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Dollar General Industry Analysis Essay

Continuing to serve low-, middle-, and fixed-income implies in small communities will prevent Dollar General from competing directly against mass retailers such as Wall-Mart and Target. Dollar General’s strength has been their ability to remain small, convenient, and cost-efficient; they should continue to do so. Consolidating the fragmented industry via acquisition will increase economies of scale in an industry where low-costs are critical. The extreme-value retail industry includes companies such as Dollar General, Family Dollar, Fried’s, and 99 Cents Only.

The industry is fragmented outside the two largest firms, Dollar General and Family Dollar. An analysis of the industry shows that the highest threats are rivalry of existing competitors and customer buying power. These threats are due to the industry being highly price competitive and selling of undifferentiated products. In addition, the target market is low to middle income families who are price sensitive. The critical success factors are achieving a low-cost business model, economies of scale, merchandising, convenience, and effective customer service.

The internal analysis of Dollar General shows that the company relies on serving a focused assortment of branded and generic goods to low-, diddle-, and fixed-income families primarily in small communities. Financial analysis shows that net income and sales

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growth increased steadily since 2002 until 2006, when profits and growth slowed. Dollar General must work to keep operational costs low and revenues high. Their small-box format gives Dollar General the mobility and convenience that mass retailers like Wall-Mart and Target do not have.

There is room for Dollar General to expand geographically in the U. S. , particularly to the west. Acquisitions enable Dollar General to achieve economies of scale in the highly fragmented industry. Acquisitions also allow Dollar General to reduce the threat of existing rivalry in geographic areas. The economic and social environment plays a significant role in the extreme-value retail industry. In 2007, the U. S. Had 23,000 small-box retailers. Consumers were searching for the best bargains with the expansion of retailers such as Wall-Mart and Target.

Cam’s Club and Cost were stores where consumers could save money by purchasing items in bulk. In 2005, an increasing number of consumers were shopping at dollar store retailers. This can be attributed to the rising number of low-income households and the increasing umber of elderly on fixed-incomes. The dollar store industry is characterized by stores that offer low prices in a small-box format. The critical success factors are achieving a low-cost business model, merchandising, convenience, and effective customer service. Rivalry between existing competitors is high.

This is due to the high-level of price competition that stems from the sale of undifferentiated products. Keeping costs low is essential due to the requirement of pricing products as close to margin as possible. This means companies are competing on operational effectiveness. Rivalry between companies also develops from the fact that outside the two largest firms the industry is fragmented. The high threat of existing rivalry drives profitability of the industry down. The sale of undifferentiated products increases customer buying power, of which the threat is high.

The large number of buyers with few switching costs increases buyer power. The dollar store industry caters to low-, middle-, and fixed-income buyers who are price sensitive. Regarding consumables, buyers are looking for the best bargain for an item that they will need to purchase again in the near future. The high threat of customer buying power rives profitability down. In contrast to buyer power, supplier power is low. This is due to the large number of suppliers that offer price-competitive, undifferentiated products.

Suppliers must rely on the retail industry to sell their product, so forward integration is unlikely. The low threat of supplier power increases profitability. The assortment of goods in a small-box format, mass retailers such as Wall-Mart and Target are substitutes rather than competitors. On one hand, mass retailers have a larger assortment of branded goods, economies of scale, and are highly price competitive with extreme-value retailers. On the other hand, extreme-value retailers are more convenient due to the small-box format, allowing a customer to get in and out quickly.

The products being sold are undifferentiated so price-performance tradeoff is low. The threat of new entrants into the industry is medium. There are areas of the U. S. With no extreme-retail presence, making it easier for a new entrant to open and capture market share. On the demand side, customers may or may not be willing to buy from a newcomer; switching costs are low due to undifferentiated products increasing threat and decreasing profitability. However, Dollar General has economies of scale and may be able to sell their products cheaper than newcomers.

Capital requirements such as high fixed costs, customer credit, and building up inventory can deter new entrants, increasing profitability. After completing an industry analysis, it can be seen that the industry, although competitive, has the potential for profitability (see Exhibit 1). The internal analysis shows that Dollar General’s core competencies are a low-cost structure, convenience, merchandising, and customer service. For example, Dollar General builds stores in second tier locations to maintain low real estate costs. Advertising cost is less than 1% of sales.

In an industry where companies keep prices close to marginal cost, low operational costs are crucial; this is why Dollar General operates the store with a limited number of personnel to keep labor costs down. Customer service and convenience go hand-in-hand. Most customers are in the store for 10-20 minutes; much less time than a customer would spend in Wall-Mart. This is made possible by Dollar General’s small-box format that makes it easy for customers to find products. In addition, Dollar General offers even dollar prices on cost of its products so that customers can easily add up their bill.

For merchandising, Dollar General offers a focused assortment of branded and generic goods. Customers aren’t over burdened by choices and most products are priced under $10. Although Dollar General sells a broad product mix, highly consumable products make up an increasing percentage of sales every year, with 65. 7% of revenues in 2006. Therefore, Dollar General’s merchandising plan should be to continue to focus on highly consumable products. Customers are looking for a bargain when buying highly consumable products, whereas they may not want to “go heap” when purchasing clothes or home products.

The addition of coolers in the store allows Dollar General to sell the products needed to accept Electronic Benefit Transfer customers. Dollar General sells primarily to low-, middle-, and fixed-income customers, many of which rely on government assistance and electronic benefit transfer (see Exhibit 2). Financial analysis will show the Dollar General has had increasing revenues and profits the last five years. However, in 2006, Dollar Generals net income decreased by more than half. Revenues increased in 2006, so Dollar General’s costs are increasing more rapidly than sales.

Because profit drives business, most other ratios decreased, such as return on assets and return on equity. Net sales increased every year since (excluding 2006). This means that Dollar General could be doing a better Job controlling costs. Dollar General closed several low-potential stores and increased spending for remodeling, relocating, and advertising. Implemented in 2006, testing and training employees also increases costs. In addition, Dollar General has outfitted most stores with coolers for perishable items that must be kept cold.

Most of these costs are beneficial for the long-term performance of the company. The financial drop-off of 2006 appears to be an outlier in the otherwise consistent performance of Dollar General that has enabled them to lead the dollar store industry. Extreme-value retail leads the dollar store industry in sales. Much of this is attributed to Dollar General with 24% of industry sales in 2006. The second position goes to Family Dollar with approximately 16% of sales. Despite Dollar General having a difficult financial year in 2006, they still have the most stores as well.

Limited assortment grocers, such as Save-A-Lot, have large revenues per store, but have considerably less stores than Dollar General. The numbers become much closer when comparing Dollar General against mass retailers like Wall-Mart or Target. In 2005, Dollar General had the second highest net income margin behind Target and similar SO&A costs. This is impressive because Dollar General does not have the economies of scale or buyer power that mass retailers have. However, Dollar General does not have the revenues or the inventory turnover that the other mass retailers have.

In 2006, after restructuring changes, Dollar General falls to second to last in in net income and inventory turnover with the highest percentage of SO&A costs. There are several options that Dollar General can pursue to achieve its strategic objective of long-term sustainable growth. One alternative is geographic expansion, in which growth will be driven by opening new stores. Dollar General has a presence in 35 states. The obvious choice would be for Dollar General to expand to the west coast of the U. S where it has less presence.

California, Nevada, Washington, Wyoming, and Oregon all have rural communities where Dollar General could be successful. There is the possibility that Dollar General could lose focus on the existing store base. Opening new stores requires significant capital, which may be a reason why Dollar General has had similar net income percentage despite increased revenue. Another alternative would be for Dollar General to improve merchandising productivity. This is a less viable option because the majority of Dollar General’s sales are highly consumable products at 65. %. It does Dollar General no good to expand into electronics, pharmacy, or other merchandise when customer buying trends already demonstrate what they are shopping for at Dollar General. Dollar General has the option of doing an industry roll-up. Outside of Dollar General and Family Dollar the industry is highly fragmented. Consolidating the industry would benefit Dollar General in that it would enable expansion as well as increase economies of scale. Economies of scale will lower costs, something that Dollar General needs to increase net income.

At the same time acquisition enables Dollar General to eliminate competitors. Rather than opening a new stores that share locations with small competitors Dollar General can acquire the competitor. Dollar General must be sure not to overpay for the acquisition as some companies tend to do. Dollar General could consider pursuing a new store format, the Dollar General UAPITA to open a larger store, widen the inventory, increase distribution, and spend more on advertising, the new store format would put Dollar General in direct competition with mass retailers.

Wall-Mart and Target already have market share and customer base. This would be an identity crisis for Dollar General. Lastly, international expansion is an option due to the fact that one out of four retailers opening in Europe is a discounter. Laid, the limited assortment grocery retailer based in Germany, has had success in Europe. In contrast, there is room for geographic expansion in the U. S. It would cost Dollar General more to expand internationally where they have no customer base. This would require a new distribution network in Europe as well as market research to realize the unique customer buying trends.

Rather than implementing any single alternative, Dollar General should have a combination of alternatives. Dollar General is already a profitable company and the critical success factors match the company’s core competencies. Therefore, Dollar General should still sell a focused assortment of goods in a small-box format to low-, middle-, and fixed-income families. This means keeping costs low by opening stores in second tier locations and small communities ill mass retailers are less attracted.

Convenience is critical as this separates Dollar General from the mass retailers where huge stores make customer service and finding items difficult. Next, Dollar General should look to expand geographically in the United States. With the U. S supporting an estimated increase of 5,000 extreme- value retail stores in 2008, there is room for Dollar General to open more stores. Dollar General has placed a premium on same-store sales and opening as many stores as possible. However, Dollar General should tone down the number of stores t opens so it can remain focused on existing stores.

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