Retailer Spotlight
3 Reasons to Fear Dollar General
Table of Contents
If you only have 5 minutes refer to sections 1-3, for 15 minutes sections 1-6, if you have over 20 minutes sections 1-9
Customer Strategy & Insights
SECTION 1
Executive Summary
- Reason #1 Dollar General clearly helps its Customers save money - Thanks to its ability to help its customers save money, specifically with its focus on base prices, which accounts for 50% of the Save Me Money preference driver from the Retailer Preference Index: Special Inflation Edition (Inflation RPI), Dollar General (DG) has made it to the seventh spot in the aforementioned Inflation RPI. Dollar General has thus surpassed all its closest competitors except for Aldi. Furthermore, if Dollar General can increase its positioning on Make It Better attributes, which largely relate to variety, it can significantly impact its long-term performance. And Dollar General is already working on a solution. It’s called DG Fresh.
- Reason #2 If Dollar General gets its food offering right, it is positioned to conquer America - Dollar General has the sixth biggest five year compound annual growth rate (CAGR), eleventh largest market share, and tenth highest foot traffic growth in the US. Seventy-five percent of the population already lives within five miles of a Dollar General location, and DG is planning to open 1,100 more stores in 2022, over and above its current 18,000 locations. Eight hundred of these new stores are meant to be a larger 8,500 sq ft format with a wider assortment – its regular format averages 7000 sq ft, and includes more coolers, produce, and a wider health and beauty assortment. DG is also well positioned to compete across all segments -- rural, urban, and suburban -- with its four various formats: DG, DGX, DG Market and PopShelf. Based on a sample of 27 public US retailers, our data shows that with its current strategy, Dollar General is twice as profitable as the average US retailer. With an operating margin at 11% versus the 5% average, Dollar General is the second-most profitable retailer, meaning DG is well prepared to face a slowdown, which may be in the stars in a post inflation world. Given everyone is feeling inflationary pressure and more consumers across all income brackets are living paycheck to paycheck versus 2021, we expect DG to start attracting higher income brackets.
- Reason #3 Dollar General will become the Health Destination - We believe the discounter will become the Health Destination for several reasons. The DG Fresh initiative consists of expanding Dollar General’s footprint of produce and coolers in their stores. It plans to have DG Fresh in 3,000 stores in 2022, with a vision to extend DG Fresh to more than half their stores. DG Fresh will focus on the top 20% produce SKUs that make up 80% of the volume and provide 80% of the produce categories carried by most food grocers. DG has recently invested a combined $480M in three new DG Fresh facilities, creating a potential of 1,100 jobs at full capacity, and ultimately helping DG to self-distribute frozen and refrigerated products across its supply chain. Perhaps the most exciting news in recent months is the retailer’s appointment of a Chief Medical Officer and health panel to help make Dollar General a « Health Destination ». Dollar General will offer a health assortment in 4,000 stores at prices 40% cheaper than in drugstores and envisions providing health care services like other big box retailers. Dollar General has even partnered with a nutritionist to provide Better-For-You recipes and is expanding its Good and Smart Private Brand. With its wide and exclusive footprint, it can bring Health to underserved areas and turn food and health deserts into oases.
Dollar General has room to grow
The future of dollar stores and discounters is more than positive. If the trend in America follows more mature markets in Europe, discounters and dollar stores could own between 20 and 50% market share in coming years. The combined 6% market share for discounters and dollar stores in the US now, leaves a lot of room for growth, and if inflation keeps rising, we can only expect shoppers to shift their spending to these price-focused retailers where they feel they can get more bang for their dollar and thereby better manage their overall budget.
Long-term RPI 1st Quartile: Ranking 1st - 17th, out of 69 retailers
If Dollar General makes the right moves, what does their long-term outlook look like?
If DG can achieve quality scores like Aldi (which is only slightly below average in the U.S.), DG could jump from the 4th quartile in the long-term to the 1st quartile, moving its long-term rank up 45 spots to 15, ranking three spots ahead of Walmart in the strength of its long-term value proposition. Or if they became as good as Grocery Outlet, it would jump to 19th overall in the long-term rankings. In this scenario, Aldi would still be fifth. To climb higher in quality, DG would need to improve their food offering. A quality score as good as Grocery Outlet's would have DG ranked right next to Walmart for the long-term. In other words, if DG can become a better all-around destination for grocery and have a passable food offering in more categories, it could significantly decrease Share of Wallet leakage to Walmart (which is higher for DG than for any other retailer in the US) and accelerate share gains from Walmart, considering DG's time savings advantage to Walmart. DG is vulnerable if they don't do this, but considering that it is working on it, and that its goal may bring DG to having a competitive overall proposition to Walmart, or at least as good as Grocery Outlet in quality, every retailer should take notice.
At the same time, DG will have to continue to carve out a defensible point of differentiation to Aldi, who can move into its territory and offer an even better time/money combination than DG, at present. You can’t let your Value Core (price and quality) get too far out of balance in grocery. In this case, DG’s current quality perception, mostly in food and store experience, is too far behind to make it a better grocery destination. Get the value core right and differentiate on an amplifier is the general formula for success. Like Aldi, great on price, not too far behind average on Quality and top in Speed, puts them in the top five every year. DG’s aggressive store count growth, great prices and time savings in non-food has allowed it to build a huge following of shoppers, particular Walmart shoppers looking to get cheap non-food items faster without having to take a long drive and then a long walk-through Walmart. But, that offering will eventually only take DG so far. DG will need a way to extend its growth horizon, once store builds slow down. Expanding and improving the food offering is one way to extend their horizon, because doing so will position it as a competitive destination to Walmart for grocery categories, whom four out of five of their customers shop regularly. Based on category DNA today, Aldi is shopped for different missions (food), so it is more a complementary store than direct competitors. Walmart is more of a head-to-head competitor to DG, since both skew more toward non-food than the average retailer. DG will continue to be a strong non-food destination for people who are price conscious, and if it can improve the food offering, it will rise up the ranks for the long-term positioning.
SECTION 2
If you fear Dollar General, here’s what you can do now
What can you do today to be prepared to fight in the near future if Dollar General continues on its current growth path, build better relationships in communities, and has a satisfactory food offering?
- Overall, minimize gaps on base price perception and be best-in-class at orchestrating promo, price, private brand, and communications. Retailers that have done so have had a tremendous impact on their emotional connection with Customers – see Inflation RPI.
- If you’re going to invest in base prices, make sure to focus on Fresh categories first. Why? Because that’s DG’s focus with its DG Fresh initiative.
- Find out which fresh products to compete on and do whatever you can to potentially widen the advantage in the 20% of fresh categories that DG plans on carrying. The good news is that DG has announced this, and the assortment is probably predictable, based on what Aldi and Walmart have done in the past. Invest in targeted promotions, base price, quality and offers/rewards/communications, and feature merchandising decisions in that 20% of products.
- Make sure you offer great entry point prices and private brand across categories that matter to DG shoppers, like common HH Products, Frozen Foods, Packaged Food and Fresh Produce to avoid leakage to dollar stores.
- Create barriers to entry like exclusive pack sizes that can only be found in your stores, or a wide assortment with entry-point Private Brand items that keep Customers spending in your stores. Those two areas are where DG has major gaps with its closest competitors.
- Revalidate and recommunicate your overall position as a health destination. Are you offering better-for-you options at great prices? How about your overall health assortment? Knowing that this will be DG’s focus in coming years, validate whether you can offer Health care services or whether you can partner with other providers to do so.
- Adapt your strategy and focus on your competitive advantage. You can’t be everything to everyone. Reward your loyal shoppers with exclusive discounts and excessively communicate how competitive your prices are and how you care about Customers facing inflation.
SECTION 3
What Dollar General should do now
Keep focusing on base prices. Base price has the biggest impact on the Save Me Money preference driver. Base price perception has the biggest impact where Customers try to save most – Common Household Products, Frozen Foods, Packaged Food and Fresh Produce, so focus on these categories first.
Focus on Make it Better and variety. The magnitude of Dollar General's disadvantage in variety will hold back future growth, so offer more variety in Fresh Categories to compete with the likes of an Aldi or Walmart. Better prices on a wider variety means Customers feel like you care about their overall budget, not just their budget for commodity, non-food categories.
Improve the overall in store and online experience. Make it better, make it seamless, and make it dependable to win the hearts of Customers. In the long-term, price alone is not enough, it’s about the whole equation – fast check out, online, variety, OOS, cleanliness are all part of the attributes that also drive overall performance and emotional connection. Price is important, but if Customers can’t find products in store, then they aren’t getting the product they want at the price they want.
Happy Employees
Keep your employees happy. In our yearly RPI study, we’ve shown that companies with better overall employee satisfaction drive better performance. Currently, Dollar General ranks at 61 out of 63 US retailers in our 2022 Glassdoor data, with low pay and dissatisfaction with upper management as the main cons of working there.
SECTION 4
Reason #1 Dollar General clearly helps its Customers save money
“Save Me Money” increases dramatically in importance for customers, during inflationary times
In fact, it ranks #12 in NAM at being able to do so. Now why does that matter you ask? Our Inflation RPI shows that the retailers most capable of saving customers money also experienced the most visits during inflationary times beginning in February 2022. In addition, these retailers also had a positive impact on emotional connection with Customers. Save Me Money was in fact 5x more important than any other preference driver at predicting overall performance.
Thanks to its ability to help its customers save money, specifically with its focus on base prices which accounts for 50% of the Save Me Money perception, Dollar General made it to the 7th spot in the Inflation RPI surpassing all its closest competitors except for Aldi, strong contender on the podium at the 2nd spot. Dollar General was also able to outperform its competitors in the 2nd most important driver for customers during inflationary times, Save Me Time. And so, it’s not surprising that as a result, Dollar General has the 6th biggest 5YR CAGR, 11th biggest market share and tenth highest foot traffic growth in the US.
What Drives Retailer Success?
Inflation RPI 1st Quartile: Ranking 1st - 17th, out of 69 retailers
Dollar General’s head-to-head sources of share-of-wallet leakage are: Family Dollar, Target and Amazon. Complementary mission threats who may skim some food purchases away are by far Walmart followed Aldi and Kroger.
Dollar General Competitive Landscape
*Share of Wallet defined as estimated monthly grocery budget devoted to retailers they shop. Retailers they don’t shop aren’t asked about but assigned a “0” for that shopper. “Leakage” as defined as proportion of grocery budget not spent at your retailer. Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
Competitive Position on Customer Perception Pillars
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
Dollar General has a Save Me Money edge over Family Dollar (but lags Aldi) and in Save Me Time over all comps. It lags on other pillars, though. Dollar General could be more vulnerable in the long-term, due to deeper disadvantages in “Make It Better”
DG accounts for 2.4% of the Grocery & Drug industry share, ranking 11th overall in share, right between Safeway (2.6%) and H-E-B (2.2%)
Grocery Industry Market Share, Total Sales
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
Market share is for sales of products typically included in traditional grocery formats (consumables, health & beauty, OTCs, ready-to-eat food). Does not include hard and soft home goods, like clothing or electronics. The top 70 banners by sales are included here and defined as the “Grocery Industry.”
Dollar General is growing YoY but still lags behind Family Dollar and Aldi, potentially held back by the Make it Better Pillar
5 Year Sales CAGR
Source: Edge Ascential
Even though Dollar General has successfully positioned itself as a base price leader, Aldi still leads the pack with a performance twice as high in base price perception with customers, which may explain why Dollar General still lags Aldi. With its below average performance on its Bulk Pack offering and average Private Brand performance, which we know are top savings activities pursued by its shoppers, Dollar General could and should focus on these areas to help customers save even more money.
Dollar General performs well on base price perception vs. the average U.S. retailer, but is behind most of its competitors.
Dollar General underperforms in bulk pack offering vs. all competitors below and against most in Private Brand.
- ~50% of Save Me Money perception is driven by base price
- The other half, driven by coordinating the rest of the drivers
Competitive Position “Save Me Money”
Perception Levers
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
Intensity of General Saving Activity
General Savings Activities Pursued
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
I shop for more items at Aldi.
DG shopper, fulltime employed with two children.
To save money, about half of Dollar General shoppers say they’ll seek out more products on sale; pack sizes and trading down are other common behavior
And if we dig a little deeper, Aldi surpassing Dollar General sheds light on one of its major weaknesses. What halts Dollar General’s growth and makes its vulnerable in its ability to sustain a long-term growth (hence its 60th long-term rank) is its extremely low performance on most Make It Better attributes, which mostly have to do with the variety of assortment.
Imagine you’re a customer and you walk into a Dollar General store because it’s the closest to you and you do love the prices, but you still need to head to another big box retailer in the area after that visit because you couldn’t get the Fresh Produce or Frozen Products you needed at that first location. Now take the second scenario where instead you walk into an Aldi which has a bigger focus on Fresh Categories and wider assortment, and you can get everything on your list at the price you want, you now feel like Aldi is helping you save money, but in this case with an impact on your overall budget. Look at what this customer has to say.
SECTION 5
Reason #2 Dollar General is positioned to conquer America
It’s not a surprise that DG was No. 15 on The PG 100, Progressive Grocer’s 2021 list of the top food and consumables retailers in North America. Aside from its abovementioned stellar performance, Dollar General is growing and is growing fast. DG is planning to open 1,100 more stores in 2022 over and above its current 18,130 locations. Eight hundred of those are meant to be a larger 8,500 square foot format with a wider assortment – its regular format averaging 7000 square feet, including more coolers, produce, and a wider health and beauty assortment. In fact, DG is well positioned to compete across all segments, rural, urban and suburban with its various formats.
On top of its regular and newer format, DG also operates PopShelf locations at 6,000 square feet with a focus on “fun” non-consumables, Dollar General Market with 15,000 to 18,000 square feet and DGX, its urban convenience format. This footprint explains why 75% of the US population lives within five miles of a Dollar General. Its strategy lies in opening stores where other big box retailers are not present, thus carving a geographical niche for itself. And if that weren’t enough, Dollar General is dreaming big with an international expansion into Mexico with 10 locations across the border.
Dollar General is twice as profitable as the average retailer and makes it the one to watch
% of Gross Revenue; sample of 27 US public retailers 2021
Likely due to its purchasing power…
DG ranks 4th in GM our in our sample of 27 public US retailers and is efficient in earning revenue and covering its expenses.
2nd in operating margin, probably the truest measure of profitability. This high operating margin means it could adapt well in case of a slowdown.
Also 2nd in net margin, meaning DG is also managing costs and pricing goods well.
With YoY inflation breaking 40-year highs at almost 10% and rising fuel costs, it’s expected that Dollar General, which has typically attracted the below $40,000 income bracket, will start attracting more higher income brackets shopping at conventional retailers. Everyone is feeling the pressure across all income brackets versus 2021 and are living paycheck to paycheck.
Have stopped going grocery shopping like I used to in going down the aisles and getting what I want. Now I have a list and only get what I need right then.
DG Shopper, with no children and a household income of $100,000 plus.
Always buy store brand, make meals that are cheap and that will stretch two or three days. Use digital coupons. Only buy meat that's on sale instead. Go to Dollar Tree and get as many items as possible. Always watch prices and make as many things at home as possible.
DG Shopper, with no children and a household income of $50,000 to-$100,000
Record inflation began to break 40 year highs late in 2021
Year-over-Year Price Inflation
Source: Bureau of Labor Statistics
Most Americans (66%) live paycheck to paycheck. Dollar General’s shoppers are above the average shopper on this measure
Consumers Living Paycheck to Paycheck
Share of consumers who lie paycheck to paycheck, over time and by annual income
Source: PYMNTS, LendingClub Paycheck-to-Paycheck Report.
Shopper Paycheck to Paycheck Profiles
Source: Income distribution from dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022. % of Retailer Shopper’s paycheck to paycheck %’s extrapolated from survey data and LendingClub data
Of course, it’s not all rainbows and unicorns for Dollar General. It’s the first time we’ve started monitoring dollar stores’ emotional connection with customers, and Dollar General lags its competitors and the US average at 69%. All competitors have made significant strides in the past five years meaning Dollar General has more work to do to build that connection with its current and future Customers.
% of Customers Agree “Retailer tries hard to keep prices down during economic inflation”
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
% of Customers Agree Have an Emotional Connection* with Retailer
*Percents are average scores for three statements: Trust retailer, Sad if retailer closed, Likely to recommend
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
Walmart has been trending up in the strength of their emotional connection, over time, narrowing the gap with Amazon and Aldi
% of Customers Agree Have an Emotional Connection* with Retailer
*Percents are average scores for three statements: Trust retailer, Sad if retailer closed, Likely to recommend
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
The way to build that emotional connection is to focus on what matters to its shoppers. And what matters is to keep focusing on that base price perception, particularly in common household products, Frozen and packaged food, and fresh produce, but also on closing those biggest gaps we already mentioned in bulk packs and private brand.
Intensity of Department Specific Saving Activity
Save Me Money Activities by Department
Source: dunnhumby Grocery Retailer Preference Index survey, n=9,970 US Grocery Shoppers, collected May 2022.
SECTION 6
Reason #3 Dollar General will become a Health Destination
If you’ve been keeping up to date with DG news in recent years, you know that Dollar General has been highly criticized by government officials for allegedly creating food deserts, fined millions of dollars by OSHA, and limited by several states from opening new stores qualified as small box discount retailers. But what if Dollar General was able to turn food deserts into food oases and become a Health destination? Well, that’ exactly what Dollar General has in mind, with a few key initiatives that will help it get there.
First, there is the DG Fresh initiative which consists of expanding Dollar General’s footprint of produce and coolers in their stores. Dollar General plans to have DG Fresh in 3,000 stores in 2022 (in 2,300 by the end of the first quarter), with a vision to extend this to more than half their stores focusing on the top 20% produce SKUs that make up 80% of the volume and provide 80% of the produce categories carried by most food grocers . In most locations that will make quite a difference as the closest conventional grocers are 20 miles away. As we mentioned earlier, Frozen Goods and Fresh Produce are top categories where DG shoppers look to save money, particularly on base prices, hence this will also help them improve their overall price perception to compete with the likes of an Aldi. To back up this initiative, they’ve recently invested a combined $480 million in three new DG Fresh facilities (a total of 12) creating a potential of 1,100 jobs at full capacity, helping DG to self-distribute frozen and refrigerated products across its supply chain. This will indeed help reposition Dollar General as a provider of food oases.
Perhaps the most exciting news in the recent month is its appointment of a Chief Medical Officer and health panel to help make Dollar General a « Health Destination ». Dollar General will be offering a health assortment in 4,000 stores at prices 40% cheaper than in drugstores. We’re talking cough-cold products, dental, nutritional, medical items, health aids and feminine hygiene. But that’s not all. The four health experts that make up the newly appointed health panel are envisioning providing health care services like other big box retailers. In 2021, Yale published a study selecting Dollar General (not Walmart or CVS) for vaccine distribution as a way to help end the Covid pandemic thanks to its extended footprint and the CDC agreed.
Also notable, Dollar General has partnered with a nutritionist to provide Better-For-You meals. If you visit the retailer’s website, you can find better-for-you recipes with products you can easily find inside a Dollar General. This combined with the expansion of its Good and Smart private brand will surely help position it as a retailer that cares about the health of its Customers.
Do you think Dollar General can become the Health Destination of America?
SECTION 7
Dollar General has room to grow
The future of dollar stores and discounters is more than positive. If the trend in America follows the mature markets in Europe, these retailers own between 20 and 50% market share. With the combined 6% market share for discounters and dollar stores in the US, that leaves a lot of room for more growth, and if inflation keeps rising, we can expect shoppers to shift their spend to these retailers. In that future, Dollar General will have to bring its A game and measure up to Aldi and Lidl, which have a significant presence in these markets and are already focusing on other performance drivers like ease of payment, discount and convenience, loyalty, automation, and ecommerce to name a few. It will be interesting to see who wins the battle for increasingly sophisticated price sensitive shoppers. But by the looks of it, Dollar General is already focusing on ecommerce as demonstrated by its double-digit web traffic growth, even surpassing Aldi and Amazon, albeit on a smaller scale.
Discounter Markets Fall into Three Phases of Maturity
Market share controlled by discounters (%)
Share of total square footage of sales area (across all stores) controlled by discounters (%)
Source: Planet Retail; BCG analysis
Dollar General’s web traffic is growing faster than all major competitors
SECTION 8
About our store walk
We’ve scored Dollar General at a 2/5 on our store walk. A picture is worth a thousand words and the following pictures help explain why the Dollar General store we visited doesn’t have what it takes, at least on that day, to build an emotional connection with its Customers (i.e., Customers would be sad if the store closed).
Although its focus on based prices and discounts is obvious when walking into the store, the amount of out of stocks and the disorderliness doesn’t really add to a positive shopping experience. The signage indicates good prices with a great price perception one would expect, but the prices are so-so with no apparent prices on the endcaps. The Dollar Tree across the street was much nicer.
When arriving at the cashier, the following incidents probably best illustrate another way Dollar General keeps its costs down. The cashier was complaining that she wasn’t paid the salary she had been promised when she joined. The advert said $13 and she was only getting $11.45 and she was going to quit soon. She claimed she wasn't paid enough money to check the prices, or change the tags on the shelves, which didn’t match the prices ringing up at the register for two customers in front of the line. She wants corporate to send more people down to the store to make tag changes.
Although they had great variety for the size of the store, some frozen and dairy (this wasn’t a DG Market, so no fresh produce or meat) and private brands like Good & Smart and Clover Valley, the whole cashier experience and messiness overshadowed the instore experience. Lesson learned, price is definitely important, especially in this socio-economic context, but if Dollar General wants to position itself in the ranks of other retailers long-term, it should focused on these operational issues.
SECTION 9
What our panel of experts has to say
Our dh Voice panel is comprised of experts across all our capabilities with a wealth of deep retail experience. Here are some strategies they see retailers put into place around the globe. In some of these cases, we have even helped our clients produce strategies to protect themselves.
Adapt your strategy
In Germany, Edeka is the #1 domestic retailer. They have been pushing a marketing message for the last few weeks of "In every Edeka we've got a discounter - come and check out our private label range which we price to match Aldi and Lidl." They have received criticism from marketing experts for their approach, but this example shows that conventional retailers are taking notice and action.
Create barriers to entry
In Colombia, Exito implemented a very aggressive economy private brand strategy, they called it "Insuperables" (unbeatables). They identified the strongest categories of the discounters and developed products with the promise that they could not find the same product cheaper in any other supermarket. To fulfill this promise, the development of new product sizes was key (this created a barrier for their competitors), for example offering a 1.1 liter-sized water when the normal format in Colombia was 900ml. dunnhumby supported this effort.
Reward shoppers
Tesco in the UK introduced Clubcard promotions - which has been a strong success. Removing mass promotions and ensuring that promotions become relevant only for the most loyal customers has not only increased their penetration of the loyalty card across all formats (large and small) but value perception of getting an immediate discount off promotion presents a strong offer of value to the customer. Clearly this represents an opportunity for the bigger retailers with a loyalty program to offer something unique to customers vs. what discounters and dollar stores offer.