We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Dollar General Industry Analysis Essay Sample

The whole doc is available only for registered users OPEN DOC

A limited time offer!

Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

Dollar General Industry Analysis Essay Sample

Executive Summary: Dollar General is the sixth largest mass merchandiser, and the fourth largest discount store in the U.S. However, significant growth opportunities remain for extreme-value retailers such as Dollar General. Dollar General’s strategic objective is sustainable and profitable long-term growth. The company has opportunities for growth by expanding in the United States to areas that lack an extreme-value retail presence. Continuing to serve low-, middle-, and fixed-income families in small communities will prevent Dollar General from competing directly against mass retailers such as Wal-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.

Dollar General’s strategic objective is sustainable and profitable long-term growth. The extreme-value retail industry includes companies such as Dollar General, Family Dollar, Fred’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-, middle-, and fixed-income families primarily in small communities. Financial analysis shows that net income and sales 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 Wal-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 Wal-Mart and Target. Sam’s Club and Costco 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 number 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 drives 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 threat of substitutes is medium. Since extreme-value retailers offer a focused assortment of goods in a small-box format, mass retailers such as Wal-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 Wal-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 most 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 cheap” 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 1993, but net income percentage has remained at approximately 4% since 2001 (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 Wal-Mart or Target. In 2005, Dollar General had the second highest net income margin behind Target and similar SG&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 SG&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 65.7%. 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 Market. This is bad idea;
not only would the new store format require significant capital 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. Wal-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. Aldi, 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 will 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 it opens so it can remain focused on existing stores. This will prevent having to do a major overhaul like in 2006. As a replacement for going full throttle on new store openings, Dollar General should consider acquisitions in order to consolidate the fragmented industry. The economies of scale will help Dollar General’s low-cost strategy. Acquisitions will also enable Dollar General to increase market share and prevent the market from becoming saturated.


Shih, Willy, Stephen Kaufman, and Rebecca McKillican. “Dollar General.” Harvard Business School 140th ser. 9.607 (2009): n. pag. Print



Inbound LogisticsOperationsOutbound LogisticsMarketing/SalesServices
•Used direct-store-delivery vendors to distribute and merchandise time-sensitive consumables such as milk and eggs
•New Inventory system improved in-stock percentage to 95%
•New Inventory system enabled stores to better manage inventory flow and product allocation
•2007 – Labor better matched customer demand, rather freight
•New Inventory system enabled distribution center to better manage inventory flow and product allocation
•Used direct-store-delivery vendors to distribute time-sensitive consumables such as milk and eggs
•Price competitive merchandise
•Offers generic products
•Low advertising costs to support low-cost business model •Even dollar prices on most items
•2006 – Began using local circulars
•Moved the company towards a pull strategy
•Inventory system provides product information like gross margin by category
•2007 – Gross margin return on investment to evaluate overall SKU profitability relative to inventory investment
•Coolers added to the stores enabled the sale of refrigerated goods – expand customer base
•Focus on an assortment of quality, consumable merchandise
•In rural areas, employees often know their customers and want to provide great service
•Small store size designed to increase customer convenience – in and out
•2004 – acceptance of debit and credit cards in most stores
•2007 – customer service primary driver of work in the store
•Coolers added to the stores enabled the sale of refrigerated goods
•Addition of coolers allowed Dollar General to offer the types of products needed to accept EBT – first extreme-value retailer


ProcurementHR ManagementTech. DevelopmentFirm Infrastructure
•Operated store with limited personnel to save costs
•District Managers link between corporate and individual stores
•District Managers aimed to handle merchandising issues
•2006 – Selection and testing for store manager skills
•Increased skill set training increased the “hire from within” capability
•2006 – 65% of new district managers were former store managers
•2006 – turnover of district managers drops to 20%
•2002-2004 began using auto-replenishment inventory system connected to electronic POS system
•2004 – acceptance of debit and credit systems following the introduction of card readers
•Average store size is 6,900 sq. ft.
•Small back-rooms designed to get product on the floor as quickly as possible
•Built stores in 2nd tier locations to maintain low real estate costs

INDUSTRY ANALYSIS – PORTER’S 5 FORCES (Arrows represent profitability)
Threat of Entry Substitutes Rivalry of Existing Competitors Suppliers Buyers Threat: Medium
Profitability: MediumThreat: Medium
Profitability: MediumThreat: High
Profitability: LowThreat: Low
Profitability: HighThreat: High
Profitability: Low

•Demand-Side Benefits of Scale: Extreme- value segment is highly fragmented outside two largest firms ↓
•Demand-Side Benefits of Scale: Customers may not be willing to buy from a newcomer ↑
•Demand-Side Benefits of Scale: Newcomer unable to compete on price until built up customer base ↑
•Customer Switching Costs: Low switching costs ↓
•Capital Requirements: High fixed costs, customer credit, building inventory, start- up losses, advertising ↑
•Large parts of the country have no extreme-value presence ↓
•Low government restrictions ↓
•Expected retaliation from incumbents ↑
•Mass retailers have larger assortment of branded products ↓
•Mass retailers compete on price ↓
•Small-box retailers more convenient ↑
•Price-performance trade-off is low ↑
•Undifferentiated products ↑
•Highly fragmented outside the top two firms ↓
•Price competition is high due to undifferentiated products, low marginal costs, few switching costs for buyers ↓
•Industry relies on keeping fixed costs low, making operational effectiveness important ↓
•Large number of suppliers that are competitive ↑
•Suppliers rely on the retail industry to sell their products ↑
•Low switching costs in changing suppliers ↑
•Suppliers offer undifferentiated products ↑
•Substitutes for what the supplier provides ↑
•Low threat of forward integration ↑
•Large number of buyers ↑
•Higher volume purchasing – one stop shop ↓
•Industry products are undifferentiated ↓
•Buyers face few switching costs ↓
•Buyers not able to integrate backward ↑
•Buyer group is low-, middle-income, and looking for a bargain ↓
•Buyers less concerned with quality due to consumable items ↓

We can write a custom essay

According to Your Specific Requirements

Order an essay
Get Access To The Full Essay
Materials Daily
100,000+ Subjects
2000+ Topics
Free Plagiarism
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access

Become a member

Your Answer Is Very Helpful For Us
Thank You A Lot!


Emma Taylor


Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59
Become a Member