Dollar_General_Strategy

Memo Date: 11/1/2010 To: David Perdue, Chairman and CEO Re: Growth Opportunities in the West Executive Summary Dollar General is at an inflection point. We have learned a great deal of lessons from our past, but now we look to the future to see what it holds. This memo takes a closer look at our industry and our current operations to examine what we need to change, or keep the same, to expand our presence in the extreme-value retail sector. A SWOT and Porter’s Five Forces analyses aid in getting that closer look, and our growth options are examined for their viability. Dollar General (DG), and the dollar store industry in general, has made significant progress in the United States over the last decade, and we now face the challenge of building on this success in order to stay relevant and profitable. By 2007, we had become the sixth-largest mass retailer in the U.S. with average annual revenue growth of 9% from 2002 to 2006. Our sales and profit growth made us one of only three companies to outperform Wal-Mart in these areas. This accelerated growth has also highlighted some aspects of our operations that need improvement in order for us to remain profitable and continue growing into the future. “To Serve Others: provide customers a better life, shareholders a chance for superior return, and employees respect and opportunity.” This mission is what DG’s strategy is built around, and it drives every facet of our operations. Our strategy of providing customers with “a focused assortment of fairly priced, consumable merchandise in a convenient, small-store format” is built around the mission of serving others, and this is what sets us apart from our competition. By taking a closer look at our industry, and ourselves, we can better see what opportunities we have for growth. SWOT Analysis I have performed a SWOT analysis to examine our Strengths, Weaknesses, Opportunities, and Threats at the current time. I have identified the internal and external factors that affect our performance and could affect our strategic planning. Strengths Our greatest Strength is that we provide low priced goods in the convenience of a small-format store. This value-proposition is the greatest factor in our being able to compete with mass retailers such as Wal-Mart. Wal-Mart has focused on price and a large selection, and while our target market expects low prices, the convenience of our small size and targeted product range is what sets us apart. Our transition to a more customer-centric store management philosophy has become another advantage we have over the competition. Our store managers are putting customer-service first and this makes an impression on our customers and the bottom-line. Our current locations are focused in rural towns with populations of 20,000 or less and primarily serve customers who live within 5 miles of the store. Our employees know our customers, and this knowledge allows us to better focus our product range and mix to improve individual store sales. Our customers are why we are in business, to serve them, and we cater to a relatively specific target market. The majority of our customers are in the low-, middle-, and fixed-income brackets, with approximately 41% of customers having an annual gross income of less than $30,000, and approximately 24% having an annual gross income of less than $20,000. Another important aspect of our customer base is that 86% of consumers making purchases in the dollar store channel were female. Lower-income women and families are the primary consumers that shop with us. These groups have greatly contributed to our growth in the past, and if we continue to provide them with the products they need and the convenience they want, they will help us grow into the future. As Kathleen Guion puts it, “It is knowledge and understanding of this customer and her needs that truly lies at the heart of Dollar General.” Weaknesses We have experienced a high turnover of employees and store managers in the past and these labor issues are preventing us from reaching our full potential. Our past labor management plan was to have as minimal a staff as possible and match labor to freight demand, rather than customer demand. This caused the workload to be heavy and the store to be hectic on “truck days.” With labor limited to a few employees, each had to work harder to keep the store running smoothly. Store managers also had trouble with managing inventory levels and the placement of non-core products. There have been improvements through the involvement of district managers, but we can still improve on the labor planning and execution in our stores. We have had some success with “Project Alpha” in identifying underperforming stores and focusing on either closing, renovating, and/or relocating them. Our past inventory “pack away” policy has been eliminated and inventory management has improved. The problem remains that we have some stores that are just not performing well and are hurting our entire operation. If we are to proceed with any expansion, these stores need to be brought up to par with our level of service and product offerings. We must focus on our customers and make individual location a store we can be proud of. Another major weakness we have is our even-dollar pricing model and the inflationary effects that can cause the already narrow profit margins to shrink. Our everyday low prices are a strength that allows us to remain competitive and customers value the simplicity of even-dollar price points, however, much of our competition can increase prices in small increments while we cannot. As inflation causes the value of the dollar to rise, and our prices remain the same, the profit margin shrinks and we lose money. We must continue to remain competitive with our prices but be careful to keep the margin at a profitable position. Opportunities With “Project Alpha,” we have identified the stores that can be improved upon and now we have the opportunity to make a turnaround. We have the knowledge and resources to upgrade these existing stores and make them some of our best. We are only as good as our least quality store. Our image and reputation could be tarnished by underperforming and badly managed stores. We must take this opportunity to ensure a solid foundation of quality stores before we expand further. Over-expansion and inventory mismanagement have helped to create these poor stores, so we must ensure our inventory management strategy is solid before we proceed further. We have recently made significant improvements to our inventory management strategy, and enhanced our product mix to satisfy consumer demand. We have the opportunity to further focus on properly managing inventory and finding the right product mix that will generate good profits and satisfy consumer demand. We must continue to prohibit the legacy inventory “pack-away” policy to ensure fresher and more relevant merchandise is on our shelves. We also have to make the product mix in our stores a high priority. We need to find the right balance of consumables that turnover quickly, but have low profit margins and the non-core items that have a greater profit margin, but turnover slowly (See Exhibit A for the 2006 Product Mix). If we can identify the “right” mix of products, we have the greatest opportunity for profits and growth. This “right” mix should be implemented and shifted on a regional basis to ensure our customers are getting what they want. Another opportunity we have is with our Dollar General Market concept. Our competition has also been experimenting with this format, which goes to show it has the potential to be a viable, profitable operation. We have the capabilities to make an entrance into the small-format grocery market, and now is the time to do so. Tests have shown that a slightly larger format than we currently have, and a product mix focused on grocery has been very profitable. We should explore this format further in regions that are under saturated with this type of store. Threats A threat we face is the fact that we try to maintain price parity with Wal-Mart. Wal-Mart has many operational advantages over us with their massive scale and significant purchasing power. Consumers now have a “bargain-based mentality” and shopping behavior has shifted to purchasing the lowest priced goods when possible. In order to remain competitive with Wal-Mart we have to ensure we are the most convenient option available. We also can enter markets that may be too small for Wal-Mart but just right for us. We nearly always have the price parity with Wal-Mart, so convenience needs to be the major selling point. Another major threat is the economic pressures that our target market faces. Our customers often have limited and/or fixed incomes that do not allow a lot of room for discretionary items. Economic issues such as unemployment and rising cost of living expenses, including fuel and utilities, have an effect on everyone’s financial stability. However, for our core customers the cost of these expenses may mean the difference between buying from us or not. Industry Analysis The Porter’s Five Forces model is used to examine not only DG but our industry as a whole, and can identify what needs to be done in order to remain competitive. The five forces model includes the competitive rivalry within an industry, the threat of new entrants, the threat of substitute products, and the bargaining powers of suppliers and customers. Rivalry – Family Dollar, Dollar Tree, Wal-Mart Markets These firms all have relative price parity with each other, so it comes down to the details that make the difference. “Retail is detail” and in order to get ahead of the competition we have to prove that we offer something they do not. Whether it is customer-service or the look of our stores, the details are what will set us apart. New Entrants –Extreme-Value Retailers The growth rate in the extreme-value retail sector had been nearly twice that of the overall retail sector from 200 to 2005. Family Dollar and DG make up 40% of the revenues in the extreme-value retail sector, with the other 60% highly fragmented among other retailers. This shows that with the low barriers to entry into this segment and the demand for more stores like them, new entrants will continue to rise. Substitute Products – Highly consumable products The product offering at DG is primarily focused on quality, consumable merchandise in core categories such as household cleaners, paper products, and groceries. These highly consumable products are often the most easily substituted, and even though DG carries name brand merchandise, consumers have become much shrewder in their purchases. Power of Suppliers – Suppliers have little power Suppliers to the extreme-value retail sector have little power because of the number of suppliers, and the fact that the quality of the product is not always a top priority, but instead price is. The customers of this industry are extremely sensitive to price, and will not make a purchase if it is not at the right price. Therefore, DG has to act in the same manner with their suppliers. If the price from one supplier is not right, DG will simply find another supplier. DG also has the scale and purchasing power that suppliers will acquiesce to their demands because of the sheer volume of their purchases. Power of Customers – Customers have major bargaining power In such a highly competitive and fragmented industry, the customer has major bargaining power over the retailer. It would not be difficult for a customer to switch from one store to another, in search of a lower price or more convenience. Because it is so easy, price is often the determining factor, so DG has to work to stay price competitive among value-retailers. Growth Options and Recommendation DG has several options available to us as to how we could expand. We can expand the demographics of our customers, expand our product offerings and/or mix, or expand geographically into the Western U.S. and/or Internationally. Of these three options, I would like to recommend expanding geographically. I do not think DG is ready for International expansion yet, but we still have plenty of room to grow within the U.S. The extreme-value retail sector is still unsaturated in Western regions of the U.S., and there is great potential for growth in this area. As stated earlier, I think “Project Alpha” should be continued, and underperforming stores need to be brought up to par with our best stores before we expand further. Once our existing stores are operating at their full potential, we should examine areas in the West that have the potential to be profitable locations. Analysts estimate that the U.S. could support upwards of 5,000 new extreme-value retail outlets within the next 2 years. This number highlights the increased consumer demand for our stores, and the potential for growth beyond our current regions. Conclusion DG’s growth strategy has worked well in the past and we must continue to grow within the U.S. if we are to position ourselves as a leader in the dollar-store sector. We face tough competition, not only from rivals in the dollar store segment, but also large retailers like Wal-Mart and Target. We must remain ahead of these competitors with our everyday low prices and the convenience of shopping with us. We must continue to operate a customer-centric business model whereby we provide our customers with the best possible shopping experience possible. We have a significant opportunity for growth in the Western U.S. with both our standard stores and our new larger format Dollar General Markets. Our future holds many new prospects, and with the right strategy and planning we can become the leader of our industry. Exhibit A