DOLLAR GENERAL A Big Deal, Even Without the Big Deal

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DOLLAR GENERAL A Big Deal, Even Without the Big Deal

By Pan Demetrakakes - 09/01/2015

Dollar General is about to lose its position at the top of the dollar-store world, thanks to an acquisition between its two biggest rivals. Paradoxically, it's never been stronger.

The company, which had $18.9 billion in sales and 11,789 stores last year, is in expansion mode, planning to open more than 700 new stores this year and 900 next year, some of them in three new states: Maine, Rhode Island and Oregon. Its financial results for the first quarter were solid, with an 8.8 rise in overall sales, 3.7 percent rise in same-store sales and a 13 percent jump in operating profit over last year. In short, it appears to be in good shape to take on No. 2 rival Dollar Tree, which is absorbing No. 3 chain Family Dollar–in a deal that took place after Dollar General's offer for Family Dollar was spurned.

Expansion is not the only priority for Dollar General. The company is remodeling many of its older, smaller stores, some of which haven't been upgraded in years, says Mike Paglia, director of retail insights at Kantar Retail; elements include lighting, color schemes, signage and planograms. "It's really an attempt to bring them up to the standards of the rest of the store base," Paglia says.

In some cases, the expansion will entail refrigerators and freezer cases, to allow Dollar General to expand its product offering. Dollar General locations tend to be in either suburban or rural areas; in the latter, it often has relatively little retail competition, including food retailing. This opens up an opportunity to take advantage of the increasing fragmentation of food retailing, where shoppers seek out what they want–whether it's gourmet food or bargains–wherever they can get them.

Of course, dollar store denizens are more likely to be looking for bargains. Dollar General, along with the sector in general, thrived during the recession, and the anemic recovery provides a powerful incentive for them to stay loyal. Shortly before he retired in early June, former Dollar General CEO Rick Dreiling told analysts that "the elevated under-employment rate, along with continuing low labor participation rate" were keeping his company's core clients coming back. Dollar General and its direct competitors took shoppers away from Walmart at the depths of the recession; Walmart's business has picked up since then, but that doesn't seem to be hurting the dollar store market.

Dollar General is not going to be following in Walmart's footsteps in one respect: an across-the-board wage hike. Walmart announced to great effect in February that it would raise all of its hourly workers to at least $9 an hour by the next month and $10 by February 2016.

Dollar General is already matching that, at least in part; according to Dreiling, after about five months on the job, employees who start at the federal minimum of $7.25 an hour are eligible for a raise to $9 after five months. And Dollar General is launching another labor initiative: increasing hours. In March, then-COO Todd Vasos (who has since become CEO) said the company had been experimenting with added staffing at a select group of stores, and would be expanding the new labor model to "a large group" of its stores this year.

Paglia says improving service is a worthwhile goal for Dollar General. "Having more staffing on the floor improves the in-store experience for shoppers," he says. "That means fewer out of stocks, cleaner stores, and it also means more opportunities for shoppers to get help if they have a question. They're realizing that even though that is an investment to raise labor hours, it pays off with more productive and more successful stores."