Value Retailers: Dollar General and Family Dollar Cater to an Underserved Market Segment

Dollar General, headquartered in Goodlettsville, Tennessee, and Family Dollar, based in Mathews, North Carolina, are the two leading retailers in the fastest growing segment of the industry, referred to as extreme value retailing. In 2005, Dollar General had over 7,500 stores in 30 states with sales surpassing $7 billion. Its annual growth in sales has been above 20 percent for the last six years. Family Dollar, with 5, 600 stores in 44 states, generated over $5 billion in sales in 2004. Both retailers are opening new stores at rates exceeding a store a day. The extreme value retail format has become increasingly popular among a variety of customers, including rural and urban shoppers, low- to middle-income young families, ethnic groups, and older customers with fixed incomes. Consumers have come to trust both of these retailers to provide good quality merchandise at low prices without the hassle of crowds and lines. The breakdown by geographic segments is 25 percent rural, 33 percent urban, and 44 percent suburban. This distribution is about the same as the sales distribution for Wal-Mart and Kmart stores. About 25 percent of U.S. households shop at an extreme value retailer once a month. Sometimes these firms are grouped under the category of dollar retailers – retailers that sell merchandise priced under one dollar. While Dollar General and Family Dollar keep their prices typically under $15, most of their merchandise is priced over a dollar. Family Dollar has multiple price points whereas Dollar General prices its merchandise at even-dollar price points. About 50 percent of the merchandise sold in the stores is consumables (pet supplies, food, paper, household cleaning and personal care products), with the remaining sales equally divided among basic clothing, hardware and seasonal merchandise, and home products. The percentage of consumable sales has been increasing over the past five years. Basic stock is supplemented with opportunistic buys of closeout/liquidation and impulse merchandise giving the impression of a changing merchandise mix in the stores. Vendors are developing new products and packaging to meet the needs of these extreme value retailers. For example, Fruit of the Loom typically sells men’s underwear in a nine-pack, but it offer small packs to value retailers. Procter & Gamble and Johnson Products also sell smaller sizes of hair care products with lower retail prices to extreme value chains. Most of their locations are in the Southeast, where the companies are headquartered. The stores are small, 6,000 to 8,000 square feet, primarily located in small towns with populations under 40,000 and in suburban strip shopping centers. Because the stores are relatively small, it is easy to find good locations in almost any market the retailers choose to enter. Initially, these extreme value retailers focused on low-income communities that were too small to support a large Wal-Mart or Kmart discount store. Residents of these towns appreciate the convenience of buying merchandise close to their homes rather than driving 30 minutes to a discount store in a larger town. Many of their customers can walk to the stores. Not only are the stores closer to customers, but shoppers are able to park closer to the stores in uncrowded parking lots and avoid long checkout lines. With a small store, customers can get in easily, find what they are looking for, and get out in a few minutes. The average transaction is between $8 and $9. To maximize operating efficiencies, the retailers typically open a cluster of stores in a geographic area before entering a new area. Dollar General and Family Dollar are now opening stores in suburban strip shopping centers, using space that has been abandoned by drugstores that moved to stand-alone locations. At one time, these extreme value retailers advertised sales using circulars. But both Dollar General and Family Dollar reduced their advertising expenses when they converted to an everyday low-pricing strategy. This cost saving allowed the retailer to pass even more savings on to their customers. A recent Family Dollar annual report stated, “Supply chain efficiencies are vital to the success of any retailer, particularly one growing as fast as Family Dollar.” Thus, Family Dollar and Dollar General are making significant investments in point-of-sale terminals, store-level inventory tracking systems, automated distribution centers, space allocation software, and replenishment systems to reduce stock outs and increase inventory turnover.

Questions for Analysis: (Answer in 3-5 sentences)

1. The customer base for the value retail segment is growing. Why are customers increasingly patronizing these extreme value retail stores? Identify and explain 3 value-oriented tactics.

2. How do extreme value retailers make a profit when their prices and average transactions are so low? Identify and explain 3 examples of strategic and operational efficiencies in the case that aid in this profitability.