Dollar General Case Study Analysis Background J. L. Turner and son Cal Turner founded Dollar General in 1939 as a wholesale dry goods retailer. They quickly changed their business to retail and opened their first dollar store in Kentucky, 1955. The company went public 14 years later and eventually Cal took over as president in 1977 and then became chairman in 1989. With the foundation of the company starting from a father and son, it is no wonder why Dollar General has a strong family culture.
This is emphasized with their company mission: “To serve others: to provide customers a better life, shareholders a chance for a superior return, and employees respect and opportunity” (Harvard Business Review 2009). Company superiors treat the employees fairly and with respect. And the employees treat customers with that same level of respect. Dollar General works on serving people by focusing their efforts on low-income consumers and providing them with fairly priced consumables in a convenient, small-store format. Cal helped buildup his father’s company by focusing in the beginning on “opportunistic buying”.
Cal would buy large quantities of product and attempt to create a very high turnover rate. In the early days of the company, the success mainly fell on the buying decisions of the company owners and merchants. This tactic helped Dollar General but they really hit their stride when they shifted their focus in the 90s with a customer-centric model, which is still in place. Today, Dollar General has a big stake in the extreme value retail segment and from 2002-2007 their revenues increased at an average growth rate of 9%.
It is the 6th largest mass retailer in the United States and from 2001-2006 they were one of three companies to have outperformed Wal-Mart in sales growth and profit growth. Since David Perdue became CEO of Dollar General, the amount of stores have increased from 6,273 to 8,260 in just 4 years and in 2007 had revenues of $9. 2 billion. Problems While Dollar General has been one of the best when it comes to the dollar store industry, there have been some noticeable areas for improvement. There have already been a number of structural changes for Dollar General in recent years because of the significant growth they have achieved.
In response to these issues, the company has shut down over 200 low-potential stores and gotten rid of a good amount of old inventory. One effort was called Project Alpha and was designed to remodel and relocate a significant number of stores while also eliminating an inventory pack-away policy. This policy had store managers packing away old inventory for seasonal items that were not sold one year to be sold for the following year. It created more clutter in the backroom and more headaches for the store manager.
The successful increase in growth of the past couple decades has overshadowed the fact that Dollar General has its fair share of problems preventing it from performing more efficiently. With the concentration of the company focusing on serving low-income folks in rural areas, at some point they will have to move into more urban settings if they want to be a leader in the industry. Dollar General store customers typically live within 5 miles of the store yet half of its stores operate in communities with populations of 20,000 or less. Their stores are located mainly in the southeast, southwest, and Midwest of the U.
S. Only 2% of the stores are in urban areas with low-income people where the real estate rent was usually lower as well. With lower rents and the company policy being low cost with a pattern of buying short-term leases for their stores, urban areas might be a way to grow into areas with much higher populations. Dollar General has the majority of their products priced at $10 or less with 30% of the products being $1 or less. They have increased the amount of nationally recognized brands to their stores to compete with the likes of Wal-Mart.
With Wal-Mart being a big competitor, Perdue has chosen to differentiate his company by keeping things simple, including the price points. All price points in stores are even prices either being $. 50, $1. 00, $5. 00…etc. Perdue believes this provides convenience to the customer and being that Dollar General competes with Wal-Mart through price and convenience, this makes sense. While it does offer the customer an easy way to keep track of what the items might cost, even Perdue admitted that with inflation rising, it will be hard to compete with the $1. 99-type priced goods of Wal-Mart.
Perdue should focus on a more low-cost way to display superior convenience. Dollar General and its executives clearly have built a business model designed for low prices and convenience for the customer. As noted by Beryl Buley, (division president of merchandising, marketing, and supply chain) the average shoppers at their stores are in and out in 10-20 minutes while a similar shopper would spend about 55 minutes in a competing Wal-Mart (HBR, 2007). The company in the store is focused on the top turning stock-keeping units in each SKU category whether it is household cleaners, seasonal decorations, or paper products.
Dollar General from its foundation has always focused on having a high turnover rate. With this philosophy in mind, the backrooms of the store have been known to become over loaded with inventory leading to an inefficient use of inventory. This hurts turnover rates. Their pack-away strategy, which had been recently dismantled, would require store managers to pack away items not sold to be sold the following year. One manager from the case study said “I spent two hours trying to stock a carton of soccer balls and a carton of water toys. This has clearly been a problem and the company has improved the situation somewhat by appointing district managers who help individual store managers with setbacks such as these. Much of the problem is the fact that non-core merchandise creates an unnecessary amount of inventory that the managers do not know what to do with. While attractive because the margins are twice that of highly consumable products, they have a much less turnover rate. Having a philosophy of quick “in and out” customers consuming low cost goods with a high turnover rate conflicts with the company adding more non-core merchandise with lower turnover rates.
To challenge Wal-Mart, Dollar General has built the concept of competing on price and convenience and bringing in low turning products that clog the shelves is hurting their cause. Possible Options With Dollar General experiencing some minor setbacks in their goal of growth, Perdue and other company executives face a number of options to increase growth. They have the ability to increase geographic expansion within the United States. Opening more stores has contributed to the company’s significant achievements from 2003-2007 and it could be an easy way to gain more fans in Wall Street while delving into untapped regions such as California.
Same store growth has hurt Dollar General recently, which was the reason for “Project Alpha”. In the late 1990s they were experiencing around 8% same-store sales growth and by 2005 it was down to 2%. By improving Merchandising Productivity they could find the right product mix to spark higher same-store sales growth. Another opportunity for growth would be to expand into services such as check cashing and wire transfers. Since some 28 million Americans do not even own a bank account and the target market for Dollar General are low-income earners, it could be a way to increase their revenues.
Another unconventional way for the company to grow is for Dollar General to go private and concentrate on leading the industry. With the majority of the industry being fragmented, they could focus all of their efforts on industry consolidation. The company could begin to further pursue new store formats. In 2003, Dollar General began a new store format called Dollar General Market which had some more square footage than the standard stores and focused a lot of its products on grocery items. With results of early success, it might be a way for Perdue to grow their customer base.
A final opportunity for Dollar General to grow is in the international markets. This is focusing on the big picture and is very enticing yet it seems to be a few years down the road. It is difficult to grow in international markets evidenced by Wal-Mart who succeeded in countries such as Canada, Mexico, and the U. K. but failed badly in Germany and were forced out of the market. While international expansion has the capacity to make Dollar General an industry giant, it seems as though that is a few years down the road. Recommendation
With all of these growth opportunities laid out and with the company’s’ resource constraints in mind, I argue that Dollar General should work to improve merchandising productivity while continuing to expand in the United States. Clearly, the non-core merchandising and backroom inventory problems have been hurting same-store sales growth. This has caused the shutdown of over 200 stores, and while it is evident they are putting more of an emphasis on remodeling their stores for more efficiency, they benefit greatly from improving their product mix. By finding the right mix of SKU’s and highly consumable merchandize vs. on-core, they can really lift up same-store sales growth for years to come. Dollar General can also expand geographically throughout the United States into more urban areas which, mentioned earlier in this analysis, has a high potential because of the low cost and high populations. States such as California, which have no major extreme-value retail presence, could be a potential goldmine. While Perdue has a good amount of options improving the same-store merchandising productivity and expanding into new markets could make Dollar General serious threat to Wal-Mart and other industry leaders.