April 30th 2013 Dollar General Business Proposal Executive Summary Our group performed an analysis of Dollar General’s external and internal environment, which included a Porters Five Forces breakdown. Those findings as well as analysis on the company’s financial statements formed the basis for our recommendations. We considered several alternative growth strategies for Dollar General to implement. Those strategies are, international expansion, continued domestic expansion, internal improvements, extending services, and taking the company private.
We concluded that the most beneficial direction for the company is to go private thereby relieving pressure to meet short-term objectives. We also believe that Dollar General can benefit from increasing domestic expansion and improving its value chain efficiency by upgrading merchandising products. This strategy will allow Dollar General to achieve sustainable long-term growth. Introduction Dollar General has reached an inflection point in the company’s history. Recent growth has been explosive, sending revenues to a high of over $9 billion in 2007.
However that data may be misleading, though revenues have been increasing each year the rate of revenue growth has been declining steadily since 2000. This phenomenon of diminishing margin of returns, as well as recent issues forcing the close of 200 stores in 2006, has put Dollar General in an uncomfortable financial position with its Wall Street investors. The question we will be addressing in our paper is the strategy Dollar General should use to grow its business efficiently and create sustainable long-term advantages. External Environment
By performing an external analysis we were able to determine many potential opportunities for Dollar General. First, consider the changing demographics in the United States. In 2005, 37 million Americans had household incomes below the poverty line as defined by the U. S. Census Bureau. The shift in demographics has arguably led to a new bargain-based mentality of the American consumer. In 2005, 67% of American households shopped at some type of dollar store, up from 55% in 2000. Additionally, an aging population (such as the Baby Boomers) contributed to a rise in the number of people on fixed incomes such as pensions.
Clearly, Dollar General has the opportunity to exploit consumers who value a low-priced bargain shopping experience, in addition to consumers who come from low-income households and require EDLP in order to satisfy their needs on a budget. By keeping their retail format to a small defined set of goods they are able to open in areas big box retailers such as Wal-Mart are unable to. As stated Wal-Mart requires a population of at least 50,000 in order to consider opening a store, Dollar General finds itself successful with populations of around 20,000.
Management has also considered bringing their talents to other portions of the world where extreme retailing is much more widely accepted. With the past successes of the Aldi Corporation in the United States, and one in four retailers opening in Europe being a discounter, Dollar General should absolutely consider a possible expansion into Europe. Unfortunately, there are also significant external threats that Dollar General faces. Extreme competition between Dollar Stores and Extreme-Value Retailers, who offer everyday low prices in small-box format, presents a huge potential concern.
Extreme-Value Retailers offer a more focused assortment of goods compared to mass retailers such as Wal-Mart, but still stock a significant number of nationally branded products. Dollar General, although seemingly a “Dollar Store,” utilizes the “Extreme-Value Retailer” model. These two retail formats feature similar strengths and weaknesses, which is why the extreme competition presents itself as a threat. The price point at which Dollar General operates at is also a threat to their existence. While goods can be priced anywhere at Wal-Mart, Dollar Generals focus is to keep goods priced at either $1 or a . fraction so customers can easily calculate their totals before getting to the register. In order to keep this price point Dollar General is at a disadvantage when 10% inflation happens because Wal-Mart can just raise their prices and they cannot. Although these potential threats exist, Dollar General has an arsenal of potential opportunities for the future. Porters five forces Bargaining Power of Suppliers With 30% of Dollar General’s inventory being made up from nationally known brands and the other 70% consisting of Private label brands, Dollar General does not face a large threat from the bargaining power of suppliers.
While the national brands are on par, or sometimes below, big box stores such as Wal-Mart’s prices. Dollar General’s focus is supplying consumers with quality products at the lowest price possible. Since the majority of their products are created internally the power of supplies to control prices or production is very low. Bargaining Power of Consumers While there may be low bargaining power of suppliers, the bargaining power of consumers is extremely high. The rise of the Internet has led to an unprecedented transparency of prices within retail.
It is now significantly easier to find the different prices offered at the various discount stores in the U. S. Thus in order to keep customers from the other 23,000 discount retailers in the united states, Dollar General must appease their customers at all costs in order to remain successful. Threat of New Entrants The threat of New Entrants is extremely high for discount retailers. In an industry where limited retail space and inventory is needed to turn a profit, it’s no wonder that there are currently 23,000 discount retailers in the United States.
The main barriers to entry are startup capital and the ability to supply low cost products. Threat of Substitute Products In an industry whose top 3 selling products are household cleaners, seasonal decorations, and wrapping paper. Consumers have limitless options to where else they can purchase goods. Most consumers that shop at Dollar General live below the poverty line so quality and brand name is not the reason they are shopping there. This leads to a very serious threat of substitute products at a lower price. Internal Environment
Dollar General, operating in the dollar store industry, executes a strategy of offering superior prices and convenience. Dollar General’s intention was to act as a complementary retailer, but still competitive, alongside Wal-Mart. Dollar General’s core customer purchases her staple items at Dollar General, and embellishes her household needs with items from Wal-Mart. Dollar General, as a competitive leader in the industry, has several strengths. Dollar General is able to reach smaller, more rural areas than big-box competitors by focusing on a specific layout meant to ensure convenience at all costs.
Wal-Mart’s stores are usually a minimum of 100,000 sq. ft. , whereas Dollar General stores average around 6,900 sq. ft. This severe difference in size allows Dollar General to be successful in different markets. Another significant strength of Dollar General is the convenience that it offers. A typical shopper spends on average 10-20 minutes to purchase the same basket of goods that would take them about an hour to purchase at Wal-Mart. Multiple Dollar General stores are in the drive path to Wal-Mart stores, some are even in the parking lots of big-box Wal-Marts’.
Another internal advantage is the ability to offer even price points (mentioned earlier) that ensures convenience for consumers. However there are some weaknesses internally at Dollar General. Inventory management has been lackluster; cresting in 2006 Dollar General was forced to write off a significant amount of inventory that had built up over time. The issue at the heart of Dollar General’s inventory woes was the “pack-away” policy that forces merchants to pack-away unsold merchandise and attempt to resell the goods a year later.
Though it has been an issue Dollar General has made the effort to improve its inventory management. Implementing an auto-replenishment inventory system allowed DG to better manage inventory flow and product allocation. By continuing to improve its supply chain management, Dollar General can increase its efficiency, and as a result decrease costs. Another area of internal improvement has been human resources. Dollar General has revamped its entire hiring process in the sense that they now look for significantly different qualities than previously.
Recently Dollar General has been hiring managers based on problem solving abilities, and leadership experience. The new criterion in managers has improved customer service and store performance. Dollar General has also placed added value in promoting from within the company. In terms of merchandising, Dollar General has improved its selection of goods offered. Specifically, coolers were placed into numerous stores to offer grocery items that shoppers may purchase using EBT (electronic benefit transfer). Overall, Dollar General has detected its core competencies over ime and has exploited them to its benefit for profitability and success. Recent Growth and Current Strategy Over the past decade, Dollar General has proven to be a great success. Their progression has created a solid platform and has set them up with a great opportunity for growth in the future. Over the recent five years, Dollar General has grown from 6,113 to 8,260 stores. Dollar General has continually evolved, leading to higher sales each year. In 2007, they became the 6th largest mass retailer in the US.
The old vision that Dollar General will succeed in selling “knick-knacks” has transformed, and now they provide many consumer goods. Project Alpha is a project that has led Dollar General to their success over the recent years, increasing sales, efficiency, and effectiveness. Project Alpha encouraged the closing of 128 stores that had a low potential. They have also revamped and even relocated many stores. These moves have helped them to reach a greater efficiency. This project has pushed changes on Dollar General, which has molded the firm and allowed their new strategies to be more effective.
They have also invested in a new inventory system that was connected to a point of sale system. This has helped the store manage inventory much more accurately, as well as keeping shelves stocked. This system has made huge improvements in the accuracy of the store’s inventory. All of the changes that project Alpha has brought on the firm, has led to many improvements on the storefront. They can now better manage their inventory as well as increase the amount of data that is available to managers throughout the company. This will allow performance to be evaluated and decisions can be made with more confidence.
On top of all of the store transformations and improvements in management, Dollar General has also made big changes in the merchandise that they carry. The firm began focusing on carrying low price household consumables. They also began carrying items that would draw customers into the store, such as refrigerators to keep drinks refrigerated, or freezers to sell frozen food product. The changes that Dollar General has made over the recent years, from new management practices, to new merchandise strategies, to revamping their physical stores, has really helped them to become a stronger competitor against other firms.
They have built a strong platform that will enable them to get where they want to go; however, it is very important that they know where to head next if they want to continue to lead the firm on a path towards continued success and growth. What are the firm’s options and our recommendations? Before giving an analysis on the firms new growth strategy it is important to first discuss Dollar General’s historical financial statements so that we can diagnose the problem. The first impression from looking at past statements is obvious but also slightly misleading.
Dollar General has seen a significant increase in growth over the past several years. Sales have increased from roughly $4. 6 billion in 2000 to roughly $9. 2 billion in 2007. The company’s sustained success is supported by their sales per square foot and inventory turnover, which have been right on par with their respective historical averages. However, when analyzing these numbers context is key. While it is correct that Dollar General has seen increasing revenues the rate of growth has decreased every year since 2000, hitting a low of 6. % in 2006. That number is well below the 10. 2% compounded annual growth rate for the extreme value retailers. Even more concerning gross margin, a measure of the company’s profitability (computed as revenue minus cost of goods sold over revenue) has decreased steadily from a healthy 30. 7% in 2002 to just 25. 8% in 2006. Together these two facts indicate that while Dollar General is growing it is not growing efficiently relative to competitors and is experiencing diminishing margins of return.
With an industry that has high projected growth in the future what strategy will best allow Dollar General to raise their revenue growth rate and ROIC to industry standards? One option to consider is to continue opening stores across different areas of the United States, specifically targeting low-income areas. As mentioned in the external analysis, Dollar General customers tend to be low-income earners, “41% of dollar store customers earned below $30,000 per year” (case). Demographic studies further support increasing store openings.
The number of Americans living below the poverty line increased 12% from 2000-2005 (US Census Bureau), and the number of American households that shopped at dollar stores increased the same 12% in that time period (case). There is a risk to opening new stores. Dollar General has been increasing its number of stores every year but revenues grew at a miniscule 6. 8% in 2006 (well below industry average 10. 2%). Dollar General’s focus on opening new stores may distract it from earning full value on their current stores (same store sales growth 2% in 2005).
The next option to consider is improving merchandising productivity. Same store sales growth had been a strong point for Dollar General through the 1990’s and into the early 2000’s but had dropped to a paltry 2. 0% in 2005 (down from 8% in 1990’s according to exhibit 2 of the case). The risk behind improving merchandise productivity is that it is costly. Project Alpha already did a great deal to improve on Dollar General’s inventory policy but there is still a lot of growth that the company needs in terms of improving the value chain.
Another option to consider is international expansion. On paper this seems like a sure way to grow revenue. Europe owns a large share of global demand for discount products. According to the case, 70% of global discount sales occur in Europe. However, the risks of expanding abroad are considerable. Dollar General has no experience in international markets and taking a business into a new market with new culture is risky. It is also costly and time consuming, especially when slowing same store growth remains a prevalent issue. Finally there is so much growth potential in the U.
S market that if Dollar General wants to open more stores it would make more sense to remain domestic (whereas European market is saturated). Dollar General may also look to implement new services to add to customers such as wire transfers and check cashing. This strategy makes sense considering the low income clientele at Dollar General are more likely not to own bank accounts. However implementing these services would be expensive and customers may not identify the Dollar General brand as a place to cash a check negating the ability to add to revenue.
The last option to consider is taking the business private. One of the issues that is hurting the company is the pressure to meet the demands of its equity shareholders, namely Wall Street investors. The company has an inventory system that is completely outdated and could also use an upgrade to its merchandising productivity, however implementing those changes are costly. Taking the company private will reduce pressure to show monthly results to Wall Street and allow the company to focus on fixing their value chain to help ensure sustainable growth.
However taking the company private could bring added debt to the capital structure and increase the risk of insolvency. Our recommendation is that Dollar General continue to increase the number of stores in America however target specific low-income areas with high growth possibilities. The reason for this comes from the data presented in exhibit 12. Using the number of store openings and company revenue from 2002-2006 Dollar General actually increased their revenue per store from $1. 00 million to $1. 1 million in 2006, so even though they are seeing diminishing margins of return it is not due to market saturation. Our second recommendation is to take the company private. Relieving the pressure to produce results in the short term will allow the company to grow more efficiently. Once the business is privatized Dollar General should also look to improve its merchandising productivity in an effort to grow same store sales from its low of 2% in 2005. Bibliography Chinni, Dante. “Poverty’s Changing Profile in the U. S. ” PBS. PBS, 07 Nov. 2011. Web. 29 Apr. 2013 Company reports, MVI research, 2006.