A General-Store Race Is On

Dollar General's Move to Add Fresh Food Underscores Midsize Store Rivalries

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•  April 30, 2012, 10:27 a.m. ET
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By ANN ZIMMERMAN

MERCED, Calif.—Dollar General Inc., DG +1.01% whose discount stores have stolen bargain-seeking shoppers from Wal-Mart Stores Inc., WMT +0.48% is trying to grab a share of the grocery business.

 http://online.wsj.com/article/SB10001424052702303978104577359940028920610.html

Dollar General, whose discount stores have stolen bargain-seeking shoppers from Wal-Mart, is trying to grab a share of the grocery business. Ann Zimmerman has details on The News Hub. Photo: Bloomberg.

The idea behind entering the notoriously low margin business? That stocking fresh food and more refrigerated products in midsize stores will drive shoppers to visit more frequently—and increase how much they spend on standard dollar-store fare, from corn chips to children's clothing.

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Bloomberg News

A Dollar General store in Saddle Brook, N.J. The chain is trying to win a share of the grocery business.

So far, Dollar General Market stores aren't nearly as profitable as the company's traditional dollar stores, which now number 10,000, though the company says the profit gap is narrowing.
Competition is heating up in the midsize store category. Many big-box retailers, including Target Inc. TGT +0.50% and Wal-Mart, have their own small-store strategies. And every drugstore, it seems, has added packaged food, cleaning supplies and dog biscuits, in an attempt to pry more money from customers.
It is a race to become what Dollar General's CEO, Rick Dreiling, calls "the new general store"—a place where harried, frugal shoppers can get the most essential things they need at a discount without traipsing through airplane-hangar-sized supercenters, which top 150,000 square feet.
At 16,000 square feet, the markets are far smaller—but still about twice the size of a typical dollar store. Over the next year, Dollar General plans to open about 40 of the Markets, many in "food deserts"—neighborhoods that lack easy access to fresh food.
Dollar General, the largest and fastest-growing of the dollar-store chains with $14.8 billion in revenue last year, continues to post strong results, growing 2011 sales at stores open at least a year 6% and profit 22% to $766 million.
Walking through the newly opened Dollar General Market here, with its green-hued walls to denote "freshness," Mr. Dreiling stops occasionally to straighten shelves and greet customers. Many ask him to stock additional products; one asked for lactose-free ice cream.
Mr. Dreiling says the key to a successful small grocery store isn't to offer everything, but to concentrate on the small number of items that account for the majority of a larger supermarket's sales.
Since the appeal of a Dollar General Market is, in part, convenience, the company decided to put frequently purchased items such as bread, milk and juice by the store's entrance for quick pickup. Most supermarkets stock these items far from the door, forcing customers to walk past an array of tempting merchandise.
Because Dollar General stores are much smaller than big-box rivals, getting the product mix is more important and not always easy. Women's clothing continues to be a problem category for the company. Dollar General is trying some new tactics—carrying smaller sizes, bringing in new merchandise more frequently and marking everything as "half off," because, Mr. Dreiling says, that is what women have come to expect when buying clothes.
Despite fears that Dollar General's better-heeled customers would start trading back up to more upscale stores, the company said it has held on to the majority of them by stocking a wider array of brand names—from Hanes to Stouffer's—while simultaneously catering to financially strapped customers with improved versions of private label products.
Rival Family Dollar Stores Inc. is following Dollar General's lead—remodeling stores, adding more food and private-label products and opening hundreds of locations a year. But Dollar General last year notched sales per square foot of $213 compared with $145 at Family Dollar.
Though Dollar General expects the Markets to be a big part of its future growth, right now it is experimenting—and trying to bring down the costs.
"They are a good opportunity for growth where they fit," Mr. Dreiling says. "But we're trying to be analytical and thoughtful, eating the elephant one bite at a time instead of swallowing the whole thing."