Growing up in rural Horowhenua our closest store for bread, butter and milk was the local Four Square. The store offered convenience (with the closest supermarket more than 10km away in Levin), but with that convenience came higher prices. A quick check on the company’s website shows 500g of butter is currently on special for $5.99, a 25% premium on a block of Tararua’s finest at Countdown.
We have recently added a US convenience store operator called Dollar General to the international portfolio. The company predominantly opens stores in rural parts of the US with similar floor plans to a Four Square. The glaring difference between the two businesses is that Dollar General prices its items at a 20-40% discount to supermarkets. Carrying on with my comparison, Dollar General sells butter for NZ$3.60, or 25% lower than Countdown. The strong customer proposition of convenience and low prices has enabled Dollar General to continually take market share from traditional supermarkets.
Dollar General sells a range of everyday household items including food and cleaning products, as well as toys, stationery and basic apparel. It has one of the most successful track records in the US retail industry and has delivered same-store sales growth for 29 consecutive years.
Dollar General is able to keep prices low as stores are based in rural areas where rent is lower and it only takes 4-6 employees to staff a store, which keeps labour costs low. There is nothing fancy about the stores. Think metal shelves, strip lighting, and cheap signage, which all-in costs $250,000 to build. It is a no-frills shopping experience, suitable for the customer who wants to get in and get out. This low-cost set up, combined with Dollar General’s huge purchasing scale (there are currently 15,000 Dollar General stores across the US), enables extremely sharp pricing.
Dollar General’s primary customer is continually stretched financially and very budget conscious. Average household income of its core customer is less than US$40,000 versus the median US household income of US$61,000. This cohort of customers has been growing as stagnant wages, increasing housing costs and healthcare inflation in the US has squeezed disposable incomes and led to increasing inequality. Dollar General’s focus on everyday low pricing helps this part of the population stretch their weekly budget further.
From an investment perspective we also like the fact that Dollar General’s business has counter-cyclical qualities. Selling non-discretionary items at a low-price point supports Dollar General’s business in difficult economic environments, and sales growth actually accelerated in the last two recessions as consumers traded down. We also believe Dollar General’s value proposition and competitive advantage positions it well for ongoing store openings and growth.
