Dollar General: A Distressed Retail Giant
“We do very good in good times, and we do fabulous in bad times” - Todd Vasos, Dollar General CEO
Welcome to the 61st Pari Passu newsletter.
Today, we will be exploring the recent downturn of Dollar General (NYSE: DG). Dollar General is the largest dollar store in North America (19,414 stores), followed by Dollar Tree (15,115 stores) and Family Dollar (owned by Dollar Tree, 8,451 stores). Discount retailers, like Dollar General, Aldi, and TJ Maxx, thrived during the pandemic and have continued to perform well in times of heightened inflation and cost consciousness. However, recent expansions (both in terms of the number of stores and the types of inventory sold), trends in consumer behavior, and regulatory attention have introduced costly challenges that call into question the future of DG’s financial and operational health [1]. Let’s jump in.
Overview of Dollar General’s History
Dollar General was founded in 1939 by James Luther Turner and his son Cal Turner Sr. as a family-owned wholesale business in Scottsville, Kentucky. This was the time when general stores were the main stores where small communities bought food and household supplies. For reference, Walmart and Target did not come along until 1962. DG began as a liquidator of bankrupt general stores during the Great Depression and later transitioned to retailing in the 1950s. The first DG store opened in Springfield, Kentucky in 1955, with the concept of selling a variety of merchandise for no more than one dollar. The idea proved to be successful, and the company expanded rapidly throughout the rural areas of the South and Midwest. The strategy was simple: insert itself in a small town (20,000 people or less) that lacks the demand or infrastructure for a Walmart and cater to these low-income, rural customers who do not have other options to buy merchandise or the disposable income and space to buy it in bulk. By 1957, Dollar General had 29 stores and annual sales of $5mm. The company went public in 1968, and continued to grow its store count, product assortment, and geographic reach. By the end of 2000, Dollar General had over 6,000 stores in 27 states, and annual sales of $4.6bn [2].
The KKR LBO
In 2007, Dollar General agreed to be acquired by KKR in a leveraged buyout transaction valued at approximately $7.3bn, including debt [3]. The deal was motivated by the desire to revitalize the company’s operations, improve its profitability, and enhance its competitive position. Under the new ownership, Dollar General implemented several strategic initiatives, such as closing underperforming stores, opening new formats, expanding its private label offerings, improving its merchandising and inventory management, and investing in technology and infrastructure. The company also benefited from the Great Recession, as more consumers sought value and convenience in their shopping. As a result, Dollar General’s sales and earnings increased significantly during the LBO period, and the company was able to reduce its debt burden and generate positive cash flows. In 2009, Dollar General returned to the public market through an initial public offering that raised $716mm. The IPO was one of the largest and most successful in the retail industry and marked the beginning of a new phase of growth for the company.
Dollar General’s Success Over the Past Decade
Dollar General continued to perform well over the past decade [4], as it leveraged its strong brand recognition, loyal customer base, and unrivaled store footprint to capture more market share and increase its profits. The company pursued an aggressive store expansion strategy (coined “we go where they ain’t”), adding over 10,000 new stores between 2010 and 2020, and entering new states such as California, Nevada, and Maine. To give a sense of today’s scale, for every Walmart and McDonald’s, there are four and 1.5 DG locations, respectively. DG’s no-frills stores are cheap to stand up and run- they typically lease store locations (in already low-cost-of-living locations), invest minimally in the in-store shopping experience, and operate with the least amount of staff possible. DG locations typically have 5-6 employees total that make a median income of $16,688/year, and all employees are part-time except the manager. You can expect a small (7,400 square feet), consistent layout with two to three personnel and prices between $1 and $10. DG makes products fit prices instead of providing the best value on a per-unit basis.
The company also diversified its product mix, introducing more fresh and frozen food, health and beauty products, and seasonal and home goods. Part of the push into fresh and frozen food is because DG stores are typically located in food deserts where nutritious and affordable food is scarce. Unfortunately, this has pushed many local, independent grocers out of business, because they make money off of the products that DG can sell more cheaply. The new foray into food has proved difficult for DG as well: perishable items necessitate staff and inventory management policies to unload, process, and shelve/deshelve that DG’s ultra-lean operation lacks.
The company also enhanced its customer experience, offering digital coupons, loyalty programs, online ordering, self-checkout, and even delivery services. They also began operating two other types of stores: Pop-Shelf in suburban areas and DGX in urban areas. Popshelf is described as a “fun and easy shopping destination” that sells home goods, party supplies, and gifts (think of something in between a Five Below and a HomeGoods). DGX is a convenience store with name brands and ready-made options (think of something in between a 7/11 and a City Target).
The diversification of product selection has introduced inventory complexities compounded by continued store growth. Both employee dissatisfaction and inventory management costs (holding, order, and shortage costs) increased significantly for DG, but revenues were climbing drastically, so management turned a blind eye. The company also invested in its workforce, providing training and development opportunities and emphasizing diversity and inclusion. Keep in mind here that if a consumer does not have another place to shop for merchandise, they probably do not have another place to work. The company’s efforts paid off as it delivered consistent growth in earnings which led it to outperform its peers and the broader market. Between 2010 and 2020, Dollar General’s annual sales grew from $11.8bn to $33.7bn, representing a CAGR of 11% and its stock price grew from $21 to $208, representing a CAGR of 26%.