Dollar General Case Study Essay

Dollar General is a retailing company, especially extreme value oriented. Since its establishment in 1955, Dollar General has drastically grown. In 10 years, from 1955 to 1965, the Company grew to 255 stores with annual sales of $25.8 million. Today, Dollar General owns 6,300 stores in 27 states, with 2002 annual sales of $6.1 billion and more than 54,000 employees. This growth was extremely fast in the 1990’s. The number of stores grew so from 1,461 in 1991 up to 6,113 in 2002. Since the beginning, Dollar General takes advantage of a niche by setting up profitable small stores delivering convenience and value. All the Dollar  General’s Strategy is based on a customer-driven distribution of consumable basics. Financial situation of the Company remains really satisfying in spite of shareholders lawsuits due to restatement of its earnings few years ago. Revenue growth was equal to 12.6% in 2003 for a total amount of $7.24 billion. Its net income was the largest of the sector with $319.9 million. In the same time, and over the last three years, the Company has reduced its long-term debt by $448 million. Such a success can be explained by a really good positioning of the Company through its external environment and among its direct competitors. Dollar general knows very well how to manage the exploited niche and its opportunities. The main strength of Dollar General remains its ability to constantly open new stores, knowing that the key success holds in the proximity of small stores delivering convenience and value. It is in fact a kind of necessary comparative advantage on this market. The new CEO, David Perdue has got no experience of retail industry. He has to choose in which direction Dollar General will go. He has to go on the expansion of the Company but with the arrival of new and very powerful competitors such as Wall-Mart or Kmart. 1. Background Dollar General is a discount retailer of general merchandise, with around 6,300 discount stores in over 27 states in 2003. The Company, which headquarters are based in Goodlettsville, Tennessee engages in the provision of general merchandise at low prices, serving customers in Midwestern and Southeastern US. The Company offers its customers an assortment of consumable basic merchandise, which includes: health and beauty aids, packaged food products, cleaning supplies, hardware, stationery, household items and basic apparels. The majority of its items are priced at $1. The Company employed around  54,000 employees. Their buying staffs negotiate low purchase prices from suppliers. It purchases its merchandise from various major suppliers. To maintain high in stock levels of core merchandise, the Company usually limits its stock-keeping units per store. Timeline In 1939, with only a third grade education, J.L. Turner formed his own company in Scottsville, Kentucky, with his son, Cal. In 1955, Cal Turner and his son Cal Turner Jr. opened the first Dollar General store in Springfield, Kentucky. In 1965, they operated in 255 stores and generated $25.8 million of sales. In 1976, Dollar General exceeds annual sales of $100 million for the first time. At the beginning of the 1990s, the Company’s annual sales kept increasing and began to expand store sizes from 5,000 square feet to 6,800 square feet. In 2000, Dollar General’s corporate employees move to Goodlettsville, Tennessee. The move also saw the most aggressive store reset in the Company’s history, in which, more than 5,000 stores were set. In 2001, the Company began offering perishable products. This program included a selection of dairy products, meats, frozen foods and ice cream, and was expanded from 411 stores at the end of 2001 to 1,367 stores at the end of 2002. In February 2003, 7 distribution centres which served around 6,192 stores in 27 states and generated in net sales $6.1 millions. 2. Dollar General diagnosis a. Financial analysis Net Sales Increases in net sales resulted primarily from 587 net new stores and a same-store sales increase of 4.0% in 2003 compared to 2002, and 573 net new stores and a same-store sales increase of 5.7% in 2002 compared to 2001. The Company’s merchandising strategy in recent years has been to place a greater emphasis on faster-turning consumable products and to give less prominence to slower-turning home products and clothing. The Company believes that this strategy has enabled it to better serve its customers while improving its inventory turns. As a result of this strategy, over the past three years the highly consumable category has become a greater percentage of the Company’s overall sales mix while the percentages of the home products, seasonal product and basic clothing categories have declined. In 2002 and 2003, the mix was as follows (in percent of sales): 2003 2002 Highly Consumable 63% 60.2% Seasonal Products 15% 16.3% Home Products 12% 13.3% Basic Clothing 10% 10.2% The Company’s same-store sales increase in 2003 over 2002 of 4.0%, or $228.3 million, was due to a number of factors, including but not limited to: increased sales of candy and snacks, health and beauty aids items, pet supplies and perishable products primarily due to the increase in the number of stores with coolers (in 2002, 1,400 stores had coolers). Gross Profit The gross profit increased by more than 200 millions dollar in 2003 as compared with 2002 primarily due to the following: The Company made progress in reducing the shrink at problem stores during 2003. Some of the actions taken by the Company to combat shrink beginning in 2002 included the installation and the implementation of software that improve the inventory management. They also invest in others technologies which help purchasing and store allocation decisions. Current Financial Condition The Company has also to deal with its accounting issues due to the uncertainty about their past financial reports. The Company is still under the investigation of the US Securities and Exchange Commission and has to provide solid proof for every financial figures published and for every transactions done. b. Strengths and weaknesses analysis STRENGTHS WEAKNESSES One of the leading dollar store retailers in the US Improved financial performance Stores located in small communities Invested in better distribution facilities Space issues Merchandise mix problems Lost of competitive advantage Strengths Dollar General is one of the leading dollar store retailers in the US. The Company enjoys a strong market position within this particular segment of the retail market. It has a low cost operating structure and a relatively limited assortment of products offered. The Company’s strong market position will help to enhance Dollar General’s brand awareness. Dollar General is well known Company which does not need to communicate on their strategy because of their strong identity, they have low communication cost. This will in turn make it easier for the Company to attract new custom. Their strong store experience allows the ability to develop their strategy with a high knowledge experience. It facilitates their expansion strategy. The Company improved its financial performance and increased in revenue in 2003 up to $6.1 billion after a 15% increase in 2002. Net income also grew by 27,7% in 2003 reaching $264,946. Stores are located in small communities, meaning it does not have to compete with the larger retail outlets for custom. Moreover they have made better distribution investments which allow them to have better facilities in their distribution and lower costs. Weaknesses Growing fast, involved learning experiences, duplicating models, and creating format. It has been a force during a few years. Nowadays, Dollar General has to adapt its stores to the demand, and follow the market growth. Merchandise mix problems Dollar General has also experienced merchandise mix problems in recent years. These merchandise mix problems have led to the Company’s inventories becoming obsolete. This has forced Dollar General to write down some of the value of its inventories. The concept of dollar store has been a success, and many competitors are on the general store traces. Their concept has been copied, so their competitive advantage and their strategy are no more as efficient as in the  beginning. Competitors have also learnt form the Company’s experience. 3. External Analysis a. Competitors According to the case the two major competitors of Dollar General Corporation are: Family dollar Dollar tree These two companies have adopted the same strategy than Dollar General. Their expansion has been fast, they have the same customers, and the same core business. Although they have many customers such as The Talbots, Inc.Fred’s, 7-Eleven, Sears Roebuck, Wal Mart, 99 Cents Only Stores, Kmart or Target. COMPETITOR COMPARISON (2002) The following chart shows the differences between those three companies. Comparison criteria – 2 – 1 0 1 2 Industrial Equipment (number of stores, distribution center†¦) Wide of product range Productivity Profitability Pricing Image Penetration rate Revenue Growth over the past year Dollar Tree Family Dollar Dollar General Following this graph study it seems Dollar General generally remains the most impressive competitors of the sector. DG remains the best in term of image, penetration rate (even if it is only present in 27 states whereas the others are present in about 40 states), financial position (they have the best Net Income 265 millions dollars, Dollar Tree: 155 millions and Family Dollar: 217 millions) and in term of selling force thanks to its still greater number of stores (6,113 stores for 54,000 employees, Dollar Tree: 2,263 stores for less than 9,600 employees and Family Dollar: 4,616 stores for less than 22,000 employees). [ in 2004, Dollar Tree has got 9,600 employees and Family Dollar 22,000 employees according to Yahoo.com so we can guess that it was inferior in 2002] Nevertheless DG has to take care not to lose its leadership concerning the wide of product range proposed. And even if the target household income is not exactly the same than Dollar Tree, DG has also to pay attention to the politic pricing implemented by Dollar Tree, which is in fact the best of the sector thanks to products price at $1 or less than $1. But generally, DG remains really well positioned among its competitors. b. Opportunities and threats analysis OPPORTUNITIES THREATS New distribution centers Business less susceptible to slowdown in consumer spending Stores expansion in new states Size of the stores New competition People qualification Dependency to suppliers Opportunities The Company is dependent upon the smooth functioning of its distribution network and upon the capacity of its distribution centers. The Company relies on the ability to replenish depleted inventory through deliveries to its distribution centers from suppliers. New distribution centers are expected in the end 2004 or in 2005 in order to support continued growth. The dollar business is less susceptible to a slowdown in consumer spending compared with other retail operations because over a third of its stock costs $1 or less. This will mean that Dollar General’s business will not be affected as much as other high cost and high margin led retail operations, as in times of economic distress consumers will look to save money by purchasing goods that are perceived to offer better value from retailers such as Dollar General. So they have the possibility to gain market share if the economy slowdown. The stores are located in only 27 states so they have the possibility to open new stores and to expand into additional states. It will depend on factors that are beyond the Company’s control such as: the ability to negotiate favourable lease terms; the ability to hire and train new personnel,  especially store managers; the ability to identify customer demand in different geographic areas. The size of the stores is from 5,000 to 6,800 square feet, whereas Family Dollar stores’ size is from 7,500 to 9,500. It shows that DG can extend the size of their stores in order to grow their sales. Threats The discount retail merchandise business is subject to excess capacity and some of the Company’s competitors are much larger and have substantially greater resources than the Company. The competition for customers has intensified in recent years as larger competitors, such as Wal-Mart, have moved into the Company’s geographic markets. The Company remains vulnerable to the marketing power and high level of consumer recognition of these major national discount chains, and to the risk that these chains or others could venture into the â€Å"dollar store† industry in a significant way. The Company’s success depends to a significant extent upon the abilities of its senior management team and the performance of its employees. The loss of services of key members of the Company’s senior management team or of certain other key employees could negatively impact the Company’s business. In addition, future performance will depend upon the Company’s ability to attract, retain and motivate qualified employees to keep pace with its expansion schedule. The Company’s business is dependent on its ability to obtain attractive pricing and other terms from its suppliers. The Company believes that keeping good relations with its suppliers is generally a good way to obtain attractive pricing. If the Company fails to maintain good relations with its suppliers, it may not be able to obtain attractive pricing with the consequence that its net sales or profit margins would be reduced. 4. Problem identification Dollar General’s strategy is based on low prices and convenience. That is what differentiates this Company from another. They had the ability for delivering value to their customers and for placing many stores where other big-box retailers will not is well-deserved. The new CEO, David Perdue, which has no experience in retail industry, has to go on the expansion. But he has to face the problem of a harder competition. Indeed, the success of dollar stores attract big firm such as Wall-Mart and Kmart on this market. So where will he decide to open new stores? He will probably has to expand new stores in new states but he might not find a location without competitors.