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