Undergraduate yrs4 -business integrative strategic
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R E V : A P R I L 2 8 , 2 0 0 9
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Senior Lecturers Willy Shih and Stephen Kaufman and Rebecca McKillican (MBA 2007) prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2007, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
W I L L Y S H I H
S T E P H E N K A U F M A N
R E B E C C A M C K I L L I C A N
Dollar General (A)
Ironically, small-box retailers like Dollar General owe their growth to the success of our big-box rivals. The dominance of big-box retail fuels the demand for a convenient alternative.
— David Perdue, Chairman and CEO, Dollar General
Walking through the home cleaning aisle of a Dollar General store in Nashville, Tennessee, David Perdue, CEO of Dollar General, reflected on the significant progress the dollar store industry, and Dollar General in particular, had made in the United States over the past decade. Many consumers in the U.S. still believed that the large dollar store retailers focused on low-priced knick-knacks. In 2007, however, this was far from reality. The majority of the products sold at Dollar General were household consumables priced under $10, and one-third of these products were nationally branded consumer goods including Tide, Pepsi, and Kellogg’s Cereal. The dollar store industry, led by Dollar General, had been the fastest-growing retail channel throughout the United States over the past decade with the only exception being supercenters (such as Sam’s Club and Costco).
At the beginning of 2007, Perdue had reason to be pleased. Since he had taken leadership of the company in 2003, the company had grown from 6,273 stores to 8,260 in early 2007. Revenues had increased to $9.2 billion by the end of fiscal year 2006, representing a 9% cumulative average growth rate over the past five years. This frenetic pace of growth, while very exciting, also created some growing pains for Dollar General. During fiscal year 2006, Dollar General was forced to address a number of structural issues pertaining to its growth. The company closed over 200 low-potential stores and wrote off a significant amount of old inventory that had built up over time. Perdue knew that there remained significant growth opportunities within the U.S., but the question hanging over his head was how to achieve both sustainable and profitable growth for the long term. With 8,260 company-owned stores in the U.S., maintaining the current growth rate was going to be challenging.
“Should we continue to drive growth through new store openings?” Perdue thought to himself as he stood in the store, “or should we focus more on our existing stores and look to drive growth through merchandising and in-store operational improvements?” As Perdue watched a customer add a $20 leather jacket to her shopping cart, which was already filled with grocery items including soup, bread, and soda, he once again was struck by the unique position Dollar General occupied in the marketplace. The company had evolved over the past decade to become a retailer that provided highly consumable products in addition to the traditional dollar store “treasure-hunt” items. As
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Perdue observed the bustling activity in the store, he knew the opportunity in front of Dollar General was tremendous. The question that remained in his mind was, “How do we continue to leverage the significant growth in this industry and avoid being marginalized like the five-and-dime retailers of the past?”
Company Overview
In 2007, Dollar General’s revenues reached $9.2 billion, making it the sixth-largest mass retailer in the U.S. (see Exhibit 1). For the five years leading up to 2006, revenues grew at 9% per year, making Dollar General one of only three companies to have outperformed Wal-Mart both in sales growth and profit growth during the period (see Exhibits 2 through 4 for detailed financial information). 1
Dollar General operated small-format discount stores that offered a focused assortment of basic consumable merchandise including health and beauty aids, packaged food and refrigerated products, home cleaning supplies, housewares, stationery, seasonal goods, basic clothing, and domestics (see Exhibit 5). Dollar General stores served primarily low-, middle-, and fixed-income families in 35 states, centered in the southern, southwestern, midwestern, and eastern United States (see Exhibit 6 for geographic distribution of stores). In 2006, approximately 41% of Dollar General customers had a gross income of less than $30,000 per year, and approximately 24% had a gross income of less than $20,000 per year.2 The operating and merchandising strategies at Dollar General were designed to meet the need for basic consumable products for customers in these lower-income groups.
The average Dollar General store had 6,900 square feet of selling space and served customers who typically lived within five miles of the store. Over half of its stores operated in communities with populations of 20,000 or less. Dollar General had achieved significant organic growth with 537 new stores added in 2006, 734 new stores in 2005, and 722 new stores in 2004 (see Table A). Selling square footage had grown an average of 7% per year over the past five years, representing one to two new Dollar General store openings per day.
Table A Dollar General from 2002 to 2006
2006 2005 2004 2003 2002
Revenue ($ millions) 9,170 8,582 7,661 6,872 6,100
Net Income ($ millions) 138 350 344 299 262
Total Stores 8,260 7,929 7,320 6,700 6,113
Same-store sales growth 3.3% 2.0% 3.2% 4.0% 5.7%
Source: Company annual reports.
Retail in the United States
The dollar store concept originated with the five-and-dime model pioneered by Woolworth’s, which was founded in 1878 in Utica, New York. Other five-and-dime pioneers included W.T. Grant, J.J. Newbury’s, McCory’s, Kresge, McClellan’s, and Ben Franklin stores. These stores were usually situated in the downtown area of cities and towns throughout the United States and offered merchandise at two price points: a nickel or a dime. Inflation eventually took its toll, and stores were
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no longer able to sell any items for five or ten cents, so they became known as “variety stores.” Given that $0.05 in 1913, adjusted for inflation, was $1.01 in 2006 dollars, the five-and-dime retailing concept had shown remarkable strength over the years.3
Woolworth’s original five-and-dime concept was widely copied during the first part of the twentieth century, and its stores were a fixture in American downtowns through the 1960s. Woolworth’s was also among the pioneering group of retailers that evolved the five-and-dime concept to a larger discount store format. In 1962, Woolworth’s founded a discount chain called Woolco. This was the same year that its competitors opened similar discount chains: the S.S. Kresge Co. opened Kmart, the Dayton Company opened Target, and Sam Walton opened his first Wal-Mart. Interestingly, as the larger-format discount retailers grew at a rapid pace, the five-and-dime stores remained primarily locally owned and never found the growth engine other retailers found in the 1960s and 1970s. It was not until the 1990s that the dollar store segment truly broke away from its five-and-dime roots with a shift in product mix and the industry began to achieve significant growth.
Extreme-Value Retailing
Dollar Stores vs. Extreme-Value Retailers
While the roots of the dollar store lay with the five-and-dime stores of the past, today four distinct types of retailers fell under the dollar store umbrella. The first type was the original dollar store, which carried on the tradition of its predecessors, the five-and-dime stores. These stores were single- price-point retailers that adhered to the strict philosophy of selling every item for $1 or less. The two major retailers in the U.S. where “everything is a dollar” included 99 Cents Only and Dollar Tree.
The second subcategory of the dollar store segment was the close-out retailer. These stores sold overstock, discontinued, surplus, and distressed merchandise. Big Lots and Tuesday Morning were the two companies that fell into this category in the U.S. Many items in these stores were usually available for $1, but the quality was wildly inconsistent and the selection varied dramatically from day to day.
Limited assortment grocery retailers were considered a third subcategory of the dollar store segment. Save-A-Lot and Aldi were the two major U.S. firms in this category. These stores offered a small number of grocery stock-keeping units (SKUs) and primarily offered private-label products in-store.
Extreme-value retailers represented the fourth type of dollar store in the United States. These retailers offered everyday low prices (EDLP) in a small-box format. They had a more focused assortment of goods compared to mass retailers such as Wal-Mart but still stocked a significant number of nationally branded products. Mass retailers (e.g., Wal-Mart, Target) and supercenters (e.g., Sam’s Club, Costco) competed on large assortments and price, while small-box extreme-value retailers competed on convenience and price. Many products offered at extreme-value retailers were in fact $1; however, price points could range up to $10 or $15. Dollar General and Family Dollar were the largest players in the extreme-value retail segment in the United States. (See Exhibit 7 for an overview of U.S. dollar stores and format types.)
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Extreme-Value Retail
The extreme-value channel in the United States in 2007 was estimated to total $46 billion. (Exhibit 8 shows the breakdown by subcategory.) The growth rate in the sector had been almost twice that of the overall retail sector from 2000 to 2005, growing at a 10.2% compound annual growth rate (CAGR) during this period compared with 5.6% for the retail sector as a whole.4 In 2006, Dollar General and Family Dollar combined represented approximately 40% of the overall revenue in the extreme-value retailing channel in the U.S. Beyond these two major extreme-value retailers, the industry was highly fragmented and remained regionalized. Dollar General and Family Dollar themselves were regional players, and both operated mainly in the southeastern, southwestern, and midwestern United States.
In the United States in 2007 there were approximately 23,000 small-format discount retail outlets. Small-box discounters outnumbered supercenters 16 to 1 in the U.S. The growth in the sector could be attributed to two main drivers:
The new bargain-based mentality of the American consumer. Over the past three decades, Wal- Mart, Target, and Costco (among others) created a culture shift in the U.S. whereby consumers turned into bargain hunters. Some observers termed this the “hour-glass economy,” where there is a bifurcation of shopping behavior. Shoppers make aspirational purchases in one channel and augment these purchases with commodity purchases in the discount channel. This channel blurring continued to lift the popularity of warehouses, supercenters, and extreme-value retailers in the U.S. In 2005, 67% of American households shopped at some type of dollar store, up from 55% in 2000.5 This was the largest household penetration increase of any bricks-and-mortar retail channel over this period.
The rising percentage of U.S. households in lower-income brackets and/or on fixed incomes. In 2005, 37 million Americans had household incomes below the poverty line as defined by the U.S. Census Bureau.6 The number of Americans living below the poverty line increased 12% from 2000 to 2005. In addition to growth in the lower-income brackets, an aging population in the U.S. contributed to a rise in the number of people on fixed incomes. The post-World War II baby-boom bubble will continue to dramatically increase the ranks of the elderly over the next decade and likely drive increased demand for value discounters in the U.S.
Company History
Dollar General was founded in 1939 as a wholesale dry goods retailer by J.L. Turner and his son Cal Turner. The company eventually switched from wholesale to retail, and in 1955 Dollar General opened its first dollar store in Kentucky. In 1965, Cal Turner, Jr. joined his father in management of the company, and they took the company public in 1968. Cal Turner, Jr. succeeded his father as president in 1977 and as chairman in 1989, remaining in that position until 2003 when he stepped down.
Dollar General remained a family business to the core for many decades. The influence of the Turner family on the company can still be felt throughout Dollar General today. As Perdue, the first nonfamily chairman and CEO, commented, “Over the years, the Turner family created a strong mission-oriented culture that is the core to our success today. Our mission of serving others is timeless, and it is the starting point of any strategic discussion.”
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In addition to a strong family culture, Dollar General built its foundation on opportunistic buying. Cal Turner bought large quantities of liquidated merchandise and then pushed the merchandise to the stores with the hope of moving as much product as possible. The company relied on the buying prowess of the company’s owners and merchants. This proved to be a successful strategy for the company for many decades. Perdue recalled, “From 1955 through to the early 1990s, Dollar General operated a close-out retail model. In the 1990s we started adding household consumables to the product mix. This began the migration from the buyer-driven company model of the past to the more customer-centric model we see at Dollar General today.”
The company achieved significant scale primarily through organic growth over the past five decades. From one store in 1955, Dollar General grew to over 1,300 stores in 23 states by the end of the 1980s. By the mid-1990s the company operated over 2,000 stores in 25 states, and as of February 2007, the total number of stores had reached 8,260 in 35 states.
The Dollar General Mission
At the heart of Dollar General was the company mission, which permeated every facet of the organization. This mission lay at the roots of the organization and had been a central focus for decades. The Dollar General mission was “To Serve Others: to provide customers a better life, shareholders a chance for a superior return, and employees respect and opportunity” (see Exhibit 9). David Bere, COO of Dollar General, commented:
I truly believe our mission statement is something that makes us very distinctive in the retailing industry. The mission of serving others is embraced at all levels of the organization. Many people in the organization see the mission as a ministry itself. Dollar General makes a special effort to reach low-income consumers. There is a sense of purpose to the work that we do. Oftentimes we are the only retailer in a rural community, and we take great pride in serving that community.
To carry out this mission, the company’s business strategy was based on providing customers with a focused assortment of fairly priced, consumable merchandise in a convenient, small-store format. Kathleen Guion, division president of store operations, commented on the pervasiveness of the Dollar General mission:
We often get letters from communities asking us to open a Dollar General in their town. The closest option these people have to get everyday consumables at low prices is Wal-Mart, which may happen to be in the next town 30–40 miles away. The convenience of having a Dollar General within five miles of your home is of tremendous value to these customers. Suddenly they don’t have to think about their purchases in weekly intervals based on their trip to Wal-Mart. They can now stop by the Dollar General and pick up needed items any day of the week and avoid the cost of driving 30 miles to the nearest Wal-Mart. It is the knowledge and understanding of this customer and her needs that truly lies at the heart of Dollar General.
At the corporate support center (Dollar General’s term for the corporate office) and in the field, the customer was consistently referred to as she. Women represented 86% of consumers shopping in the dollar store channel, and 41% of dollar store customers earned less than $30,000 per year. As Guion stated, “Employees feel a close affinity to the customer that they serve. They know their customers well, especially in the more rural locations, and they want to provide great products and service to their customers.”
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The Dollar General Store
The average Dollar General store was 6,900 square feet and contained 4,900 SKUs. This compared with over 100,000 square feet of selling space for a Wal-Mart and 75,000-plus SKUs. Dollar General had a focused assortment of quality, consumable merchandise in a number of core categories. It did not carry every brand and size but focused its inventory on the fastest-turning SKUs in each category. Table B shows the top 10 SKU categories in the extreme-value retail segment in 2006.
Table B Top 10 SKU Categories for Extreme-Value Retailers in 2006
1. Household cleaners 6. Housewares
2. Seasonal decorations and supplies 7. Storage containers
3. Wrapping materials and gift bags 8. Batteries
4. Paper products 9. Health and beauty supplies
5. Laundry supplies 10. Dry groceries
Source: Michael Silverstein and John Butman, Treasure Hunt: Inside the Mind of the New Consumer (Portfolio Hardcover, 2006).
Dollar General emphasized even-dollar prices on most of its items. In the typical store the majority of products were priced at $10 or less, with approximately 30% of the products priced at $1 or less. Over 30% of the products offered were nationally advertised name brands, including Tide, Dawn, CoverGirl, Dove, Campbell’s Soup, and Kellogg’s Cereal. The remaining products came from a variety of manufacturers, including Dollar General’s private-label brands: Clover Valley and DG Guarantee. Private-label products represented 12% of Dollar General’s merchandise mix. Perdue commented:
We are very price competitive with Wal-Mart on the products we offer in our stores. We are constantly doing research to ensure that we have price parity with Wal-Mart. In some instances we can even beat them on price. Customers are very shrewd when it comes to price.
At Dollar General we have a desire to keep things simple for our customers. This includes focusing on even-dollar price points. We want to make it easy for our customers to add up their basket of goods prior to entering the checkout line. While we do have some products at prices of $0.50 or $1.50, you don’t see a price point of $1.79 in our stores. This poses a challenge for us when we face inflation. Wal-Mart can increase prices in 10 cent increments. We don’t typically do that.
While Wal-Mart competed on price and selection, Dollar General competed on price and convenience. Beryl Buley, division president of merchandising, marketing, and supply chain, noted:
The average shopper at Dollar General is in and out of our stores in 10–20 minutes. If the same shopper went into a Wal-Mart and picked up an identical basket of goods, they would spend 55 minutes in the store. Convenience is where we win. Some of our stores are literally located in the parking lot of a Wal-Mart. Consumers will shop our stores first to get basic consumables and then go into the Wal-Mart for any additional items they need. We also have
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many stores located on the drive path to Wal-Mart that do incredibly well. Our value proposition is clearly compelling for a certain set of consumers.
In addition to allowing it to compete directly with Wal-Mart in certain communities, Dollar General’s business model allowed it to enter locations that were much too small for Wal-Mart. Of the 8,260 stores in operation as of February 2007, approximately 4,750 were in communities with populations of 20,000 or less. Wal-Mart, on the other hand, required a population of 50,000-plus before going into a community. “Dollar General is one of very few retailers with an economic model that enables it to be profitable in such small communities,” added Perdue.
The location of Dollar General stores within a community was split between strip malls (49%) and freestanding buildings (49%). The remaining 2% of stores were in more urban areas that generally had lower household incomes (and hence lower rents). The majority of Dollar General stores were rented on short-term leases. The company emphasized a low-cost business model that permeated all aspects of the organization. Dollar General built stores in second-tier locations to maintain relatively low real estate costs. Dollar General also had very low advertising costs (less than 1% of sales) to support its low-cost business model. (Exhibit 10 shows comparative metrics across discount retailers in the U.S.)
Life in the Dollar General Store
The average Dollar General store had revenues of $1 million per year and operated with one store manager, two assistant store managers, and two or three store clerks. With such limited labor, life in the store was not always easy. Guion explained:
Truck day has always been the central focus of any Dollar General store. Each store receives 800–1,200 boxes of merchandise per week, and these boxes must be manually unloaded from the truck into the store’s back room. Almost every employee in the store is scheduled to work on truck day. If the truck is late or delayed, employees will do other tasks until it arrives. Once the truck arrives it takes two or three hours to unload with the truck driver and usually four employees “throwing” freight. Some employees will begin stocking immediately. Working in the store is a very physical job.
Back rooms at Dollar General were quite small at 600–800 square feet. They were purposely built small to force stores to get the product out onto the floor quickly. The small back rooms posed many problems for store managers, and some stores faced back rooms overflowing with product all year. The back-room problem had been exacerbated by Dollar General’s pack-away strategy, which persisted until 2006. Merchandise that did not sell during a given season (e.g., Halloween) would be packed away to be sold the following year. This created additional chaos for the store manager. Not only did they have extra merchandise to try and squeeze into the back room, they also had to become merchandisers for product that was not planned for. As one store manager explained:
It is easy for me and my employees to get the everyday products onto the store shelves. We know where to stock the paper towels and the soda. They each have a standard location in the store that doesn’t change from week to week. But when it comes to noncore merchandise that is not planogrammed, it is much more difficult for us. I wouldn’t consider myself an expert merchandiser. I am much better at unloading freight and keeping the store running. Last week I spent two hours trying to stock a carton of soccer balls and a carton of water toys. I just couldn’t figure out where to put them. The water toys were too bulky to fit on the standard
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gondolas, and the soccer balls kept rolling off the shelf. What could I do? Eventually I left the soccer balls in a big basket on the floor and put the water toys in the back room. Maybe I’ll find a spot on the shelf for water toys next week.
This struggle was not uncommon for a store manager. District managers (DMs), who numbered 525, aimed to help the individual store with these types of issues. Guion commented that there was a significant improvement in the role the DMs played in the store over the past two years:
Our district managers today are more focused on training store managers and problem solving for the root cause of a problem rather than directly addressing the symptom of the problem. In the past, if a store had a back room overflowing with product, the DM would roll up his or her sleeves and help the store manager dig product out of the back room. Today, our DMs are focused on avoiding the back-room problem altogether through increased in-store training and improved labor planning.
Guion emphasized that the DMs were the key link between corporate and the individual store. This link was especially important when it came to noncore merchandise, the merchandise outside of the highly consumable category. Seasonal items, basic clothing, and housewares would be considered noncore merchandise at Dollar General. While most of the items in these categories did not have a permanent home in the store, noncore merchandise was very attractive to Dollar General because the margins were often one to two times those of the products in the highly consumable category. Despite the attractiveness of the noncore merchandise to the bottom line, this merchandise caused the most headaches for store employees.
The merchandise mix between highly consumable and noncore merchandise in the extreme-value channel illustrated the classic dilemma highlighted by Clayton Christensen.7 Consumables might typically command a 20% gross margin with an 8X turn rate, while seasonals and treasure hunt items might command 40% or higher gross margins, but at a much lower turn rate. Choosing the mix, or shifting the mix, had major impacts on the business model.
Dollar General: Past and Present
Dollar General had gone through a significant transformation over the past decade. Many would say the company had grown up, transitioning from an infant that was an inward-focused rural dollar store to a more mature and customer-facing retailer. These changes were reflected in the evolution of the key metrics tracked by Dollar General, both at the store level and across the entire organization. (Exhibit 12 shows the metrics used by Dollar General to assess its own performance.)
A number of structural changes were introduced at Dollar General over the past five years, many spurred by the significant growth of the organization. Some changes, particularly those made in 2006, were implemented to address legacy issues that remained from the earlier days of Dollar General. These changes hurt the 2006 financial performance (as seen in Exhibit 4). The most recent changes were implemented under the name “Project Alpha” and were focused on upgrading the existing store base by closing 128 low-potential stores, remodeling and/or relocating a significant number of stores, and eliminating the legacy inventory pack-away policy. The old inventory pack-away policy involved boxing up unsold merchandise from one season, storing it in the back room, and then placing it back out on the shelf the following season. In 2007, Dollar General was focused on enhancing the customer in-store experience and providing fresher and more relevant merchandise to its customers. In the spring of 2006 there was also the resumption of local circulars for the first time in
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over a decade. Some would argue that the company was beginning to look more and more like its big-box competitors, namely Wal-Mart and Target.
Technology
From 2002 to 2004 Dollar General rolled out an auto-replenishment inventory system connected to its electronic point-of-sale (POS) system. These systems significantly improved the company’s in- stock percentage, moving from approximately 80% to 83%, to 95% in-stock product today. These systems helped move the organization further away from a push strategy to a pull strategy driven at the store level. These systems enabled the distribution centers and stores to better manage inventory flow and product allocation. Detailed product information was now available at the SKU level for corporate, merchants, and store managers. Access to this information transformed how many employees did their jobs. For the first time store managers had access to gross margin information by category. Merchants were now able to be held accountable for buying and sell-through at the SKU level. And finally, corporate had the ability to make better merchandising decisions including improved SKU adjacencies and private-label choices. The improvement in the in-stock percentage was substantial with the technology improvements in-store; however, there was still significant opportunity surrounding the high-velocity SKUs, which usually represented the 5% of goods that were out of stock at any given point.
Other technology changes included the acceptance of debit and credit cards in substantially all stores in 2004. The movement to electronic payment allowed the company to move further away from its cash-and-carry roots. This change followed the company’s introduction of card readers, which made shopping more convenient for customers who relied on government assistance and electronic benefit transfer as a means of payment. Together these changes helped contribute to increased success at the store level, with basket size increasing to $9.31 per transaction in 2006, a 3.3% increase over that of 2005.
Store Management
Dollar General had transitioned from a company that hired store managers based on who could throw the most freight (literally) to one that hired store managers based on their ability to solve problems, plan, and delegate. In 2007, labor was better matched to customer demand, not freight demand. Guion commented, “Customer service moved from a distant secondary focus in the store to the primary driver of work within the store.”
A further move toward a more customer-centric store management included selection and testing for store manager skills. Implemented in 2006, store manager testing better matched the skills of the store manager to the needs of the Dollar General customer. Increased focus on the skill set and training of the store manager increased the “hire from within” capability of the company—a key metric Dollar General began focusing on in 2004. As of 2006, 65% of new district managers were former store managers, and turnover within the DM ranks dropped from 30% in 2005 to under 20% in 2006. Guion commented:
We feel the positive movement in these personnel metrics is a leading indicator of the improved focus we have on people management at Dollar General. The biggest productivity lever we have in the store is the goodwill of our people. By focusing on improved training and increased communication we hope to continue to build on the goodwill that helps enable Dollar General to fulfill its mission of serving others.
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Merchandising
During the majority of Dollar General’s life, the merchants had primarily worked under the philosophy that the more they bought, the more they would sell. With the shift toward everyday low prices on household consumables, merchants were forced to rethink their buying process. Merchants in the old Dollar General were only held accountable for a product’s initial markup, with no accountability for sell-through or markdowns. In 2007, merchants were responsible for overall shelf profitability, and the company used gross margin return on investment (GMROI)) to evaluate overall SKU profitability relative to inventory investment.
In addition to improved merchant accountability, Dollar General added coolers to most of its stores between 2002 and 2004. This enabled stores to offer a focused assortment of milk, frozen foods, ice cream, and lunch meats. Offering these types of items benefited the company in two ways. First, these items helped increase store traffic, and hence same-store sales. Second, coolers allowed Dollar General to expand its customer base and address the needs of a customer segment that required the use of electronic benefit transfer (EBT) as a payment mechanism. The U.S. government had strict requirements on EBT-qualified retailers, which included a provision that all qualified retailers must provide basic consumables such as milk, eggs, and meat. With the addition of coolers, Dollar General could offer these types of products and hence accept EBT. Dollar General used direct-store-delivery (DSD) vendors to distribute and merchandise these time-sensitive consumables within the store. The company became the first extreme-value retailer qualified to accept EBT across nearly all of its stores by early 2005.
Growth Opportunities
With many significant achievements at Dollar General over the past five years, the senior team (see Exhibit 13 for Dollar General organizational structure and management bios) pondered the growth opportunities ahead of them. They, like many others, believed there was significant opportunity in the extreme-value retail segment. Financial analysts were now giving much more attention to the sector, many citing it as the most undersaturated major retail sector in the U.S. While Perdue was happy with the increased attention, it did not make his decisions any easier. He was still worried about the many choices he faced and found it difficult to focus on just one. He often thought about his growth options across three broad dimensions: demography, geography, and product mix/merchandising (see Exhibit 14). While he thought he might be able to pursue more than one growth option simultaneously, he knew he had many resource constraints including financial resources and management bandwidth. Many in the industry often stated, “Retail is detail,” and Perdue knew he could not afford to take his eye off the ball as he looked at the options in front of him.
Geographic Expansion within the U.S.
New-store openings had been the growth engine of choice for Dollar General over the past two decades. The company could continue to increase the number of outlets it opened in the U.S. Analysts estimated that the U.S. could support upwards of 40,000 extreme-value retailing outlets as of 2008, compared with the 35,000 outlets in operation across the U.S. at the end of 2006.8
The ability to continue to grow selling square footage at 10% per year had proven difficult in 2006. Dollar General only opened 537 new stores in its most recent fiscal year, down from the projected 800
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new stores it had promised Wall Street at the beginning of the year. Guion noted, “Opening new stores is fantastic, but we can’t lose focus on our existing store base. Recently, we have reinforced our efforts to close or relocate underperforming stores. Additionally, our real estate strategy is strategic rather than opportunistic, which hasn’t always been true in the past. We believe this is a better long- term strategy for the company.”
Opening new stores was a relatively easy and known way to achieve the growth that Wall Street was looking for. It was hard not to go full steam ahead with geographic expansion in the U.S. when there were still large parts of the country, such as California, which had no major extreme-value retailer presence (see Exhibit 6).
Improve Merchandising Productivity
Growth in retail had always been a combination of increasing same-store sales growth and increasing selling square footage. Dollar General had seen strong same-store sales growth through the 1990s and early 2000s but recently had run into some difficulty. Same-store sales growth hit a low of 2.0% in 2005, improving slightly in 2006 to 3.3% (down from 8% during the late 1990s—see Exhibit 2). Was there an opportunity to improve Dollar General’s product mix and/or operations to drive same-store sales growth? Should the company expand into new categories? Should Dollar General create regional pricing and/or merchandising zones as opposed to the one-size-fits-all merchandising mentality it currently operated under?
Perdue reflected on the fact that Dollar General had not been in the pet supply category 10 years ago, and now pet was one of its strongest-performing categories. “Are there other categories we are missing?” he wondered. He also looked at the 4,900 SKUs in the store and was unsure if this was the right number. “Should we have fewer SKUs or more SKUs in the store? I can see the argument for both sides. The question remains, which SKU strategy will make the store more productive?”
Expand into Services
Reflecting on the customer base of Dollar General, the senior management team thought that there might be an opportunity to expand into services such as check cashing and wire transfer. As of 2004, more than a third of U.S. income earners aged 15 and older did not have a bank account or only used banks intermittently.9 The subset of income earners who did not have any bank account represented 28 million Americans. By expanding into services, Dollar General might be able to better serve its core customer in addition to helping strengthen same-store sales growth. Solutions that leveraged Dollar General’s existing fixed assets, namely the 8,260 Dollar General stores, could have significant impact.
Go Private and Do an Industry Rollup
Extreme-value retailers in the U.S. remained highly fragmented, particularly outside of the top two chains—Family Dollar and Dollar General. (Exhibit 15 shows the distribution of dollar store chains within the U.S.) The top 15 dollar store chains captured 61% of the segment in 2005. There was definitely potential for economies of scale to be achieved in such a fragmented industry. Could Dollar General improve operating leverage through some type of industry consolidation? Was growth through acquisition a reasonable strategy for a company that had only grown organically over the past 20 years?
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Wall Street had a tendency to be short-term focused, and many retailers felt same-store sales figures were overemphasized in the market. Unlike many industries that reported financial results quarterly, retailers reported financial results, including revenue and same-store sales growth, each month. This put an incredible amount of short-term pressure on retailers like Dollar General, making it difficult for them to lay foundations for longer-term plans.
Pursue New Store Format
In 2003, Dollar General started testing a new store format called Dollar General Market. These stores averaged 17,400 square feet and carried an expanded assortment of grocery products and perishable items. At the beginning of 2007, there were 56 Dollar General Market stores in operation in the U.S. This concept had received much attention within the company over the past three years, with the senior vice president of Dollar General Markets reporting directly to COO Bere.
Other retailers, including Wal-Mart, had also been looking to small-format grocery as a path to growth. As of July 2006, there were 107 Wal-Mart Neighborhood Markets in the U.S.10 These stores were similar to the Dollar General Market concept as they offered mostly grocery items, with some assortment of general merchandise. The significant difference between Wal-Mart Neighborhood stores and Dollar General Market stores was the total selling square footage. Wal-Mart Neighborhood stores were more than twice the size of Dollar General Market stores at 40,000 square feet.
Could the small-format EDLP grocer be a significant avenue of growth for Dollar General? Some thought that the core competency of small-format retailing could be transferred to a slightly larger- box grocery environment. Others within the organization thought there could be an alternative retail concept to pursue. Recent in-store tests had shown that Dollar General stores that were only slightly larger than average (approximately 10,000 square feet), with a product mix more heavily focused on everyday grocery, were very profitable. With only 56 Dollar General Market stores opened from 2003 to 2006 and 2,160 standard stores opened over the same period, it was apparent that there were still some questions remaining about the viability of the Dollar General Market concept.
Perdue often reminded himself that Wal-Mart was only a $44 billion company in 1992 when Sam Walton died. After his death, Wal-Mart changed its focus from building traditional stores to building Wal-Mart Supercenters. It was this new store format that drove Wal-Mart’s growth, enabling it to become the $344 billion international retailer it is today. Was 17,000 square feet the right-size box? Was grocery the right product? Was it time to pursue a new store concept?
International Expansion
The final growth opportunity at the back of Perdue’s mind was the option to expand internationally. Looking at some of the very successful international hard discounters such as Aldi and Lidl in Europe, he knew there was opportunity to take Dollar General beyond U.S. borders. In fact, extreme-value discounting was much more accepted in other parts of the world. At the end of 2004, European retailers accounted for 70% of total global value of discount sales.
Many in the industry often looked to Aldi as an example of an incredibly successful discounter. Based in Germany, Aldi was one of the oldest and most successful hard discounters. It popularized discount shopping in Europe by focusing on high-quality, private-label products with a very limited in-store assortment (700 SKUs per store). Aldi operated in the U.S. under the Trader Joe’s brand. In
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2006, Aldi North and Aldi South in Germany had combined sales greater than the entire $43 billion value discount channel in the U.S. Perdue commented:
I see tremendous opportunity at the international level. Today, five of the 10 largest retailers in Europe operate a discount format. In fact, one out of every four stores opening in Europe is a value discounter. In contrast, only 12 of the top 50 global retailers operate a discount format. We know how to do small-box discount. Should we take our skills and apply them in a new market?
I have followed Wal-Mart’s international successes and failures. They have done very well in some countries including Canada, the U.K., and Mexico. However, they suffered significant losses after entering Germany and ultimately were forced out of the market. What can we learn from Wal-Mart’s experiences? Is this the right time for international expansion? Do we have the resources and capabilities to be successful outside of the U.S.?
With so much growth opportunity domestically, many analysts argued that it did not make sense to go beyond U.S. borders. Would the Dollar General business model work outside the U.S.? None of the other U.S. extreme-value retailers had a presence outside of the country. Should Dollar General be the first?
Decision
As Perdue continued to observe the activity within the Dollar General store in Nashville, he could not help but ponder the breadth of growth opportunities in front of him. Dollar General had evolved significantly over the past four years since his appointment as chairman and CEO. He was proud of what the company had accomplished, and he truly believed in the mission to which the company aspired.
Now in February 2007, Perdue felt Dollar General was at an inflection point. He knew Dollar General was on solid footing and potentially on the cusp of significant growth. With the recent Project Alpha changes, Perdue felt that Dollar General had made a necessary course correction, slowing growth in the short term and laying the foundation for another potential wave of long-term growth. The question was where Perdue and the management team should focus.
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Exhibit 1 Top U.S. Mass Merchandisers
Top Mass Merchandisers Fiscal Year End Revenues ($B)
Wal-Marta Jan. '07 267.8
Target Jan. '07 59.5
Sears Holdings Jan. '07 53.0
Federated Dept. Stores Jan. '07 27.0
J.C. Penny Jan. '07 19.9
Dollar General Jan. '07 9.2
Nordstrom Jan. '07 8.6
Dillard's Jan. '07 7.8
Family Dollar Stores Aug. '06 6.3
Top Discount Stores Fiscal Year End Revenues ($B)
Wal-Marta Jan. '07 267.8
Target Jan. '07 59.5
Kmart Jan. '07 18.7
Dollar General Jan. '07 9.2
Family Dollar Stores Aug. '06 6.3
Big Lots Jan. '07 4.7
Dollar Tree Stores Jan. '07 4.0
Fred's Jan. '07 1.8
99 Cents Only Stores Jan. '07 1.1
Source: Company reports.
aU.S. operations only.
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Exhibit 2 Dollar General Key Financials, 1993–2006
Year Sales ($000s) Change in Sales Same-store Sales (%)
Operating Income (%)
Net Income (%)
1993 1,132,995 23.1% 12.7% 7.1% 4.3%
1994 1,448,609 27.9% 13.7% 8.4% 5.1%
1995 1,764,188 21.8% 5.1% 8.4% 5.0%
1996 2,134,398 21.0% 8.2% 8.9% 5.4%
1997 2,267,325 23.1% 8.4% 9.0% 5.5%
1998 3,220,989 22.6% 8.3% 7.9% 4.7%
1999 3,887,694 20.7% 6.4% 8.2% 4.8%
2000 4,550,571 17.0% 0.9% 6.9% 3.6%
2001 5,322,895 17.0% 7.3% 7.6% 4.2%
2002 6,100,404 14.6% 5.7% 7.1% 4.1%
2003 6,871,992 12.6% 4.0% 7.6% 4.5%
2004 7,660,927 11.5% 3.2% 7.3% 4.4%
2005 8,582,237 12.0% 2.2% 6.5% 4.1%
2006 9,169,822 6.8% 3.3% 2.7% 1.5%
Source: Company reports. Numbers exclude certain non-GAAP items.
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Exhibit 3a Dollar General Income Statement (in thousands)
For the Years Ending
February 2, 2007 February 3, 2006 January 28, 2005 (52 weeks) (53 weeks) (52 weeks)
Net Sales 9,169,822 8,582,237 7,660,927
COGS 6,801,617 6,117,413 5,387,735
Gross Profit 2,368,205 2,464,824 2,263,192
SG&A 2,119,929 1,902,957 1,706,216
Operating Profit 248,276 561,867 556,976
Interest 27,913 17,225 22,219
Income before Taxes 220,363 544,642 534,757
Income Tax 82,420 194,487 190,567
Net Income 137,943 350,155 344,190
Source: Company reports.
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Exhibit 3b Dollar General Balance Sheet ($ thousands)
February 2, 2007 February 3, 2006
ASSETS
Current Assets:
Cash and cash equivalents 189,288 200,609
Short-term investments 29,950 8,850
Merchandise inventories 1,432,336 1,474,414
Income taxes receivable 9,833 -
Deferred income taxes 24,321 -
Prepaid expenses 57,020 51,339
Total current assets 1,742,748 1,735,212
Net property and equipment 1,236,874 1,192,172
Other assets, net 60,892 52,891
Total assets 3,040,514 2,980,275
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Current portion of long-term obligations 8,080 8,785
Accounts payable 555,274 508,386
Accrued expenses 253,558 242,354
Income taxes payable 15,959 43,706
Deferred income taxes - 7,267
Total current liabilities 832,871 810,498
Long-term obligations 261,958 269,962
Deferred income taxes 41,597 48,454
Other liabilities 158,341 130,566
Commitments and contingencies
Shareholders' equity:
Series B junior participating preferred stock - -
Common stock, par value $0.50 per share 156,218 157,840
Additional paid-in capital 486,145 462,383
Retained earnings 1,103,951 1,106,165
Accumulated other comprehensive loss (987) (794)
Other shareholders' equity 420 (4,799)
Total shareholders' equity 1,745,747 1,720,795
Total liabilities and shareholders' equity 3,040,514 2,980,275
Source: Company report.
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Exhibit 4 Dollar General Financial Overview
In thousands except for per share and operating data
February 2,
2007 February 3,
2006 January 28,
2005 January 30,
2004 January 31,
2003
SUMMARY OF OPERATIONS
Net Sales 9,169,822 8,582,237 7,660,927 6,871,992 6,100,404
Gross Profit 2,368,205 2,464,824 2,263,192 2,018,129 1,724,266
Penalty expense and litigation - - - 10,000 (29,541)
Income before income taxes 220,363 544,642 534,757 476,523 410,337
Net income 137,943 350,155 344,190 299,002 262,351
Net income as a % of sales 1.5% 4.1% 4.5% 4.4% 4.3%
Same-store sales 3.3% 2.0% 3.2% 4.0% 5.7%
Inventory turns 4.7 4.2 4.0 4.0 3.8
PER SHARE RESULTS:
Basic earnings per share 0.44 1.09 1.04 0.89 0.79
Diluted earnings per share 0.44 1.08 1.04 0.89 0.78
Cash dividends per share 0.200 0.175 0.160 0.140 0.128
Weighted avg. diluted shares 313,510 324,133 332,068 337,636 335,050
FINANCIAL POSITION
Total Assets 3,040,514 2,980,275 2,841,004 2,621,117 2,303,619
Long-term obligations 261,958 269,962 258,462 265,227 330,337
Shareholders’ equity 1,745,747 1,720,795 1,684,465 1,554,299 1,267,445
Return on average assets 4.4% 12.1% 12.7% 12.3% 10.9%
Return on average equity 8.0% 20.9% 22.1% 21.4% 23.2%
OPERATING DATA
Retail stores at end of period 8,229 7,929 7,320 6,700 6,113
Year-end selling square feet 57,299,000 54,753,000 50,015,000 45,354,000 41,201,000
Source: Company annual report.
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Exhibit 5 Typical Dollar General Store
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Exhibit 5 (continued)
Source: Company website.
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Exhibit 6 Dollar General Store Locations by Statea
State Number of Stores State Number of Stores
Alabama 442 Nebraska 90
Arizona 62 New Jersey 24
Arkansas 222 New Mexico 41
Colorado 8 New York 233
Delaware 25 North Carolina 456
Florida 431 Ohio 454
Georgia 475 Oklahoma 282
Illinois 310 Pennsylvania 411
Indiana 290 South Carolina 307
Iowa 178 South Dakota 6
Kansas 148 Tennessee 410
Kentucky 292 Texas 962
Louisiana 329 Utah 4
Maryland 63 Vermont 1
Michigan 251 Virginia 253
Minnesota 13 West Virginia 151
Mississippi 254 Wisconsin 100
Missouri 308
Source: Company website.
aAs of April 6, 2007.
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Exhibit 7 2006 U.S. Dollar Store Overview
Sales ($000s) Stores
Extreme-Value Retailers
Dollar General $9,200 8,260
Family Dollar 6,300 6,272
Fred’s 1,800 701
Single Price Point Retailers
Dollar Tree 4,000 3,192
99 Cents Only 1,100 245
Limited Assortment Grocery Retailers
Save-A-Lot 5,900 1,189
Aldi 4,000 800
Close-Out Retailers
Big Lots 4,700 1,385
Tuesday Morning 1,000 785
TOTAL $38,000 22,880
Source: Company reports 2006, MVI research.
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Exhibit 8 2006 U.S. Discount Sales by Format
2.5 2.9 3.6 3.9 4.3 4.6 5.0 5.4 5.7 6.2
4.9 5.3 5.8 6.1
6.3 5.9 6.0 6.0 6.1 6.1
7.7 8.6
9.5 10.3
12.0 12.8 13.6 14.4
15.2 16.09.6 11.0
12.1 13.8
15.3 16.9
18.3 19.8
21.3 22.8
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2000 2001 2002 2003 2004 2005 2006E 2007E 2008E 2009E
$ B
il li o
n s
$ Billions 2000 2001 2002 2003 2004 2005 2006E 2007E 2008E 2009E
Single Price Point 2.5 2.9 3.6 3.9 4.3 4.6 5.0 5.4 5.7 6.2
Close Out 4.9 5.3 5.8 6.1 6.3 5.9 6.0 6.0 6.1 6.1
Limited Assortment Grocers 7.7 8.6 9.5 10.3 12.0 12.8 13.6 14.4 15.2 16.0
Extreme-Value Retailersa 9.6 11.0 12.1 13.8 15.3 16.9 18.3 19.8 21.3 22.8
TOTAL 24.7 27.8 31.0 34.1 37.9 40.2 42.9 45.6 48.3 51.1
Source: Adapted from MVI research and estimates.
aIncluding Dollar General.
CAGR ’00-’05: 10.2%
CAGR ’05-’09E: 6.2%
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Exhibit 9 Dollar General Mission
Source: Dollar General.
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Exhibit 10 U.S. Mass Retailer Comparative Metrics
Wal-Mart
FY2006 Target FY2006
Kmart FY2006
Dollar General FY2005
Dollar General FY2006
Revenue ($B) 348,650 59,490 18,647 8,582 9,169
Gross Margin 24.2% 32.6% 24.6% 28.7% 25.8%
SG&A 18.4% 22.2% 19.4% 22.2% 23.1%
Operating Margin 5.9% 8.5% 5.1% 6.5% 2.7%
Net Income Margin 3.6% 4.7% n/a 4.1% 1.5%
Net Sales % Increase (LTM) 11.7% 13.1% -2.3% 12.0% 6.8%
Same-store sales (LTM) 2.1% 4.8% -0.6% 2.2% 3.3%
Inventory Turns 8.1 6.6 n/a 4.2 4.7
Source: Company reports.
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Exhibit 11a Dollar General Product Mix, 1998–2006
2006 2005 2004 2003 2002 2001 2000 1999 1998
Highly Consumable 65.7% 65.3% 63.0% 61.2% 60.2% 58.0% 55.0% 51.0% 42.0%
Seasonal 16.4% 15.7% 16.5% 16.8% 16.3% 16.7% 16.0% 17.0% 19.0%
Home Products 10.0% 10.6% 11.5% 12.5% 13.3% 14.4% 17.0% 20.0% 27.0%
Basic Clothing 7.9% 8.4% 9.0% 9.5% 10.2% 10.9% 12.0% 12.0% 12.0%
Revenue (million) $9,169 $8,582 $7,660 $6,872 $6,100 $5,322 $4,500 $3,887 $3,220
Gross Margin % 25.8% 27.3% 28.1% 29.5% 30.7% 28.6% 29.1% 29.4% 29.5%
Operating Profit % 2.7% 6.6% 7.3% 7.3% 7.5% 7.0% 3.4% 9.0% 9.0%
Same-store sales % 3.3% 2.0% 3.2% 4.0% 5.7% 7.3% 0.9% 6.4% 8.3%
Source: Company reports.
Exhibit 11b Examples of Products by Category
Types of Products
Highly Consumable Seasonal Home Products Basic Clothing
Soda Valentines Day candy Scented candles T-shirts
Soup Halloween costumes Picture frames Baby clothes
Cereal Christmas decorations Lamps Sandals
Canned vegetables Garden tools Cookware Socks
Cleaning Supplies Fans Towels Nightgowns
Shampoo Back-to-school supplies Storage containers Undergarments
Source: Company reports.
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Exhibit 12 Dollar General Key Metrics
2002 2003 2004 2005 2006
Total # of Stores 6,113 6,700 7,320 7,929 8,260
Revenue (millions) $6,100 $6,871 $7,660 $8,582 $9,169
EPS $0.73 $0.91 $1.04 $1.09 $0.44
Inventory Turns 3.8 4.0 4.0 4.2 4.7
Operating Margin 7.1% 7.6% 7.3% 6.5% 2.7%
EBITDA ($M) $573 $676 $721 $749 $646
Free Cash Flow ($M) $288 $375 $103 $271 $7
ROIC 12.9% 13.3% 14.2% 13.5% 6.3%
ROA 10.9% 12.3% 12.7% 12.1% 4.4%
Total Sales Growth 14.6% 12.6% 11.5% 12.0% 6.8%
Same-store sales 5.7% 4.0% 3.3% 2.0% 3.3%
Sales / sq. ft. $154 $157 $161 $163 $164
Source: Company reports.
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Exhibit 13a Dollar General Organizational Structure
Source: Casewriter.
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Exhibit 13b Dollar General Senior Management Team
David Perdue (Chairman & CEO)
–Chairman & CEO, Pillowtex Corporation
–President & CEO of Reebok Brand
–SVP, Haggar Corporation
–SVP Operations, Sara Lee Corporation
David Bere (President and COO)
–President & CEO, Bakery Chef/Ralcorp Holdings, Inc.
–President & CEO, Bakery Chef, Inc.
–President & CEO, McCain Foods USA
–President, Breakfast Division, Quaker Oats Company
–Member of Dollar General Board of Directors since 2002
David Tehle (EVP and CFO)
–EVP & CFO, Haggar Corporation
–VP Finance, The Stanley Works, Mechanics Tools Division
–VP Finance, Ryder Aviall, Ryder System, Inc.
Kathleen Guion (Division President, Store Operations and Store Development)
–President & CEO, Duke and Long Distributing Company
–Operating Partner, Devon Partners
–President & CEO, E-Z Serve Corporation
–VP/GM, The Southland Corporation
Beryl Buley (Division President, Merchandising, Marketing and Supply Chain)
–EVP, Retail Operations, Mervyn’s
–EVP & GM, Retail Store Operations, Sears
–EVP, Stores, Kohl’s
–10 years of additional retail experience at Federated Department Stores, Marshall Fields, Mervyn’s LLC, and Target Corp.
Source: Casewriter.
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Exhibit 14 Dollar General Growth Options
Source: Casewriter.
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Exhibit 15 U.S. Dollar Store Industry
Retail Chain Size Number of Companies
Total Number of Stores
% of Total Stores
% of Total Sales
201 or more 15 21,757 74.3% 61.2%
51–200 37 3,781 12.9% 16.6%
11–50 94 2,068 7.1% 7.9%
4–10 120 705 2.4% 2.7%
1–3 754 975 3.3% 8.1%
Source: Chain Store Guide 2005; DSN Retailing Today, July 25, 2005.
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Endnotes
1 “Another Day, Another Dollar,” Chain Store Age, Spring 2005, p. 8.
2 2006 AC Nielsen Homescan Data.
3 Based on the CPI index from Historical Statistics of the United States (U.S. Government Printing Ofice, 1975) for pre-1975 data. Post-1975 data is based on the Annual Statistical Abstracts of the United States.
4 Company reports, MVI research, 2006.
5 2006 AC Nielsen Homescan Data.
6 U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States 2005,” Table B-1.
7 Clayton Christensen and Michael Raynor, “The Innovator’s Solution” (Boston: Harvard Business School Publishing, 2003), pp. 47–48.
8 Retail Forward—Food Drug Mass Dollar Store Shopper Update, 2006.
9 The Center for Financial Services Innovation. Quoted from “Banks Court a New Client: The Low-Income Earner,” Wall Street Journal, March 16, 2007.
10 Wal-Mart, “Retail Divisions,” company website, http://www.walmartfacts.com.
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