yet another Dollar General take
In Scottsville, Kentucky at the dawn of World War 2 the market for “selling the good stuff to rich folks” was already taken, so J. L. Turner and Sons sold “the cheap stuff to the poor folks” instead1. For the first 16 years of its life, the budding enterprise trafficked in close-out merchandise, first as a wholesaler and then, as they found themselves acquiring more inventory than the independent retailers they sold to could handle, as a retailer itself. By the 1950s, the business was grossing $2mn in sales from 36 stores across small towns in Kentucky and Tennessee. Things were good.
It was around this time that Cal Turner Sr., the company’s eponymous founder, wondered whether the one dollar price tagged to select merchandise featured in the dollar day sales hosted by large department stores, couldn’t be assigned year-round to the broad assortment of goods carried by general stores. Dollar General, as J.L. Turner and Son would later be known, was an immediate success, with sales more than doubling to $5mn in 2 years. The concept resonated for a number of reasons. First, shoppers could readily tally a basket of $1 items. 10 items, 10 dollars. Easy. Second, Dollar General could price familiar goods like pots and pans for just under cost while extracting outsized margins on “treasure hunt” knickknacks sourced from Asia, with no obvious comparables. Customers were delighted to buy for $1 a pot that elsewhere would be priced for $2 and astounded to see also priced for $1 a ceramic doll (or whatever) that, unbeknownst to them, Dollar General acquired for just 40c. Third, suppliers knew they had to make the gross margin math work at DG’s inviolable $1 price point, simplifying negotiations.
Dollar General didn’t remain a dollar store for long though. The concept soon evolved to include dollar increments – a pair of shoes for $2, a toy for $5 – in the tradition of five-and-dime chains from the late 1800s, retailers like J.J. Newbury’s, Kresge, and Ben Franklin that sold some things for 5 cents, others for 10. And today, with 80% of items priced for more than $1 and a range of price points, the company has shed all pretense. But the Dollar General brand retained symbolic significance, connoting the value of everyday low prices in the convenience of a small local store:
As Dollar General stores metastasized across the south and southeast in small rural towns populated with fewer than 20k people, it concentrated its growing buying power on a limited assortment of items, passing the procurement savings through to its shoppers, most of whom make less than $57k a year, live paycheck to paycheck, and rely on government assistance to get by. Today the 10k SKUs2 that Dollar General carries are shelved across close to 20k stores. 3/4 of the US population lives within 5 miles of one. A consumer could find similar items at a local drug store or grocer, but she’ll be paying ~20%-40% more3. Alternatively, she could find Dollar General’s everyday low prices at Wal-Mart, but she’ll first have to travel ~20-30 miles to get there and then roam a cavernous 140k square-foot box to find what she needs.
“Ackshually, Wal-Mart’s prices are lower when measured on a per ounce basis”. But this isn’t the most relevant consideration for DG’s cash-strapped customers. A story from Cal Jr.’s memoir, My Father’s Business, illustrates this point. Dollar General once replaced a 3-pack of microwave popcorn that sold for $1 with an 8-pack that sold for $2. Cal recounts: “We figured customers couldn’t resist the added value, and we’d be generating a $2 sale instead of a $1 sale. The problem was that popcorn sales fell. Nobody could figure out why it wasn’t a big success. We finally went into the stores and asked, and our people there told us our customers could only afford to spend $1 at a time for something like popcorn”. A Wall Street analyst cannot comprehend this. The poor literally can’t afford to maximize value through bulk purchases. They must cover a variety of basic needs within tight liquidity constraints from one paycheck to the next. So the core Dollar General shopper (a cohort that management calls “BFFs” and who make up 66% of DG’s revenue) might trek 20-30 miles to Wal-Mart twice a month to bulk buy essentials, then visit the local Dollar General to fill in the gaps in the interim. This isn’t to say that Wal-Mart and Dollar General don’t vigorously compete (they certainly do). Just that for a cash-poor resident of a small rural town, the two companies serve somewhat different roles.