Can Dollar General afford to price it out with Walmart?

Discussion
Photo: Dollar General
Aug 26, 2016
George Anderson

Dollar General reported lower than expected sales in the most recent quarter, sending its share prices sharply lower in trading yesterday. Among the factors affecting its performance was food deflation, price competition from Walmart and other retail rivals as well as cuts to the government’s Supplemental Nutrition Assistance Program (SNAP) for low income Americans.

Speaking on yesterday’s second quarter earnings call with analysts, Dollar General CEO Todd Vasos said deflation had hit key categories such as milk (down eight percent) and eggs (down 50 percent). While Dollar General had succeeded in gaining market share in the most recent quarter, Mr. Vasos said the chain was taking aggressive steps to address price cuts made by Walmart and others.

“Our focus is on the consumables categories to drive traffic in units. For example, we have taken retail price reduction on average of 10 percent on about 450 of our best selling SKUs across 2200 stores representing nearly 17 percent of our store base,” he said (via SeekingAlpha).

“We are being strategic as we look to proactively address our pricing actions across our store base,” Mr. Vasos added. “These targeted price investments are in high household penetration, fast turning categories. At the same time, we are investing to communicating these price breaks to our consumers through incremental store signage, ad circulars, digital coupons, email and digital media.”

Earlier this year, Dollar General announced plans to add 1,900 new locations to its store count over this and the next fiscal year. More recently it announced it was relocating 40 stores to real estate that previously housed Walmart Express locations.

DISCUSSION QUESTIONS: Can Dollar General afford to be in an intensified price competition with Walmart? Where do you see opportunities for Dollar General to grow its business?

Braintrust
"To compete in an omnichannel marketplace, Dollar General needs to differentiate on more than lowest price. "
"Dollar General is big enough to put more pressure on suppliers, but we all know that’s a race to the bottom of the barrel. "
"Does Dollar General have any choice but to be in price competition with Walmart?"

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10 Comments on "Can Dollar General afford to price it out with Walmart?"

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Chris Petersen, PhD.
BrainTrust

Dollar General has successfully grown revenue by competing for Walmart’s core customers on price. However, growing market share/revenue does not a profitable business make.

It’s not just a question of competing with Walmart stores on price. Long-term survival means competing with Amazon — and Jet (which is now Walmart online!).

To compete in an omnichannel marketplace, Dollar General needs to differentiate on more than lowest price. One major Dollar General asset is more stores located in neighborhoods and along traffic routes. For busy working parents, convenient availability is as important as price.

Cathy Hotka
BrainTrust

Dollar General has more than 12,000 stores and dominates this segment for a reason. (And this is a market that Walmart should have tackled long ago.) There will always be ups and downs, but Dollar General will continue to excel because it does one thing, and it does it very, very well.

Dr. Stephen Needel
BrainTrust

Does Dollar General have any choice but to be in price competition with Walmart? I can only think of two reasons to go to Dollar General instead of Walmart — price or a more convenient location.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Dollar, discount and thrift stores offer easy in-out not usually associated with Walmart, grocery and department stores, and George makes a good point that 450 SKUs account for 17 percent of store revenues. Convenience must not be overlooked in traffic attraction and basket size is commonly increased when the visit is intended for purchase of just a few items. Consumer time is their precious commodity and when this is well served with the added bonus of some limited “discovery,” margin per visit is itself well-served. The perception of discounted pricing further fuels discount store loyalty — and for brands perception is everything.

Tony Orlando
BrainTrust

Dollar General is designed to go after any retail store, as their model is two or three employees working, and it has a low-budget basic layout. As someone who shares the same plaza next door to me, it has taken a big chunk of my center store dollars, and they do it with zero frills, which in our area works. I try to match them on the top 100 items, and it has cost my bottom line profits, but I need to stay relevant so I can get the customers in to buy perishables.

If the $15 minimum wage goes nationwide than all bets are off, because prices will need to be raised by everyone, and Walmart has the staying power to outlast all of us, so for now Dollar General is a force, but that could change quickly as new mandates and laws continue to pile up on our desks.

Steve Montgomery
BrainTrust

Dollar General’s growth has been generated by adding new categories including beer and then cigarettes. Both are destination drivers and have relatively high price points per unit. Both of these have been in the stores long enough to be mature meaning that they are not providing large incremental year-over-year gains. Customers who are going to buy those categories from Dollar General are already doing so.

At the same time the dollar store industry got large enough to be on Walmart’s radar screen. The combination of the two means they have to compete not only with Walmart but with their own historic results. Dollar General sales growth will now likely be primarily driven by the addition of new stores. Same-store sales will start to draw even more attention from analysts. They will not beat Walmart on price, however they are likely to continue to gain sales from the convenience store industry.

Anne Howe
BrainTrust

Dollar General is big enough to put more pressure on suppliers, but we all know that’s a race to the bottom of the barrel. What does Dollar General have that Walmart doesn’t? Convenient, easy to shop, quick trips. If I were Dollar General I would start there. Fill-in trips at fair prices. This isn’t rocket science, it should be authentic messaging.

David Livingston
Guest
6 months 1 day ago

All stores seem to announce price cuts. Maybe 1,000 or maybe 5,000 items. What they don’t tell you is that they raised prices on 40,000 items to make up for it. So yes, Dollar General and others can definitely price it out with Walmart and vice versa. Dollar General’s growth prospects are now at a point that it will only be through acquisition. In my opinion, they have pretty much got the country covered.

Mark Heckman
BrainTrust

Dollars stores (as a retail channel) have found a viable niche over the past decade. However, market saturation and continued pressure from other price retailers (Walmart among them) is having a predictable effect on their performance.

Many of these dollar stores have ventured into expanded frozen foods, dairy and even some produce. All of these additional offerings come with their own expenses and downsides.

My advice to dollar stores is to think about being a source of a combined trip. This could translate into partnerships with c-stores and in some cases food retailers that have an expertise in fresh foods, meals to go, etc.

Developing these offerings internally will likely be too expensive and too far afield from their core business to develop these offerings organically, but branded partnerships could drive incremental traffic and new synergies.

Shawn Harris
Guest
Shawn Harris
6 months 1 day ago

Dollar General is experiencing a cyclical issue — it will pass. Their significant footprint allows them to be more localized to the community around them and makes them a great choice for convenient need-based shopping. However, as minimum wages rise Dollar General will have to innovate in their warehouses and stores, to ensure they are able realize ~$15 per hour of productivity out of their staff in order to maintain cost competitiveness.

wpDiscuz
Braintrust
"To compete in an omnichannel marketplace, Dollar General needs to differentiate on more than lowest price. "
"Dollar General is big enough to put more pressure on suppliers, but we all know that’s a race to the bottom of the barrel. "
"Does Dollar General have any choice but to be in price competition with Walmart?"

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