Even the sign for Dollar General is no frills: black letters on a yellow backdrop.
Bare bones just like the stores’ aisles.
Retail analysts say consumers’ thrifty attitude from the 2008 recession has remained, propelling value dollar stores like Dollar General to expand like crazy.
But there’s another reason for the boom times of dollar stores.
“Dollar stores’ core customers are lower-income consumers, which have been unfortunately growing,” said Ken Perkins, president at Retail Metrics Inc. He noted that the American middle class has been shrinking for decades.
The Pew Research Center found that 50 percent of the adult population in 2015 was middle class, down from 61 percent in 1971. Perkins’ firm found that the middle class had decreased in 203 of 229 metropolitan areas from 2000 to 2014.
The trend has helped make dollar stores one of only five retail sectors projected to have operating income growth above 5 percent this year, a Moody’s report found. (The others are online retailers, off-price, home improvement, and supermarkets.)
Leading growth in the sector has been Dollar General, which offers an array of items from food to general merchandise, typically at $5 or less. The retailer operates about 14,600 stores nationally, including 35 in the Philadelphia region, according to its website. Longer term, it wants to reach 25,000 stores over the next decade.
Dollar General plans to open 900 stores this year, remodel 1,000 existing locations, and relocate about 100 stores, said chief executive officer Todd Vasos during a third-quarter earnings call.
This comes on top of the 830 stores it opened last year and dozens it updated with new fixtures and better products to improve customer experience.
“DG is aggressively moving into rural, low-income, food deserts that are either underserved or not served at all by mom-&-pop shops or grocers,” Perkins said. “They sell low-cost goods typically in smaller sizes and packages to keep costs lower than bulk products sold in grocers, discounters, and warehouse clubs. As they are generally closer to low-income consumers, they better serve consumer fill-in trips during the week and saving a trip out to a grocery store, a Walmart or a Target.”
But heavy competition is looming:
“As mass merchants continue lowering prices, hard discounters [Aldi and Lidl] enter the U.S., Amazon acquires Whole Foods, and Dollar General expands into urban locations,” said Morningstar analyst John Brick.
Dollar General is following the lead of rivals Walmart and Target in shrinking the size of its stores.
New locations are about 3,600 square feet, about half the size of an average store format of 7,400 square feet.
Many of the remodels are former Family Dollar stores that Dollar General acquired in 2017. An example is the former Family Dollar store at Morrisville Square shopping plaza in Bucks County that reopened in October as a Dollar General.
“It’s cheap and easy,” said Halina Dylewska, 54, who is self-employed with a cleaning service and lives across the street from Morrisville Square, enabling her to walk there every other day. “The prices are very good and it has everything.”
Last Tuesday she bought cold flu medicine for $4, frozen chicken for $7, fresh-cut fries for $3, and Sensodyne toothpaste for $4.
Such prices are unlikely to attract internet magilla Amazon. “Dollar General has carved out a niche in the intensely competitive retail landscape by offering easy-to-navigate stores that cater to value-conscious low- and fixed-income consumers,” said Morningstar’s Brick in a December report.
The stock has risen about 22 percent over the last year and has roughly quadrupled since 2009. Dollar General has exceeded earnings estimates for the last four quarters. And some analysts expect double-digit stock growth for 2018 due to growing comparative store sales, the new tax law, and growth in store count and earnings.
“We know convenience is a major factor in our customers’ shopping decisions, as we generally serve customers within a three- to five-mile radius, or 10-minute drive,” Vasos said during the earnings call.
That suits Morrisville resident Anita Robinson, 39, just fine. She has multiple sclerosis and her husband allows her to drive only within two miles of their home to shop. “It’s really convenient, and with prices rising everywhere, it’s nice to go to a place that I can actually afford for things that I want,” Robinson said.
Dollar stores have generally outperformed both discounters and the broader retail industry in the key metric of quarterly same-store sales growth over the last 10 years, according to Retail Metrics.
“Dollar General in particular looks to have the greatest runway in terms of new store openings,” Perkins said.
In addition, he said the no-frills Dollar General stores cost just $250,000 to open with basic fixtures and coolers. And they can generate a 20 percent new store internal rate of return and pay back in less than two years, compared with other growing retailers like Natural Grocer and Sprouts Farmers Market whose payback periods range from three to four years.
“They can turn a profit in many small communities where other retailers cannot,” Perkins said.