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Dollar General is one of the largest discount retailers in the United States. They offer low-cost products (mostly below $10), that are frequently used and replenished. These include food, snacks, health and beauty aids, cleaning supplies, and many more.
Selling low-cost consumables at convenient locations encourages repeating revenue. For example, we will need to buy our toothpaste, regardless of whether we are in good times or bad times. Because it’s a low-cost product, we are less price-sensitive and will buy wherever is most convenient.
Compare this to buying automobiles. During bad times, we would delay our purchase and continue driving our old car. Because it is a big-ticket item, we will compare prices across multiple dealerships and negotiate for the best price.
There are some favorable dynamics that allowed Dollar General to generate a 20.2% CAGR for shareholders since 2012.
Here is what Dollar General has to say about its value proposition. Only 2 out of 3 points below are true—make a guess which is false!
If you have guessed low prices, you got it right!
From the above table, a bottle of Coca-Cola costing $1 will be priced at $1.31 at Dollar General, $1.13 at Costco, $1.25 at Walmart, and $1.30 at Target.
This article by Business Insider sums up why Dollar General product seems cheap, but in fact isn’t.
What truly sets them apart from their competitors is their niche in serving the under-served areas. Most of their stores are set up in small towns, where it doesn’t make economical sense to have a Walmart or Costco.
Based on the above, Dollar General creates local monopolies as they expand their presence in rural regions across the US—where it doesn’t make economical sense for big retailers to enter and the market is too small to warrant a second discount retailer setting up there.
While a customer will drive 30 or 45 minutes for their weekly shopping at Costco, it is much more convenient to drive 10 minutes to Dollar General for something like a bottle of Coke.
Consumables, which account for 78% of their sales, are what keep customers coming back. Dollar General rightfully charges less for items such as toothpaste, soap, etc. They understand that it is important to get the customers into their store by offering lower prices on everyday essentials.
Customers who come in for what they need often end up with items they don’t need. Dollar General charges higher margins for non-consumables—home products, apparel, etc.
Stellar Operating Metrics
Dollar General posts some impressive numbers.
Revenue has grown steadily from 1994 to 2019 without a single declining year. In the most recent decade, it has grown at approximately 8% CAGR, from $13 billion to $27.8 billion in 2020.
The company has grown its stores from 6,700 stores in 2004 to 16,278 in 2019.
Most impressively, the company’s same-store sales (SSS) have increased every single year. This is a tough feat to achieve for retailers.
SSS is an important metric watched by analysts and investors. A flat or declining SSS may indicate that the company may have overexpanded, reaching a saturation point.
With revenue and SSS rising every year, this tells me a few things:
They do well regardless of the economy; whether it’s boom or bust, people need to get their daily necessities.
They have further room to grow and have not reached a saturation point.
E-commerce (i.e. Amazon) which has caused the death of retailers did not impede their business model. Likely due to the nature of small-sized transactions and conveniently located stores.
Dollar General has invested significantly in its digital operations and launched its mobile app.
The company’s mobile app allows the company to utilize data and target its customers more effectively through digital coupons and discounts.
Its DG Pickup has seen increased adoption as customers enjoy the convenience of contactless pickup.
From their Q2 2020 earnings call, the benefit to Dollar General comes from customers buying even more items when they come to pick up their online orders:
“…when the customer comes in to pick up her order, she’s actually buying additional items inside the store, which then is increasing that basket size to above where we normally would see our basket size.”
The company has also launched its scan-and-go technology in selected stores since 2018, which increases convenience and potentially reduces labor costs in the future.
Dollar General has online shipping available as well as “Auto Delivery,” a recent addition that allows customers to have products shipped directly to their door on a recurring basis. Which makes the revenue stickier for Dollar General.
According to the company’s website, with each recurring order, you save 5% off their retail price and receive free shipping on recurring orders over $25.
My Two-Cents’ Worth
Dollar General is a well-managed company whose business model has proven resilient against economic downturns and the threat of e-commerce.
In this COVID-19 environment, the company has delivered crushing results, with SSS up 12.2% and gross profit up 24.4% in the latest quarter. This is likely due to a combination of consumer hoarding and work-from-home arrangements which encouraged consumers to shop at the nearby Dollar General.
It’s good that the company moved fast to adopt pick-up services in light of the pandemic and the digital transition came in a very timely manner.
However, I do not expect growth to persist at such a high clip. The market appears to be very buoyant about the company’s growth prospects given that they are trading at historically high valuations.
For more insights on Dollar General’s intrinsic value calculator using Warren Buffett’s Equity Bond Method, check out VintageValueInvesting.com breakdown of the company!