Dollar General's X-Factor

Retailers of all types are eyeing urban markets for growth and Dollar General is no exception. The company operates nearly 14,000 stores that are easy to spot throughout nearly all of America thanks to distinctive yellow and black signs. However, venture very far into major cities or densely populated suburbs and Dollar General stores are few and far between. The company would like to change that and give itself a potential new growth vehicle, which is why an important experiment underway with the DGX format is being closely watched. The first two of Dollar General's DGX stores opened earlier this year in downtown Nashville and Raleigh, N.C. Two more DGX stores are expected to open later this year at locations yet to be disclosed.

With locations in Nashville and Raleigh, N.C., already open, two more DGX locations are planned for this year.

"The DGX format is geared to meet the needs of our Millennial shoppers, which are an emerging and important part of our customer base and will help us broaden our appeal to attract a new segment of urban customers who put a high premium on value and convenience," Dollar General CEO Todd Vasos told investors in March during the company's fourth quarter earnings call.

There are several obvious differences between a DGX store and a typical Dollar General. The first, obviously, is the DGX name as Dollar General has given the concept a unique identity. The words Dollar General don't appear anywhere inside the Nashville DGX location, although savvy shoppers may make the connection to the parent company because of the black and yellow color scheme and use of some similar fixture such as PepsiCo and Coca-Cola refrigerated endcaps and the new "Beauty My Way" presentation. The decision to create a unique identity is noteworthy and suggests that Dollar General is aware that if it wanted to appeal to urban Millennials in needed to create some distance from the core Dollar General brand where expense pressures and limited staffing are known to create execution challenges which detract from the store experience and perceptions of Dollar General's quality.

The second obvious difference relates to the size. DGX is about 3,600-sq.-ft. compared to the typical Dollar General that measures about 7,300-sq.-ft. The company also has been experimenting with a smaller store that is less than 6,000-sq.-ft. and plans to have about 250 of those locations in operation by year end. However those locations still carry the Dollar General banner and are fairly indistinguishable from the slightly larger stores.

Specially designed carts help customers navigate narrow aisles at DGX Nashville.

The third obvious difference involves the product assortment. DGX offers a familiar assortment of Dollar General staple categories such as frozen and refrigerated foods, a wide range of consumables and health and beauty products. However, there are a few big distinctions. One is the prominently positioned "Snack Center," which featured a bullnose style refrigerated endcap branded as "Grab & Go," that offers fresh sandwiches and salads and convenience store staples such as coffee and a soda fountain. The second distinction is the absence of an apparel offering, which wouldn't make sense in such a small store and urban Millennials wouldn't be likely to purchase at DGX anyway.

The DGX concept's differentiation from a traditional Dollar General has positives and negatives that will play out this year and next as the concept is refined. One potential negative is some of the products and services DGX offers are not within Dollar General's core competency. For example, offering fresh salads and sandwiches requires special training or the use of third party to ensure inventory freshness. Even something seemingly as simple as providing coffee and a soda fountain adds new operational complexities that while not insurmountable are unfamiliar to Dollar General.

Then there is the issue of real estate. Urban locations don't come cheap — the Nashville DGX shares an intersection with Ruth's Chris steakhouse and the entrance to Vanderbilt University — so the smaller stores need to have a high level of productivity. The high productivity in turns creates replenishment challenges as more frequent deliveries are required and more labor is needed to keep shelves fully stocked and customers happy.

"We are excited about our new smaller store concept and the opportunity to serve busy, city-dwellers with everyday low prices on the essentials they need in a convenient, easy-to-shop format," Vasos said when the DGX opened in Nashville.

Vasos should be excited. DGX is an interesting concept with intriguing potential and Dollar General is wise to experiment beyond its comfort zone. However, the retail industry is littered with prototype stores that didn't resonate with shoppers, failed to meet financial return rates or no longer fit with a company's strategic direction. Dollar General benefitted from the latter last year when Walmart abandoned its smallest store concept known as Walmart Express and sold 41 of the units to Dollar General.

Prepared foods such as sandwiches and salads (above) are offered to appeal to on-the-go urban shoppers and are merchandised within the clearly identified DGX Snack Center (right).

It is premature to speculate about the future contributions of DGX, but if Dollar General can find the balance between expense control while offering a differentiated and desirable store experience, it could have a source of new growth for years to come. That's a big if.