.30 This new technology allows Dollar General to
save time and money on labor costs, yet still get merchandise out on time. Dollar
General also plans on reducing the amount of shrinkage the company endures
annually. The money saved from the shrinkage will be used to lengthen the new
managers training period creating an educated management team that will lead
successfully and keep customers pleased.31
This company sells a limited variety of products to create a predictable shopping
experience for customers. Dollar General 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 every transaction, which is very high,
compared to stores with out coolers who receive $8.50 every transaction.32 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.33

Along with implementing refrigerated coolers with in 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 with
in the next year. 34The refrigerated coolers will be placed in these stores and
increase perishables penetration to 80% of its stores. These Dollar General Market
stores are double the size of original Dollar Generals and provide the customer with
dry grocery items and produce.35

According to Dollar General’s annual report the acceptance of debit and credit cards
was a promising change that was instituted in the year 2003. This type of
technological change could help expand Dollar General even more and open their
business up to a new type of customer.36 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.37 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 internationally. Adding these
new market stores, developing electronic inventory systems, and fulfilling customer
needs will gain a new perspective for Dollar General on the retail industry and open
new doors for these small discount and variety stores to succeed.

Competition Between Small and Large Firms
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.

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. This 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 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 $25,000 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
operation structure and a limited assortment of products.38 Other expenses are kept
to a minimum by having fewer price points and relying on simple merchandise
presentation.39 By locating stores in second tier locations with large populations,
property expenses are relatively low.40 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.

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.” 41 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.42 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.43 Dollar stores posted same store sales growth of 7.9 percent and are
estimated to be opening more than one store every day.44 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.




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++General++Corporation+lst+Do
rel++Industries%2C++Inc%2E+md+B+op+scan+sd+Dollar++General++Corporation+shn+1+ss+dollar++gener
al+A7BD&_ug=dbs+buh+sid+EEAC520D%2DE620%2D4E5C%2D8A22%2DE2F5093B053B%40sessionmgr
5+EDC5&_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+%2
D+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%2
6K%3D520%26rn%3D%26db%3Ddmhco%26is%3D%26sc%3DL%26S%3DL%26D%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
   Ibid
14
   John R. Schermerhorn, Jr., Core Concepts of Management (New Jersey: Wiley, 2004) 84
15
   Reeves
16
   Ibid
17
   Ibid
18
   Anne Faircloth, “Value Retailers Go Dollar for Dollar,” Fortune, 7 July 1998, 164
19
   Ibid
20
   Ibid
21
   DSN Jan 5
22
   Reeves
23
   Faircloth
24
   Reeves
25
   Faircloth
26
   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
27
   Ibid
28
   Family Dollar Corp.
29
   Jerski
30
   Kaplan, Jerome H. Value Line Reports. Value Line Publishing, 2004.
31
   Ibid
32
   Ibid
33
   Ibid
34
   Dollar General Pleased With Market Store Performance. Supermarket News. Fairchild Publications, Inc.,
2004.
35
   Ibid
36
   Dollar General Corp
37
   Kaplan, Jerome H. Value Line Reports. Value Line Publishing, 2004.
38
   Dollar General Corp
39
   Ibid.
40
   Ibid
41
   Ohio University CoB Cases, Dollar Industry, 2003, www.cob.ohiou.edu/~mgt300/cases/Dollar.htm (1 April
2004)
42
   Retail Industry, Retail Forecast, 2004, <http://retailindustry.about.com/library/bl/02q3/bl_rf073002.htm> (30
March 2004)
43
   Ohio University CoB Cases
44
   Retail Industry

				
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