Dalular General Company
DOLLAR GENERAL COMPANY REPORT
Table of Contents
EXECUTIVE SUMMARY 3
INTRODUCTION 5
ANALYZING THE INDUSTRY 5
COMPETITORS 5
CUSTOMERS 5
MERCHANDISE 6
LOCATION 6
UNDERSTANDING DOLLAR GENERAL’S BUSINESS STRATEGY 6
STORE GROWTH 6
PRODUCT EXPANSION 7
TECHNOLOGICAL ADVANCEMENTS 7
EXPLORING COMPETITIVE ADVANTAGE 7
LOW-COST STRUCTURE 8
SUSTAINABILITY 8
COMPARING SMALL AND LARGE FIRMS 9
ADVANTAGES OF THE SMALL FIRM 9
DISADVANTAGES OF THE SMALL FIRM 9
LOOKING TO THE FUTURE 10
REPOSITIONING 10
INTERNATIONAL EXPANSION 10
CUSTOMER SERVICE 10
50TH ANNIVERSARY 11
CONCLUSION 11
WORKS CITED 14
Appendices Table of Contents
APPENDIX A – PORTER’S FIVE FORCES………………………...………………..I
APPENDIX B – PORTER’S GENERIC STRATEGIES….………………………….V …show more content…
APPENDIX C – STAKEHOLDER’S ANALYSIS…………………………….……VII
APPENDIX D – INTERNATIONAL BUSINESS…………………………………….X
APPENDIX E – SWOT ANALYSIS…………………………………………………XII
APPENDIX F – MIS…………………………………………………………………..XV
APPENDIX G – PRODUCT COMPARISON CHART…………………………...XIX
APPENDIX H – INDUSTRY ANALYSIS CHART……………………………….XXI
APPENDIX I – MISSION STATEMENTS………………………………………XXIV
APPENDIX J – STORE LOCATION MAPS…………………………………….XXVI
APPENDIX K – 2004 VALUE LINE REPORT………………………………….XXIX
APPENDIX L – BUSINESS LAW CONSIDERATIONS……………………….XXXI Executive Summary
The purpose of this report is to determine whether Dollar General (DG) has the right strategy to maintain a sustainable competitive advantage within its industry. Also, the report will discuss how small firms, such as DG, are able to compete with larger firms, such as Wal-Mart. In this report, recommendations are also given to guide DG in obtaining a sustainable competitive advantage in the discount retail industry.
Analyzing the Industry
The first step to understanding a company is to examine its industry. There are four main areas to consider when analyzing an industry. These include:
• competitors
• customers
• merchandise
• location
The way that these four factors interrelate determine how well a business will do in the particular industry. Understanding Dollar General’s Business Strategy
Every business needs a strategy to direct it towards achieving a competitive advantage within its industry. DG’s current business strategy is growth. Some growth initiatives include:
• store growth
• product expansion
• technological advancements
Clearly, by continuing to focus on these growth initiatives, DG can continue to further increase its profits and success in the industry. DG’s growth strategy gives it a competitive advantage over its rivals, who are not expanding at the same rate. Exploring Competitive Advantage
DG has a current competitive advantage within its industry. DG maintains this advantage through a unique cost-efficient approach. This low-cost structure is apparent through low inventories, low advertising costs, and location of stores in rural areas. Though profitable in the short-run, its current advantage is not sustainable. It is not sustainable due to:
• rivals’ similar competitive strategies
• low barriers of entry into the market
• the absence of a differentiation strategy
When examining competitive advantage, it is also important to consider the market and take into account the existing competition against larger firms.
Comparing Small and Large Firms
Small firms often find it difficult to compete with larger firms. Though there are some disadvantages DG will never be able to overcome due to its size, small firms have advantages over their larger counterparts.
In order for a small firm, such as DG, to compete with larger firms, there are many options available.
Looking to the Future
There are several ways that DG can improve profitability and success. Several of which include:
• repositioning itself in the market
• expanding internationally
• enhancing customer service
• promoting its 50th Anniversary By taking these recommendations into consideration, DG will be lead towards obtaining a sustainable competitive advantage.
Conclusion
DG’s overall business strategy is growth, but the company currently does not have a sustainable competitive advantage in the discount retail industry. In order for DG to obtain an advantage and compete with larger firms, it must continue to make technological advances, differentiate itself within the market, and consider the recommendations listed above.
Introduction
For almost 50 years, Dollar General (DG) has been a top competitor in the discount retail industry. The company has grown considerably since it was first established by J. L. Turner in 1955. This Fortune 500® company opened its first store in Springfield, Kentucky and is now headquartered in Goodlettsville, Tennessee.
The purpose of this report is to determine whether DG has the right strategy to maintain a sustainable competitive advantage within its industry. Also, the report will discuss how small firms, such as DG, are able to compete with larger firms, such as Wal-Mart.
In order to achieve this goal, this report will take an in-depth look at DG’s overall business strategy in comparison with its leading competitors. The first step to understanding a company is to examine its industry.
Analyzing the Industry
To understand an industry, aspects such as who the competition is, who the target customers are, what products the industry provides, and where the industry is located must be considered.
Competitors
There are several different types of stores within the discount retail industry, and for comparison’s sake, the industry is further broken into many segments. DG is in the market segment known as the dollar store category. It currently leads this segment in market value, above competitors such as Family Dollar, Dollar Tree, and Fred’s. See Appendix H for specific competitor information and Appendix G for product price comparisons. As a result, competitors such as Wal-Mart are in the same industry but not the same peer group. Comparisons will be made throughout this report to Wal-Mart and other big firms because they tend draw some of the same customers.
Customers
Retail merchandise stores attract many different types of people. For example, Wal-Mart targets all income level households, whereas dollar stores such as DG serve “need-to” shoppers. More specifically, the target customers of DG are normally in towns with less than 20,000 people and have the following characteristics :
• most customers are in the low-, middle-, and fixed-income brackets
• 81 percent of customers are female
• 44 percent of customers are over the age of 55
• 48 percent of its customers earn less than $30,000 a year
• 26 percent of customers have incomes lower than $20,000
• most customers live within five miles of the store
DG serves a narrow market range and offers low prices. The company can be classified as having a focused cost leadership strategy according to Porter’s Generic Strategies Model (see Appendix B).
Merchandise
Stores within the discount retail industry offer a wide variety of products at low prices. Discount stores offer brand names but place an emphasis on brands unique to their own stores for a lesser price. Trends toward perishable items are becoming more apparent in the market as well. This is demonstrated by the growth of “super-stores” in the industry. In a more broad sense concerning merchandise, Standard and Poor’s says, “Retailers – whether discounter or department store – that provide an attractive array of quality goods at reasonably low prices are likely to see the strongest sales and earnings improvements.” Finally, location is vital to the success of every business. Location
A business can only be successful if it is placed in a region where it is likely to strive. In the retail industry, stores are positioned accordingly. Larger firms, such as Wal-Mart, are present in all 50 states and have grown internationally as well. Smaller firms, such as Family Dollar and DG have not expanded into all 50 states, nor have they ventured into foreign markets. In fact, they are only present in 43 and 29 states respectively. Each store has found success in different economic regions as well. For instance, Target is considered an “upscale discounter.” Location, in combination with competitors, customers, and merchandise, all affect a company’s business strategy.
Understanding Dollar General’s Business Strategy
Every business needs a strategy to direct it towards achieving a competitive advantage within its industry. The business strategy must always remain consistent with the company’s individual mission. In DG’s case, its mission of “Serving Others” must be kept in mind as it carries out its business strategy: growth. DG continually focuses on growth initiatives such as store growth, product expansion, and technological advancements.
Store Growth
DG’s current business strategy is growth. In 2004, DG plans to open 675 new stores as well as new distribution center. Twenty additional Dollar General Markets (“super-centers”) will be opened in 2004 after the success of two pilot stores in 2003. Although these super-centers are still being tested for profitability, results are promising thus far. Stores including coolers have average purchase amounts of $13.00 compared to the average of $8.50 in stores without coolers. (For further statistics and company information, see Appendix K.) However, relying solely on building new stores does not always contribute to company growth financially.
Product Expansion
DG currently carries a variety of products, including; health and beauty aids, packaged food products, home cleaning supplies, housewares, stationery, seasonal goods, basic clothing, and domestics. These are grouped into four broad categories: highly consumable, hardware and seasonal, basic clothing, and home products. Of these divisions, the highest gross profit rate is in the hardware and seasonal category, and the lowest gross profit rate is found in the highly consumables area. These two categories had sales percentages of 16.8 percent and 61.2 percent respectively, based on 2003 figures.
Though highly consumables proved to be the least profitable of all products, DG recognizes the consumer demand for one-stop-shopping. Therefore, in combination with opening the new super-centers, DG also plans to expand its merchandise mix to include products such as perishable and grocery items. By placing more everyday groceries on their shelves, DG hopes to establish a strong base of regular customers who would otherwise meet their perishable item needs elsewhere. To achieve product expansion, DG must have an efficient supply chain.
Technological Advancements
DG depends on a number of IT systems that aid in efficient functioning of its business. Without the use of software vendors and technology, the company would be unable to operate effectively and operations of day-to-day business would suffer. According to company CIO Bruce Ash, “DG sees technology as a key enabler of business strategy.”
DG continues to improve its IT division by investing over $150 million to improve systems throughout the company in the last 5 years. These investments allow for DG to better manage inventory and merchandise shrink. DG’s main objective is to get products on the shelves more quickly to meet customer needs. Because of DG’s continued investments to make its supply chain more efficient, it can continue to offer everyday low prices to customers. To further see how technology fits into the DG’s business strategy, see Appendix F.
Clearly, by continuing to focus on these growth initiatives, DG can continue to further increase its profits and success in the industry. While expanding, DG must keep in mind that growth is often monitored by anti-trust laws (as is discussed in Appendix L). DG’s growth strategy gives it a competitive advantage over its rivals, who are not expanding at the same rate.
Exploring Competitive Advantage
DG has a current competitive advantage within its industry that is maintains through a unique cost-efficient approach. This low-cost structure is apparent through low inventories, low advertising costs, and location of stores in rural areas. Though profitable in the short-run, DG’s current advantage is not sustainable.
Low-Cost Structure
Several attributes are essential in allowing DG to outperform its competitors. The first of these components is DG’s ability to maintain low levels of inventory at the store. This allows DG to minimize storage costs and to better manage store inventory. Another way in which DG reduces expenses is by limiting advertising costs. According to Dale Limes, V.P. of Lee Wayne Corporation, the average company spends 3 percent of gross annual sales and advertising. In 2003, DG spent $5.4 million on advertising expenses which worked out to be less than 1 percent of gross sales. The last contributing factor in the low-cost structure is the location of DG stores in rural areas. By situating stores in rural areas, DG can take advantage of the lower lease rates and the lower costs of living in general.
Sustainability
There are several factors that prohibit DG from maintaining a sustainable competitive advantage within the industry.
Some of these include: rivals’ similar competitive strategies, low barriers of entry into the market, and the absence of a differentiation strategy.
Rivals’ Similar Competitive Strategies. Companies in DG’s peer group are closely aligning themselves with competitive strategies similar to those of DG. For example, in light of DG’s profitable success with low advertising expenses, Family Dollar has drastically reduced advertising expenses in the past seven years. Family Dollar went from 14 circulars in 1997 to just 1 in 2003.
Low Barriers of Entry. Because of the nature of a dollar store, which has few costs, it is fairly easy to start a new store. According to Dan Margles of Allied Systems Industries (ASI):
Our DollarStores are a relatively low investment compared to owning most franchises … Our average customer this year is purchasing a complete turnkey store with high-end inventory and fixtures in the 3,000 to 4,000 square foot range for a total cost of only $149,000 to $199,000. As always, there are no franchise fees or ongoing royalties to pay… Many operators are looking to open a second store within 12 to 18
months.
According to Franchise Direct’s website, “Allied Systems Industries (ASI) is the nation's largest developer of independently-owned Dollar Stores.”
Other barriers to entry include patents, cost advantages, advertising and marketing, and research and development expenditures. There is a lack of these barriers in the dollar store segment of the discount retail industry, making the industry susceptible to new entrants. The threat of new entrants is part of Porter’s Five Forces Model. See Appendix A for more details about this model.
Absence of a Differentiation Strategy. In order for a company to remain successful, it must establish a differentiation strategy or market identifier to separate itself from competitors. DG is not unique when compared to other dollar stores because all products offered at DG are readily available elsewhere at comparable prices. Furthermore, each company faces the challenge of creating its own niche, with which DG has not yet been successful. Comparing Small and Large Firms
Along with struggling to find a niche within the market, DG also struggles to compete with larger firms. Though DG has some methods that appear to be advantageous to the company, there are some disadvantages it will never be able to overcome due to its size.
Advantages of the Small Firm
DG’s overall culture focuses on convenience. Its stores are located in smaller areas so customers don’t have to travel far to reach the store. DG stores are smaller in size, making it easier for customers to find what they are looking for instead of having to search for what they want. There is also the benefit of not having to wait in long lines. They offer a variety of products at low prices so most of the shopping can be done in one simple stop. In the 2004 10-k report, DG stated:
The Company believes that its target customers prefer the convenience of a small, neighborhood store. As the discount store industry continues to move toward larger, “super-center” type stores, which are often built outside of towns, the Company believes that DG’s convenient discount store format will continue to attract customers and provide the Company with a competitive advantage.
In addition to the convenience factor, smaller firms generally have exceptional customer service to ensure the return of customers. Smaller firms have the opportunity to be more personable with their customers due to the nature of their shopping environment. However, through “secret shopper” observations, a team of researchers found DG to be lacking in this category. Wal-Mart, on the other hand, goes against the norm of large firms and provides superior service to customers. This creates a more personal shopping experience that is common to most small firms.
Disadvantages of the Small Firm
The main disadvantage of a small firm when competing with a larger firm is its lack of purchasing power. Firms such as DG are unable to drive down prices from suppliers as Wal-Mart does. In an NPR interview with Charles Fishman of Fast Company Magazine, he says: The best news is Wal-Mart’s going to buy your product, and the worst news is Wal-Mart’s going to buy your product. Because you instantly need to supply enormous quantities … which often lead companies into a position where they can’t pay attention to their existing customers. And over time, Wal-Mart insists that the prices you charge it go down.
Along with purchasing power, larger firms have a bigger pool of resources to allocate in order to expand and invest more freely. Larger firms, such as Wal-Mart, have also extensively penetrated the U.S. market, allowing customers to be loyal shoppers no matter where they are in the country. See Appendix J for distribution of stores.
Looking to the Future
DG has many opportunities for advancement within the discount retail industry. Though it does not have a sustainable competitive advantage, there are several ways it will be able to keep ahead of the competition in years to come. Some of these include repositioning itself in the market, expanding internationally, enhancing customer service, and promoting its 50th Anniversary.
Repositioning
DG’s current marketing strategy involves the sale of an existing product in an existing market, also known as market penetration. The company is focusing on growing within the U.S. market in order to increase sales. In the future, the best marketing strategy to implement is market development. This includes offering an existing product in a new market. International growth will benefit DG in the long run and help them compete with larger firms.
International Expansion
Dollar General should focus on an international market that is similar to the one in the United States. One option for international expansion is to open stores in Canada. Statistics show that discount stores are on the rise in Canada, and Canadians are becoming more price-aware in their shopping. Wal-Marts in Canada have experienced a 22 percent increase in customers in the past eight years, and 82 percent of Canadians say that they have shopped at a dollar store in the past year. This data proves that there is an interest for discount retail, and DG has a great opportunity to benefit from this interest if it takes the initiative to expand internationally. For more international opportunities, see Appendix D.
Customer Service
Customer service should be an important part of a store’s culture. DG would be wise to follow the lead of Wal-Mart by pursuing a more customer-centered atmosphere. For example, Wal-Mart has a “Ten Foot Rule.” Sam Walton, founder of Wal-Mart stores, said, “… I want you to promise that whenever you come within 10 feet of a customer, you will look him in the eye, greet him and ask him if you can help him.” DG is currently attempting to improve customer satisfaction through manager training that is designed to place more emphasis on customer service. A firm’s mission statement often focuses on customer service. Please see Appendix I for a list of company mission statements.
50th Anniversary
The year 2005 marks the 50th Anniversary for DG, and this milestone event will be a perfect marketing opportunity for DG to separate itself from its competitors. DG should spend a substantial amount of time and effort planning and advertising its 50th Anniversary. DG must make customers aware of the fact that it is a company that has practiced good business ethics while surviving in the industry for 50 years.
Since DG has been in the industry for 50 years, it has created a good relationship with its suppliers. Despite low purchasing power, DG can use the 50th Anniversary as leverage to get suppliers to put it on an equal playing field with Wal-Mart for one year. If DG can stress the importance of their 50th Anniversary, it is possible that suppliers might lower their prices for DG for a limited time to match the prices that they offer larger accounts. There is a point in time when suppliers may deem it acceptable to treat their “B” accounts (DG) like their “A” accounts (Wal-Mart).
Although DG has had success without much promotional advertising, it can also use its 50th Anniversary as an opportunity to engage in co-op advertising. Co-op advertising is when a wholesaler and a retailer establish a partnership to advertise a particular product. For example, if DG placed a 50th Anniversary ad in local newspapers that contained a picture of a Proctor & Gamble product, P&G would contribute money to DG to cover the advertising costs. In some cases, the wholesaler will pay for the majority, if not the entirety, of an ad that promotes its product. Co-op advertising is a win-win situation for both the wholesaler and the retailer as both parties receive recognition in the process.
DG would be foolish if it did not capitalize on marketing its 50th Anniversary. This 50th Anniversary event would be a good opportunity to attract new customers as well. Customers will want to associate themselves with a company that has 50 years of history and is still going strong. Although the anniversary event would only affect short-term profits, it would help DG establish a niche of long-time customer commitment that would direct them towards obtaining a sustainable competitive advantage.
Conclusion
DG’s overall business strategy is growth, but the company currently does not have a sustainable competitive advantage in the discount retail industry. In order for DG to obtain an advantage and compete with larger firms, it must continue to make technological advances, differentiate itself within the market, and consider the recommendations listed above.
Table of Contents
EXECUTIVE SUMMARY 3
INTRODUCTION 5
ANALYZING THE INDUSTRY 5
COMPETITORS 5
CUSTOMERS 5
MERCHANDISE 6
LOCATION 6
UNDERSTANDING DOLLAR GENERAL’S BUSINESS STRATEGY 6
STORE GROWTH 6
PRODUCT EXPANSION 7
TECHNOLOGICAL ADVANCEMENTS 7
EXPLORING COMPETITIVE ADVANTAGE 7
LOW-COST STRUCTURE 8
SUSTAINABILITY 8
COMPARING SMALL AND LARGE FIRMS 9
ADVANTAGES OF THE SMALL FIRM 9
DISADVANTAGES OF THE SMALL FIRM 9
LOOKING TO THE FUTURE 10
REPOSITIONING 10
INTERNATIONAL EXPANSION 10
CUSTOMER SERVICE 10
50TH ANNIVERSARY 11
CONCLUSION 11
WORKS CITED 14
Appendices Table of Contents
APPENDIX A – PORTER’S FIVE FORCES………………………...………………..I
APPENDIX B – PORTER’S GENERIC STRATEGIES….………………………….V …show more content…
APPENDIX C – STAKEHOLDER’S ANALYSIS…………………………….……VII
APPENDIX D – INTERNATIONAL BUSINESS…………………………………….X
APPENDIX E – SWOT ANALYSIS…………………………………………………XII
APPENDIX F – MIS…………………………………………………………………..XV
APPENDIX G – PRODUCT COMPARISON CHART…………………………...XIX
APPENDIX H – INDUSTRY ANALYSIS CHART……………………………….XXI
APPENDIX I – MISSION STATEMENTS………………………………………XXIV
APPENDIX J – STORE LOCATION MAPS…………………………………….XXVI
APPENDIX K – 2004 VALUE LINE REPORT………………………………….XXIX
APPENDIX L – BUSINESS LAW CONSIDERATIONS……………………….XXXI Executive Summary
The purpose of this report is to determine whether Dollar General (DG) has the right strategy to maintain a sustainable competitive advantage within its industry. Also, the report will discuss how small firms, such as DG, are able to compete with larger firms, such as Wal-Mart. In this report, recommendations are also given to guide DG in obtaining a sustainable competitive advantage in the discount retail industry.
Analyzing the Industry
The first step to understanding a company is to examine its industry. There are four main areas to consider when analyzing an industry. These include:
• competitors
• customers
• merchandise
• location
The way that these four factors interrelate determine how well a business will do in the particular industry. Understanding Dollar General’s Business Strategy
Every business needs a strategy to direct it towards achieving a competitive advantage within its industry. DG’s current business strategy is growth. Some growth initiatives include:
• store growth
• product expansion
• technological advancements
Clearly, by continuing to focus on these growth initiatives, DG can continue to further increase its profits and success in the industry. DG’s growth strategy gives it a competitive advantage over its rivals, who are not expanding at the same rate. Exploring Competitive Advantage
DG has a current competitive advantage within its industry. DG maintains this advantage through a unique cost-efficient approach. This low-cost structure is apparent through low inventories, low advertising costs, and location of stores in rural areas. Though profitable in the short-run, its current advantage is not sustainable. It is not sustainable due to:
• rivals’ similar competitive strategies
• low barriers of entry into the market
• the absence of a differentiation strategy
When examining competitive advantage, it is also important to consider the market and take into account the existing competition against larger firms.
Comparing Small and Large Firms
Small firms often find it difficult to compete with larger firms. Though there are some disadvantages DG will never be able to overcome due to its size, small firms have advantages over their larger counterparts.
In order for a small firm, such as DG, to compete with larger firms, there are many options available.
Looking to the Future
There are several ways that DG can improve profitability and success. Several of which include:
• repositioning itself in the market
• expanding internationally
• enhancing customer service
• promoting its 50th Anniversary By taking these recommendations into consideration, DG will be lead towards obtaining a sustainable competitive advantage.
Conclusion
DG’s overall business strategy is growth, but the company currently does not have a sustainable competitive advantage in the discount retail industry. In order for DG to obtain an advantage and compete with larger firms, it must continue to make technological advances, differentiate itself within the market, and consider the recommendations listed above.
Introduction
For almost 50 years, Dollar General (DG) has been a top competitor in the discount retail industry. The company has grown considerably since it was first established by J. L. Turner in 1955. This Fortune 500® company opened its first store in Springfield, Kentucky and is now headquartered in Goodlettsville, Tennessee.
The purpose of this report is to determine whether DG has the right strategy to maintain a sustainable competitive advantage within its industry. Also, the report will discuss how small firms, such as DG, are able to compete with larger firms, such as Wal-Mart.
In order to achieve this goal, this report will take an in-depth look at DG’s overall business strategy in comparison with its leading competitors. The first step to understanding a company is to examine its industry.
Analyzing the Industry
To understand an industry, aspects such as who the competition is, who the target customers are, what products the industry provides, and where the industry is located must be considered.
Competitors
There are several different types of stores within the discount retail industry, and for comparison’s sake, the industry is further broken into many segments. DG is in the market segment known as the dollar store category. It currently leads this segment in market value, above competitors such as Family Dollar, Dollar Tree, and Fred’s. See Appendix H for specific competitor information and Appendix G for product price comparisons. As a result, competitors such as Wal-Mart are in the same industry but not the same peer group. Comparisons will be made throughout this report to Wal-Mart and other big firms because they tend draw some of the same customers.
Customers
Retail merchandise stores attract many different types of people. For example, Wal-Mart targets all income level households, whereas dollar stores such as DG serve “need-to” shoppers. More specifically, the target customers of DG are normally in towns with less than 20,000 people and have the following characteristics :
• most customers are in the low-, middle-, and fixed-income brackets
• 81 percent of customers are female
• 44 percent of customers are over the age of 55
• 48 percent of its customers earn less than $30,000 a year
• 26 percent of customers have incomes lower than $20,000
• most customers live within five miles of the store
DG serves a narrow market range and offers low prices. The company can be classified as having a focused cost leadership strategy according to Porter’s Generic Strategies Model (see Appendix B).
Merchandise
Stores within the discount retail industry offer a wide variety of products at low prices. Discount stores offer brand names but place an emphasis on brands unique to their own stores for a lesser price. Trends toward perishable items are becoming more apparent in the market as well. This is demonstrated by the growth of “super-stores” in the industry. In a more broad sense concerning merchandise, Standard and Poor’s says, “Retailers – whether discounter or department store – that provide an attractive array of quality goods at reasonably low prices are likely to see the strongest sales and earnings improvements.” Finally, location is vital to the success of every business. Location
A business can only be successful if it is placed in a region where it is likely to strive. In the retail industry, stores are positioned accordingly. Larger firms, such as Wal-Mart, are present in all 50 states and have grown internationally as well. Smaller firms, such as Family Dollar and DG have not expanded into all 50 states, nor have they ventured into foreign markets. In fact, they are only present in 43 and 29 states respectively. Each store has found success in different economic regions as well. For instance, Target is considered an “upscale discounter.” Location, in combination with competitors, customers, and merchandise, all affect a company’s business strategy.
Understanding Dollar General’s Business Strategy
Every business needs a strategy to direct it towards achieving a competitive advantage within its industry. The business strategy must always remain consistent with the company’s individual mission. In DG’s case, its mission of “Serving Others” must be kept in mind as it carries out its business strategy: growth. DG continually focuses on growth initiatives such as store growth, product expansion, and technological advancements.
Store Growth
DG’s current business strategy is growth. In 2004, DG plans to open 675 new stores as well as new distribution center. Twenty additional Dollar General Markets (“super-centers”) will be opened in 2004 after the success of two pilot stores in 2003. Although these super-centers are still being tested for profitability, results are promising thus far. Stores including coolers have average purchase amounts of $13.00 compared to the average of $8.50 in stores without coolers. (For further statistics and company information, see Appendix K.) However, relying solely on building new stores does not always contribute to company growth financially.
Product Expansion
DG currently carries a variety of products, including; health and beauty aids, packaged food products, home cleaning supplies, housewares, stationery, seasonal goods, basic clothing, and domestics. These are grouped into four broad categories: highly consumable, hardware and seasonal, basic clothing, and home products. Of these divisions, the highest gross profit rate is in the hardware and seasonal category, and the lowest gross profit rate is found in the highly consumables area. These two categories had sales percentages of 16.8 percent and 61.2 percent respectively, based on 2003 figures.
Though highly consumables proved to be the least profitable of all products, DG recognizes the consumer demand for one-stop-shopping. Therefore, in combination with opening the new super-centers, DG also plans to expand its merchandise mix to include products such as perishable and grocery items. By placing more everyday groceries on their shelves, DG hopes to establish a strong base of regular customers who would otherwise meet their perishable item needs elsewhere. To achieve product expansion, DG must have an efficient supply chain.
Technological Advancements
DG depends on a number of IT systems that aid in efficient functioning of its business. Without the use of software vendors and technology, the company would be unable to operate effectively and operations of day-to-day business would suffer. According to company CIO Bruce Ash, “DG sees technology as a key enabler of business strategy.”
DG continues to improve its IT division by investing over $150 million to improve systems throughout the company in the last 5 years. These investments allow for DG to better manage inventory and merchandise shrink. DG’s main objective is to get products on the shelves more quickly to meet customer needs. Because of DG’s continued investments to make its supply chain more efficient, it can continue to offer everyday low prices to customers. To further see how technology fits into the DG’s business strategy, see Appendix F.
Clearly, by continuing to focus on these growth initiatives, DG can continue to further increase its profits and success in the industry. While expanding, DG must keep in mind that growth is often monitored by anti-trust laws (as is discussed in Appendix L). DG’s growth strategy gives it a competitive advantage over its rivals, who are not expanding at the same rate.
Exploring Competitive Advantage
DG has a current competitive advantage within its industry that is maintains through a unique cost-efficient approach. This low-cost structure is apparent through low inventories, low advertising costs, and location of stores in rural areas. Though profitable in the short-run, DG’s current advantage is not sustainable.
Low-Cost Structure
Several attributes are essential in allowing DG to outperform its competitors. The first of these components is DG’s ability to maintain low levels of inventory at the store. This allows DG to minimize storage costs and to better manage store inventory. Another way in which DG reduces expenses is by limiting advertising costs. According to Dale Limes, V.P. of Lee Wayne Corporation, the average company spends 3 percent of gross annual sales and advertising. In 2003, DG spent $5.4 million on advertising expenses which worked out to be less than 1 percent of gross sales. The last contributing factor in the low-cost structure is the location of DG stores in rural areas. By situating stores in rural areas, DG can take advantage of the lower lease rates and the lower costs of living in general.
Sustainability
There are several factors that prohibit DG from maintaining a sustainable competitive advantage within the industry.
Some of these include: rivals’ similar competitive strategies, low barriers of entry into the market, and the absence of a differentiation strategy.
Rivals’ Similar Competitive Strategies. Companies in DG’s peer group are closely aligning themselves with competitive strategies similar to those of DG. For example, in light of DG’s profitable success with low advertising expenses, Family Dollar has drastically reduced advertising expenses in the past seven years. Family Dollar went from 14 circulars in 1997 to just 1 in 2003.
Low Barriers of Entry. Because of the nature of a dollar store, which has few costs, it is fairly easy to start a new store. According to Dan Margles of Allied Systems Industries (ASI):
Our DollarStores are a relatively low investment compared to owning most franchises … Our average customer this year is purchasing a complete turnkey store with high-end inventory and fixtures in the 3,000 to 4,000 square foot range for a total cost of only $149,000 to $199,000. As always, there are no franchise fees or ongoing royalties to pay… Many operators are looking to open a second store within 12 to 18
months.
According to Franchise Direct’s website, “Allied Systems Industries (ASI) is the nation's largest developer of independently-owned Dollar Stores.”
Other barriers to entry include patents, cost advantages, advertising and marketing, and research and development expenditures. There is a lack of these barriers in the dollar store segment of the discount retail industry, making the industry susceptible to new entrants. The threat of new entrants is part of Porter’s Five Forces Model. See Appendix A for more details about this model.
Absence of a Differentiation Strategy. In order for a company to remain successful, it must establish a differentiation strategy or market identifier to separate itself from competitors. DG is not unique when compared to other dollar stores because all products offered at DG are readily available elsewhere at comparable prices. Furthermore, each company faces the challenge of creating its own niche, with which DG has not yet been successful. Comparing Small and Large Firms
Along with struggling to find a niche within the market, DG also struggles to compete with larger firms. Though DG has some methods that appear to be advantageous to the company, there are some disadvantages it will never be able to overcome due to its size.
Advantages of the Small Firm
DG’s overall culture focuses on convenience. Its stores are located in smaller areas so customers don’t have to travel far to reach the store. DG stores are smaller in size, making it easier for customers to find what they are looking for instead of having to search for what they want. There is also the benefit of not having to wait in long lines. They offer a variety of products at low prices so most of the shopping can be done in one simple stop. In the 2004 10-k report, DG stated:
The Company believes that its target customers prefer the convenience of a small, neighborhood store. As the discount store industry continues to move toward larger, “super-center” type stores, which are often built outside of towns, the Company believes that DG’s convenient discount store format will continue to attract customers and provide the Company with a competitive advantage.
In addition to the convenience factor, smaller firms generally have exceptional customer service to ensure the return of customers. Smaller firms have the opportunity to be more personable with their customers due to the nature of their shopping environment. However, through “secret shopper” observations, a team of researchers found DG to be lacking in this category. Wal-Mart, on the other hand, goes against the norm of large firms and provides superior service to customers. This creates a more personal shopping experience that is common to most small firms.
Disadvantages of the Small Firm
The main disadvantage of a small firm when competing with a larger firm is its lack of purchasing power. Firms such as DG are unable to drive down prices from suppliers as Wal-Mart does. In an NPR interview with Charles Fishman of Fast Company Magazine, he says: The best news is Wal-Mart’s going to buy your product, and the worst news is Wal-Mart’s going to buy your product. Because you instantly need to supply enormous quantities … which often lead companies into a position where they can’t pay attention to their existing customers. And over time, Wal-Mart insists that the prices you charge it go down.
Along with purchasing power, larger firms have a bigger pool of resources to allocate in order to expand and invest more freely. Larger firms, such as Wal-Mart, have also extensively penetrated the U.S. market, allowing customers to be loyal shoppers no matter where they are in the country. See Appendix J for distribution of stores.
Looking to the Future
DG has many opportunities for advancement within the discount retail industry. Though it does not have a sustainable competitive advantage, there are several ways it will be able to keep ahead of the competition in years to come. Some of these include repositioning itself in the market, expanding internationally, enhancing customer service, and promoting its 50th Anniversary.
Repositioning
DG’s current marketing strategy involves the sale of an existing product in an existing market, also known as market penetration. The company is focusing on growing within the U.S. market in order to increase sales. In the future, the best marketing strategy to implement is market development. This includes offering an existing product in a new market. International growth will benefit DG in the long run and help them compete with larger firms.
International Expansion
Dollar General should focus on an international market that is similar to the one in the United States. One option for international expansion is to open stores in Canada. Statistics show that discount stores are on the rise in Canada, and Canadians are becoming more price-aware in their shopping. Wal-Marts in Canada have experienced a 22 percent increase in customers in the past eight years, and 82 percent of Canadians say that they have shopped at a dollar store in the past year. This data proves that there is an interest for discount retail, and DG has a great opportunity to benefit from this interest if it takes the initiative to expand internationally. For more international opportunities, see Appendix D.
Customer Service
Customer service should be an important part of a store’s culture. DG would be wise to follow the lead of Wal-Mart by pursuing a more customer-centered atmosphere. For example, Wal-Mart has a “Ten Foot Rule.” Sam Walton, founder of Wal-Mart stores, said, “… I want you to promise that whenever you come within 10 feet of a customer, you will look him in the eye, greet him and ask him if you can help him.” DG is currently attempting to improve customer satisfaction through manager training that is designed to place more emphasis on customer service. A firm’s mission statement often focuses on customer service. Please see Appendix I for a list of company mission statements.
50th Anniversary
The year 2005 marks the 50th Anniversary for DG, and this milestone event will be a perfect marketing opportunity for DG to separate itself from its competitors. DG should spend a substantial amount of time and effort planning and advertising its 50th Anniversary. DG must make customers aware of the fact that it is a company that has practiced good business ethics while surviving in the industry for 50 years.
Since DG has been in the industry for 50 years, it has created a good relationship with its suppliers. Despite low purchasing power, DG can use the 50th Anniversary as leverage to get suppliers to put it on an equal playing field with Wal-Mart for one year. If DG can stress the importance of their 50th Anniversary, it is possible that suppliers might lower their prices for DG for a limited time to match the prices that they offer larger accounts. There is a point in time when suppliers may deem it acceptable to treat their “B” accounts (DG) like their “A” accounts (Wal-Mart).
Although DG has had success without much promotional advertising, it can also use its 50th Anniversary as an opportunity to engage in co-op advertising. Co-op advertising is when a wholesaler and a retailer establish a partnership to advertise a particular product. For example, if DG placed a 50th Anniversary ad in local newspapers that contained a picture of a Proctor & Gamble product, P&G would contribute money to DG to cover the advertising costs. In some cases, the wholesaler will pay for the majority, if not the entirety, of an ad that promotes its product. Co-op advertising is a win-win situation for both the wholesaler and the retailer as both parties receive recognition in the process.
DG would be foolish if it did not capitalize on marketing its 50th Anniversary. This 50th Anniversary event would be a good opportunity to attract new customers as well. Customers will want to associate themselves with a company that has 50 years of history and is still going strong. Although the anniversary event would only affect short-term profits, it would help DG establish a niche of long-time customer commitment that would direct them towards obtaining a sustainable competitive advantage.
Conclusion
DG’s overall business strategy is growth, but the company currently does not have a sustainable competitive advantage in the discount retail industry. In order for DG to obtain an advantage and compete with larger firms, it must continue to make technological advances, differentiate itself within the market, and consider the recommendations listed above.