As Al Reiss and Jack Trout wrote in The 22 Immutable Laws of Marketing: “A company can become incredibly successful if it can find a way to own a word of the prospect. Not a complicated word. Not an invented one. The simple words are best, words taken right out of the dictionary.” The most effective words are simple and no matter how complicated the product, it’s always better to focus on one word than two or three or four. The essence of marketing is to narrow your focus and the brand becomes much stronger when you reduce the scope of operations and concentrate on your core product.
When it comes to retail and convenience, there is not one leader that dominates the “law of focus” but instead an entire category is differentiated by one simple but self-described word: ‘dollar.’ Together, the top three dollar-store chains are growing considerable market share from a spectrum of retailers–from grocery stores to drugstores to pharmacies. These rock-bottom discounters are expanding their stores and filling the aisles with nationally known brands that lure in both the low-income shoppers who have been Wal-Mart’s core customers and higher-income households now practicing thrift after getting hit hard from the recession.
Dollar Tree (DLTR), Family Dollar (FDO) and Dollar General (DG) have all grown into dominating dollar store chains that are nibbling away market share from a diverse spectrum of retailers. This aggressive expansion strategy has been somewhat of a surprise to many competitors as the mere swarm of smaller box stores has become aggravating for the big box boys like Wal-Mart and Target. Although the dollar stores were once a complimentary co-tenant with the leading grocery and drugstore chains, the free-standing dollar stores are now penetrating practically every street block where a city bus is parked.
Wal-Mart (WMT) has a proven business model of being the one-stop, once-a-week destination retailer and the dollar stores are distinguished by the fill-in shopping habits aimed to provide convenience during the weekly travels from work or school. These heavy discounters aren’t necessarily looking to be the primary place shoppers go to stock up for the week.
They fall short of Wal-Mart or a full-scale neighborhood grocer, and are markedly less pricey than your corner convenience store. Dollar General, the largest dollar store chain in the U.S., recently (March 30) opened its 10,000 store in Merced, CA. The Tennessee-based chain added 63 units in the space of roughly two months, which sounds like a lot, bit is actually a little off the pace the company needs to achieve the 625 new stores slated to open this year.
Going forward, DG needs to average 1.8 new stores per day to hit its new-store expansion target of 625 units and seven percent square footage growth by the end of its fiscal 2013. And then DG needs to maintain or possibly accelerate that pace over the coming fifteen years, as Dollar General claims the U.S. market is capable of supporting upwards of 20,000 stores.
Family Dollar, the second largest chain operates around 7,100 stores and like Dollar General, the aggressive growth plans include a net new 450 to 500 stores this year. The real estate strategies for Dollar General and Family Dollar are similar in that the sites they occupy are typically along primary arteries near the low-income transit routes. This site selection strategy provides these two leading chains with impulse-oriented visits aimed to attract convenience minded consumers.
Dollar Tree is the third largest dollar chain with around 4,350 stores. The Chesapeake, VA -based chain operates a differentiated real estate strategy in that the stores are typically located near a major discounter like Wal-Mart or Target. The products are virtually the same as Dollar General and Family Dollar; however, Dollar Tree is a little larger selling space (of around 10,000 square feet) versus the 8,000 to 9,000 square foot stores operated by the larger peers.
Wal-Mart’s real estate strategy was once like a “sleeping giant” however, the dominant discount chain has reacted by bringing back many of the products (previously cut), adding displays focused on low-priced food and consumables, and launching promotions for everything from apples to turkey trimmings. Wal-Mart has the advantage of having both the national brands the dollar stores have and private labels that are well known to shoppers and that bifurcated approach has allowed Wal-Mart to build on its dominating platform. Alternatively, the dollar stores still provide customers with a more convenient shopping experience and these smaller stores allow shoppers to locate parking near the front entrance and get in and out quickly.
Prior to 2000, the drugstore chains were the dominating place for convenient shopping; however, the dollar-store chains have begun to build a slim lead over the top three pharmacy brands (Walgreen, CVS and Rite Aid).
As this snapshot (below) illustrates, the combination of dollar stores and drugstores across the U.S. has made a profound impact on the wave of convenience and the continued growth is sure to have considerable effects on saturation and cannibalization. Today there are around 41,500 combined drug and dollar stores (top three of each sector) and the competitive landscape is not going to end any time soon.
With a combined 21,311 stores, the dollar store sector (top three chains) is now larger than many of the leading brands and is closing in on Subway, the largest chain in the U.S. With a forecasted 20,000 more stores slate to open in the U.S., the dollar store sector should some be the most dominating retailer on the planet.
The dollar store dynasty has rolled out some impressive results as all of the top three chains have provided remarkable growth. Although the smallest chain of the three, Dollar Tree has provided the largest stock increase (51 percent year-over-year) while Dollar General and Family Dollar have produced increases of 32 percent and 15 percent respectively.
Another powerful indicator of shareholder performance is return on equity (gauges net income vs. shareholders’ equity). Accordingly, all three of these leading dollar store chains are growing the bottom line as evidenced by performance-based returns as profit for every dollar of equity. All three chains have demonstrated rising ROE’s showing that management is providing skilled leadership in its strategic growth initiatives.
All three dollar chains have performed extremely well and the demand fundamentals should continue to provide investors with strong results. On Friday (April 13), Moody’s lifted Dollar General’s corporate family rating and probability of default rating to Ba1 from Ba2, with a positive ratings outlook. S&P also recently upgraded Dollar General’s rating from BB to BB+ (S&P’s highest speculative grade rating). Moody’s said the upgrade acknowledges that Dollar General’s operating performance and credit metrics are expected to remain strong, with debt to EBITDA of 3.0 times and EBITA (without depreciation) to interest expense of 4.4 times. The upgrade also follows the company’s refinancing of approximately $880 million of its term loan, which extended its maturity to July 2017 from July 2014. Special Offer: Get in on the turnaround game and potential explosive gains. Click here for new special report: 10 Hedge Fund Turnaround Stocks. While Dollar General’s credit ratings are in the brink of investment grade, Family Dollar has a BBB- S&P rating and Dollar Tree is not rated (due to minimal long-term debt). These improved ratings are further evidence of the increased cash flow from store operations and the increased strength of the dollar store category.
The dollar store sector has seen considerable growth and the prospectus for increased performance is extraordinary. Dollar General has especially developed a sound growth strategy with its risk-aligned capital initiatives of reducing debt and growing sales. Since 2008, Dollar General has reduced its debt by around 50 percent (interest expense decreased by $69 million in 2011 to $205 million). In addition, Dollar General generated approximately $1.05 billion of cash flows from operating activities in 2011, an increase of over 27 percent compared to 2010.
So as the essence of marketing is narrowing the focus, the dollar stores have become strategically stronger by reducing their scope of operations and focusing on one simple formula–the dollar model. By exploiting this differentiated retail model, dollar stores have become extremely successful and the narrowly focused strategy has resulted in an increased threat for many retailers. The drugstores and discount stores are no longer “sleeping giants” as the army of (dollar) stores is gaining significant advantage in the size and scale of the convenience-based dollar store model.