Analysis: How Dollar General ‘knocked it out of the park’ in Q1

Some retailers suffered terribly during the pandemic; others managed to hold their own. Then there’s Dollar General, which knocked it out of the park with a 27.6% increase in sales driven by a 21.7% uplift in comparables. The bottom line is just as positive with a 68.9% increase in net income. Given these figures, there can be little doubt that Dollar General is one of the major beneficiaries of the crisis.
 
Two main factors have played to Dollar General’s advantage during the past few months. The wave of stocking-up on consumables which occurred in late March and early April was one of them. Over this period, Americans splurged on groceries and household products as they prepared for a shutdown of the country. This benefitted all grocers and supermarkets but given Dollar General’s focus on everyday essentials, it did particularly well in securing a slice of the action.
 
Having products that are much in demand is one thing, but it doesn’t fully explain why Dollar General grew at a much faster pace than the groceries market overall. From our data this comes down to the location of the stores which are mostly situated in rural or suburban areas which are underserved by other operators. This localness was a major advantage during the crisis when many households were reluctant to travel too far and some were nervous about visiting big box stores where it is very difficult to reduce dwell time. 

The dynamic was particularly strong for top-up purchases after households had done their initial bulk buy of essentials – which is why Dollar General continued to perform well once the initial period of stockpiling had subsided.
 
The other force in play has been the price sensitivity of consumers, and there are two dimensions to this. One is the desire by those buying in bulk to save money – especially for items that they wanted to have ‘in reserve’ rather than immediately consume. The second is the rising levels of financial difficulty and distress for some households, which has made low-prices an imperative. This latter factor will remain a feature of the consumer landscape for quite some time, even as the virus subsides. It has, and will continue, to increase Dollar General’s share of shoppers.
 
We have noted many times before that Dollar General’s shopper base isn’t just composed of low-income consumers. Over the past five or so years, the demographics have balanced out to include some higher-income households looking for convenience or good value. From our data, this crisis has balanced out the demographics even more and Dollar General has secured new shoppers from across the income spectrum. 

Some of this was born of necessity – because other stores didn’t have stock or were inconvenient to get to. However, the introduction has now been made and there is no doubt that some of this new custom will stick, even if only for irregular shopping trips. In our view, we see the pandemic as providing a long-term advantage for Dollar General.
 
It is easy to view the winds of crisis as simply blowing Dollar General along. However, that is not the case. One of the reasons Dollar General did so well is because its logistics and operations are extremely efficient and effective. In our view it coped admirably with the massive rise in volumes and did so while maintaining the relative simplicity of its business. This is one of the reasons why profits rose so sharply: Dollar General is not an overly complex firm and an uptick in trade falls more easily to the bottom line than it does at retailers with web operations, varied store formats, and so forth.

The dynamics have moved in Dollar General’s favor and it’s taking full advantage of them.