Dollar General raises food bar within deep-discount segment

DSN Retailing Today, Dec 15, 2003 by Debbie Howell

NASHVILLE, TENN. -- Food continues to play a larger role in Dollar General's growth strategy, as the retailer recently announced plans to expand its test grocery format to 20 more locations and roll out coolers to all stores over the next three years.

An experimental format called Dollar General Market that opened in June has grown to two locations in the greater Nashville market. These stores, more than twice the size of a typical Dollar General with 16,000 square feet of selling space, carry a wider assortment of food, including produce, refrigerated and frozen items.

While executives are still cautious about the format and saying little about its returns, the addition of 20 more stores would seem to indicate a promising new growth vehicle.

"The first two stores have been unbelievable in terms of customer response. But we're very cautious about doing things like this," ceo David Perdue told analysts at the retailer's annual investor conference, held Nov. 17 in downtown Nashville.

Because the test is being watched closely, executives declined to identify the locations of the new sites except to say some would be outside of the retailer's base in Nashville.

These 20 new stores are in addition to the opening of 675 traditional stores in 2004, including expansion into the new states of Wisconsin, Arizona and New Mexico. This would put the retailer's store count at more than 7,000 in 30 states by 2005.

A tour for analysts of the newest Dollar General Market store, which opened Oct. 24 in Pleasant View, Tenn., provided insight into this food-focused merchandising strategy. As opposed to five- or eight-door coolers being added to traditional stores, the market store features walk-in coolers with 50 doors. At least one-third of the space appears devoted to food, with the remainder featuring general merchandise categories found in regular stores, including expanded sections and a test entertainment department of videos and low-priced DVD movies.

Produce is offered immediately upon entering the store, with pricing based on quantity rather than by weight. For example, oranges were selling at four for $1, a bag of lemons for $1.75, head of lettuce for $1 and a 20-pound bag of potatoes at $2.

This same pricing strategy, primarily focusing on even and low price points, characterized the grocery section that in many ways resembles a limited-assortment food store. In most cases, food items were left in partially opened shipment boxes to reduce labor costs. Endcaps promoted the store's greatest deals, such as $5 for any size turkey and Our Family brand canned vegetables at four for $1.

Besides coolers along two walls of the store, nine parallel aisles were devoted to food, complete with overhead signage to help shoppers find specific items.

A linear checkout area with six conveyor belt registers mirrored the setup of a small supermarket. Customer traffic on this Monday afternoon was brisk, with the food side being heavily shopped by patrons, most of whom were pushing grocery carts. The Pleasant View store was a former Piggly Wiggly supermarket as opposed to the first market store in Hendersonville that was an expanded Dollar General.

The airy, open aisles are a departure for Dollar General, which has been known to use space conservatively in its much-smaller traditional stores of 7,000 square feet.

"The market concept is designed to provide a one-stop shopping experience," Tom Hartshorn, evp of new business development, told analysts at the meeting.

With a startup cost of $600,000 for a market store versus $84,000 for a regular unit, some have questioned the concept's returns. Analyst Michael Baker of Deutsche Bank Securities, in a research note, estimated sales per square foot of the concept would need to be three times that of a traditional store to match current store profitability.

"While still early, sales results are favorable," Baker wrote, adding that Dollar General must "significantly lower the cost to build these enhanced stores, in our view."

As for traditional stores, about a-third now have the smaller cooler program, which has raised the average store transaction to $13 from $8. Perdue said he wants to aggressively roll out coolers, with the entire store base retrofitted by 2006.

Other initiatives discussed at the meeting included programs to reduce shrink, an increased emphasis on imports and opportunistic purchases to boost profits and sales, and rollout of automated replenishment to all stores next year. The retailer intends to open a seventh distribution center in 2005 and another the year after.

Perdue, hired as ceo in April to replace retired chief Cal Turner Jr., hasn't made any wholesale changes to the proven Dollar General formula. He said Dollar General remains committed to its niche of providing basic goods for a core customer base of low-income and elderly shoppers in towns of all sizes. And even though the company has opened stores in urban areas and middle-income neighborhoods in recent years, he said the merchandising strategy based on value-priced goods would not change, even as shopper base broadens beyond its primary target.