By Neil Saunders
Dollar General has performed well, driving impressive growth on the top and bottom lines against tough prior-year comparatives. The one small downside comes from gross margins, which fell by 39 basis points compared to 2017. This pressure has been caused by higher transportation costs and the above-average growth of the consumables category, which pulled down the margin mix. But Dollar General has mitigated the slip by keeping a tight grip on costs elsewhere.
Dollar General’s investment in initiatives like installing cooler cabinets, adding impulse products to queue lines, and enhancing the beauty offer have a big impact on store productivity as they drive up basket sizes.
Most pleasingly, Dollar General is not only retaining both core and non-core shoppers, but it is also growing its share of wallet from both. Modest increases in disposable income have allowed core customers to spend more at Dollar General, especially on discretionary categories. Individually, the uplifts in spend are modest, but collectively they translate into a significant hike in volumes. This trend underlines the fact that a healthy economy has not diminished the necessity or appeal of Dollar General.
Reaching into rural areas
We remain equally impressed with the growth of non-core shoppers. These are typically middle-income consumers who do not primarily visit Dollar General out of economic necessity. Rather, their trips are driven by the desire for convenience and, sometimes, the love of finding a bargain. Dollar General’s location strategy, which reaches into rural areas underserved by other chain retailers, is a vital component of its success. The localness of the company’s proposition is evident: 75% of the population is now within 5 minutes of a Dollar General.
Key to attracting shoppers and driving trade is Dollar General’s ongoing investment in its stores. With over 15,200 shops across 44 states, keeping the fleet fresh and modern is a task without end. However, we remain impressed by the company’s investment in initiatives like installing cooler cabinets, adding impulse products to queue lines, and enhancing the beauty offer. These relatively simple changes have a big impact on store productivity as they drive up basket sizes.
Creating a destination
Another interesting initiative is the Better-for-You plan. This brings together an enhanced range of healthier products, including Dollar General’s own Good & Smart private label brand. While the program is only in select stores, it has been effective at positioning Dollar General as a destination that caters to families concerned with eating and living well. Again, we see this as part of a wider strategy to broaden the appeal of the chain beyond its low-price roots.
Appealing to holiday shoppers
Stores are now geared up for the holidays, and from our visits, execution looks strong. There is a good balance of holiday sundries, gifts, and essential items, which should all help drive sales. From our data, more people say they will visit Dollar General over the holiday period than last year, which is a sign of both higher store numbers and the chain’s increased appeal.
Despite all the positivity, we have concerns over tariffs and cost pressures. However, we believe Dollar General is in a better position to cope with this than its rivals. This is mostly because of its ability to drive volumes, improve efficiency, and flex prices and pack sizes. We broadly remain optimistic about the company’s prospects for the rest of this year and into 2019.
Neil Saunders is managing director of research firm GlobalData Retail.