DOLLAR’S LOWER-PRICE STRATEGY
Byline: Dianne M. Pogoda, with contributions from Thomas J. Ryan
NEW YORK — As it rolls out more of its no-frills, low-cost stores, Dollar General is gaining a reputation for selling apparel basics at bargain-basement prices and for doing it profitably.
The rapidly expanding discounter reported 1993 earnings rose 36.4 percent to $48.6 million, while sales jumped 23 percent to $1.13 billion. The momentum continued into this year’s first quarter ended April 30. Earnings soared 60.7 percent to $9.5 million on a 29.4 percent sales gain to $287.1 million. Same-store sales rose 15.8 percent.
Currently, the Nashville-based chain operates 1,861 stores in 24 states. It opened 183 stores last year and expects to have another 200 units added to the fleet by the end of this year.
“It’s like the 7-Eleven of the discount store industry,” said Linda Morris, retail analyst with PNC Bank. “It’s very good at its niche.”
Kent Garner, Dollar General’s vice president and chief financial officer, said consumers are responding to an everyday-low-pricing strategy, begun last fall. Prices on 200 basic items were slashed an average of 27 percent, resulting in a big boost in volume, more than making up for reduced margins.
Citing one example, Garner said a women’s sweatshirt was reduced to $5 this year from $6 last year. The result: Sales jumped to $3.4 million from $1.5 million.
In addition to sharper prices, Dollar General is offering more brands, which currently represent 30 percent of sales, up from 20 percent in 1993.
Imports, a prime source for low-priced basics, have risen to 23 percent from 14.9 percent, and are seen eventually representing 30 percent of sales.
At the same time, sales of closeout merchandise dropped to 20 percent of sales from 35 percent.
“Our focus is on being a dependable supplier of basics,” Garner said. “To be dependable, we really can’t rely on opportunistic buying, like closeouts and overruns. As for imports, we have increased the amount we buy overseas because it allows us to bring in special-value items.”
Todd Berko, analyst with Kidder Peabody, said Dollar General is still best known for hard goods, but he noted, “They would like to be much more of a factor in soft goods.”
Berko said the company’s main offerings on the apparel side are basic commodities, such as jeans and T-shirts, which are appropriate for Dollar General customers, who generally have little discretionary income.
Apparel was once “sort of a stepchild” at Dollar General, recalled Thomas Tashjian, retail analyst with First Manhattan Co. But now he believes the company is concentrating on developing a stronger business in basics. Dollar General stores are kept tidy and have little ambience. The decor is plain, with tile floors and fluorescent lighting. Apparel areas are dotted with signs touting low prices — $3 to $10 — topping racks of T-shirts, knit tops and rompers, shorts and jeans. Handbags and duffels are piled on shelves.
The presentation seems to be working, but it hasn’t always been easy rolling out stores. In the Eighties, the chain expanded too rapidly, increasing to 1,300 stores from 800 in a 15-month period. The company could not handle the expansion, profits plummeted and the pace of store openings was slowed.
A new team was brought in to orchestrate the rollout more efficiently. Stores are now being opened and operated inexpensively, and are generating significant cash flow, with earnings growth of 30 to 35 percent over the past few years, Tashjian said. “That has allowed them to increase the pace of new store growth, to about 12 percent this year from 11 percent last year, and from 9 or 10 percent the year before,” Tashjian added. “Since same-store sales have been up 10 to 15 percent over the past few years, they have needed to close fewer stores each year.” Also, the company is installing new technology that should help it maintain growth and keep costs down.
On average, Garner said it costs Dollar General $165,000 to build a new store. Annual sales at newer stores have been averaging $720,000 compared with $670,000 for older stores.
It costs the company about $55,000 to relocate a store, and the move generally improves sales by about 40 percent, according to Garner.
To further its growth, the company plans to open its third distribution center in the first quarter of 1995. The facility will be in Ardmore, Okla., It should speed deliveries and lower costs, Garner said. The facility cost about $20 million and has the capacity to support 900 stores.