Analysis: Dollar General maintains edge over rivals
Against a backdrop of a more difficult demand environment and the challenge of cost increases, including tariffs, it would have been reasonable for Dollar General’s results to have softened.
However, the company has bucked these negative trends to post very solid increases on both the top and bottom lines. In our view, this underlines how well Dollar General is managed and the fact it continues to expand its reach in terms of both customer segments and the geographies it serves.
On the sales line, total revenue increased by 8.9%. Comparable sales rose by 4.6%, the best rate of growth in almost five years. The good same-store numbers were driven by the combined effect of an increase in store traffic and higher average transaction values. We continue to see an increase in the proportion of middle and higher income consumers using Dollar General for everyday essentials, mainly on the basis that the stores are convenient. The fact that Dollar General has opened in some more affluent locations, especially in rural areas, has also helped to drive this trend.
Although the consumer economy remains strong, our data show that consumer confidence has deteriorated over recent months, and this trend has been especially pronounced among lower-middle and lower income segments. This dynamic has been helpful for Dollar General as it pushed up both the company’s share of shoppers in these groups and the frequency with which they visit.
Indeed, our data shows a small net transfer of share from mainstream grocers and mass merchants to Dollar General in several categories, including basic foods and household essentials. The money-saving mindset is likely to strengthen into 2020 which will help Dollar General as it starts to lap some tough numbers next year.
While basics and everyday products remain the mainstay of Dollar General’s success, the various enhancements it has made to categories like beauty and seasonal have also paid off. In cosmetics, the relatively new Believe brand – which offers products for under $5 – has proven a big hit among all shopper segments and has helped to increase average transaction values. Dollar General is hoping to replicate this success in other areas of beauty and personal care, including baby where it has recently rebranded products with a new Gentle Steps identity.
These measures are part of a wider effort to build a stronger portfolio of private brands which provide differentiation, offer great value for money to the consumer, and are margin enhancing for Dollar General. In our view, the effort put into areas like packaging and formulation also mean that private labels are helping to shift perceptions of Dollar General so that it is seen as offering good value for money rather than simply being cheap.
Our seasonal tracking data indicates that Dollar General is likely to do well over the holiday period. The proportion of shoppers looking to buy small gifts, wrapping paper, and holiday decorations and décor have all increased over last year. Some of this is down to store expansion, which means Dollar General now serves a larger audience, but much is also down to improved offers and merchandising in shops.
Dollar General’s success on the top line is helping to boost the bottom line numbers where net income increased by 9.4% over last year. This is a solid result which demonstrates that Dollar General is successfully managing the challenge of tariffs through a combination of expense management, volume expansion, and driving a higher proportion of own-brand sales. Overall, we believe this bodes well for 2020 and means Dollar General will retain its edge compared to rivals.
Neil Saunders is managing director, GlobalData Retail