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[17 comments]

Dollar General looks to do a lot more with less

March 20, 2014

Dollar General management thinks the chain has a SKU problem.

"We actually believe we can do more in 2014, with less SKUs," said Rick Dreiling, chairman and CEO of the dollar store chain, during last week's earnings conference call with analysts. "We have examined a lot of categories, and we have discovered there are categories we can expand and categories that we are going to contract as we move through the year."

Reducing the number of SKUs in the store, said Mr. Dreiling, is part of the chain's focus on "work simplification." The goal is reduce some of the current work in stores so that managers can dedicate more of their efforts to meeting the standards set for individual location merchandising.

One of the categories slated for cutbacks is health and beauty care (HBC). Mr. Dreiling said the move was being made because Dollar General "overestimated our customer's willingness to purchase these higher ticket items, and underestimated the risk of shrinkage." The chain delisted 300 HBC SKUs in 2013 and plans to discontinue selling another 300 this year.

The company is also engaged in remodeling its smallest stores. In the past, these 5,700 to 6,500 square foot units might have been shuttered and moved to a larger space. According to Mr. Dreiling, it costs Dollar General less to remodel the stores than move them, and the chain generates returns up to 40 percent higher as a result.

SKU optimization, said Mr. Dreiling, is particularly important in the smaller stores — instead of "trying to play in every category, really focusing on those that are most productive."

FINANCIALS:     [NYSE:DG] [ ]

Discussion Questions:

What particular problems do you see in SKU management for dollar stores today vs. food, drug and mass channels? Do you think Dollar General's SKU optimization and small store remodeling plans are winning strategies?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How much more or less competitive will Dollar General become as a result of its SKU optimization and small store remodeling efforts?

Comments:

I heard elsewhere that the shrink problem was a primary driver of this decision.

Overall, I have the same worries I always have around SKU rationalization - that the company makes sure it does a cross-category market basket analysis before ditching particular SKUs. The devil's in the basket details and nuking what seems to be a low performer could turn out to be a loser of large baskets.

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Paula Rosenblum, Managing Partner, RSR Research

 
11

I think dollar stores are appealing to people who are looking for value and/or low price (I'd love to hear from experts who know if this is true). If so, then expectations of assortment are probably reduced relative to other chains, which would make these winning strategies. One note of caution - it's not just reducing the number of SKUs, it's reducing and keeping the right SKUs that's important.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

The first issue is the purpose of changing the number of SKUs. If it the goal is to simplify the work process, the possibility of success is greatly reduced. If the purpose is to better match the assortment with what consumers at that location want to purchase the possibility of success goes up.

In other experiments, I have seen that if the remaining assortment matches what consumers want to buy, the response is that smaller assortment actually provides more choice because consumers can more easily find what they want. That the is the response that leads to higher sales. However, the reduction is SKUs has to be related to the products consumers do not want to purchase. These decisions can not be made with just an analysis of numbers. In most tests there are some items purchased infrequently to which consumers are loyal. If you eliminate those items consumers go to other outlets. The analysis has to identify those items purchased infrequently and then evaluate whether any of those items are important to your valuable consumers.

When both of these analyses are undertaken, consumers respond positively to fewer SKUs and an easier shopping decision.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

SKU rationalization needs to be an ongoing process, not an event.

Paula Rosenblum hit the nail on the head ... If SKU rationalization only looks at the individual SKU in isolation, some very poor decisions can be made. The key for store survival is market basket attach and profitability.

Today stores need to move from SKU rationalization to Assortment rationalization based on 3 fundamentals:

1. Which SKUs are essential for driving traffic?
2. Which SKUs drive initial conversion rates?
3. Which SKUs drive cross-category market basket attach and profitability?

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Chris Petersen, PhD, President, Integrated Marketing Solutions

It is the same for independents as well. I have eliminated over 1,000 items over the last few years, and probably another 1,000 to come, as redundancies; plus price is making it difficult to carry all types of stuff that just doesn't move. The top 250 grocery items account for most of the business in all stores, and the Big Boys have created the loss leader scenario on most of them, so a shift is going on in the center store, whether we like it or not.

I remember a statistic from a few years ago about the 13,000 new items being introduced into the stores in one year, and only 125 of them were unique, and the rest of them the same product only in different sizes or private-label knock offs. All of us need to trim the fat to become more profitable.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

In a previous life, I had a knock down drag out fight with the CFO over how to boost our inventory performance. For the CFO, it was easy - look at sales for each SKU and trim the bottom 10% so we can free up cash and improve working capital. If only it was that simple....

Echoing what Paula and Chris have pointed out, SKU rationalization can be sound but only if done right. And to do it right means looking at local basket analysis across assortments. The cross-category market basket analysis is crucial to both sales and profitability.

The motivation needs to turn FIRST on delivering what their customers want, followed by achieving internal efficiencies (simplification) on that execution.

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Mohamed Amer, Vice President, Global Consumer Industries, SAP

I'm not sure there is a difference. In every case the issue is the same -- how to cut SKUs back to the most profitable point without cutting too deeply or limiting consumer impulse purchases or trial.

I'm a huge fan of inventory rationalization, regardless of format, so I wish them the best.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Since SKUs drive inventory control, this would appear to be a smart move.

'SunnyAZ'

Remember just because an SKU is not selling in one area does not mean it is not selling somewhere else. If the customer can no longer get what they had been purchasing and need to go to another store for it, maybe that store also has other items the customer was purchasing at your store. Why go to 2 different stores to get the needed items when one trip will do?

Don Lingenfelter, Consultive Sales-Retired, Sears

I think SKU rationalization is a required exercise at retail and it helps the retailer take a hard look at each category, and SKUs within the categories. It also allows the retailer to reevaluate lineage footage allocated to each category and a SKU rationalization project may end up in a reflow of the store by adding and subtracting linage footage to categories as required.

And with the smaller stores you have the most productive SKUs so I agree, less is more!

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

Knowing which are the right SKUs is the challenge! Sales, shrink, share and margin metrics are helpful, but hide the really important insight on who is buying the SKU, what else they buy across the store, would they substitute, for how many customers is this true, are they loyal, etc.
Without the right data, it is quite easy to make a few wrong choices across a small number of categories and you have lost an entire cohort of customers.

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Matthew Keylock, Senior Vice President, New Business Development and Partnerships, dunnhumbyUSA

I think this is a very promising move for Dollar General, because the dollar store shopper overindexes for convenience store shopping.

What does this mean? That the dollar store shopper is demonstrating preference for a smaller footprint, fast shopping experience. This is the perfect move to appeal to these shoppers, and improve their SKU velocity.

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Liz Crawford, VP, Strategy & Insights, Match Drive

Whenever this area of SKU "tuning" is brought into play, the critical element that some retailers and other business lack is strong understanding of their shoppers' or buyers' desires and needs.

If DG feels confident in this area of knowing the shopper, then this work simplification (as they titled it) is a good move. If they end up learning that they did not know the shopper well-enough, then get the SKUS back into the stores fast.

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Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

Today there is little or no room for "Good." Dollar General is smart to get back to the core of what they do "Great"; low prices on low ticket everyday items. Stew Leonard's, a 5 store chain in Fairfield County proved this model 40+ years ago by opening a store with a very limited SKU assortment. That said, the average basket at Stew's is over $100. Not bad for a grocery store you can't complete your entire shopping list at.

I like the approach Mr. Dreiling is taking. Stay "Great" and you stay ahead of the competition.

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John Boccuzzi, Jr., Managing Partner, Boccuzzi, LLC

My impression is that shoppers at the dollar stores are in general not as prone to off-the-list impulse buying as are grazers/shoppers at larger stores. I am sure that careful SKU optimization is worth their time and can benefit both their bottom line and stocking time without impacting or losing customers.

'Liatt'

Absolutely a winning strategy! DG is a CONVENIENCE store. In many categories, one national brand and one private label is enough choice. The key is where to draw the line by category.

'vgallese'

The relationship between SKUs and sales is directly proportional to some extent after that point it negatively affect sales and inventory turnover, so we have to take care of the unsalable inventory part to overcome the disadvantage of increasing SKUs.

MOHAMED YASSER, owner & managing director, Croco Alex

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