Food Driving Shoppers to Dollar Channel

Rival discount chains Dollar General and Dollar Tree each reported quarterly results that indicate improving sales trends due in part to stores evolving to meet a larger percentage of their customer’s shopping needs through food. 

Goodlettsville, Tenn.-based Dollar General said sales during its fiscal quarter ending May 3 increased by a robust 8.3%, paced by new store openings and same-store sales gains of 3.8%. Officials said remodeled stores—including an increasing number that have added fresh produce offerings in addition to more cold and frozen items—were outpacing the comp growth overall, with fresh produce offerings at its DGTP models experiencing comps near 15%.

Chesapeake, Va.-based Dollar Tree, which operates the Dollar Tree and Family Dollar banners, said sales in its first quarter ending May 4 increased by 4.6% to $5.8 billion and that comps improved by 2.2% overall. Those results reflect a comeback for the beleaguered Family Dollar chain, which is showing new signs of life as a result of a steady stream of store revisions—and a rash of closures. Family Dollar comps of 1.9% in the quarter were the best since Dollar Tree acquired the brand, CEO Gary Philbin said in a conference call discussing results.

Family Dollar’s revamped store format, known as H2, incorporates new wrinkles, including a selection of $1 items from Dollar Tree, and some include adult beverages and larger selections of foods for immediate consumption. Stores renovated to this format are driving more frequent traffic as well as higher rings, resulting in “low double-figure” comp lifts, according to Duncan Mac Naughton, Family Dollar president.

“We are pleased with the results of our H2 renovation program, both with traffic and the diversity of our locations,” MacNaughton said, according to a transcript provided by Sentieo. “Customers indicate they’re shopping more often and spending more for the improved assortment. Others [say] $1 items, more frozen and refrigerated product and cleaner stores [are driving traffic]. Our survey feedback indicates H2 shoppers have a better overall shopping experience.”

Separately, Philbin revealed the company had begun testing the introduction of a selection of items priced at $3 and $5 at its Dollar Tree stores. Philbin emphasized the addition of those items, which arrived at select stores in recent weeks, come in addition to the existing selection of the single-price-point retailer.

“We are in the process of rolling it out to more than 100 test stores, and we’ll measure, analyze and adjust products, layout and other variables to ensure we are responding to customer feedback in our continued merchandising efforts,” Philbin said. “Because it’s an iterative process, we have not a set time frame for the test. It’s in the early days right now, but we will have more details to share on our progress in the future.”

Of the Family Dollar stores that aren’t evolving, many are closing. The chain has closed 140 stores this month and plans another 150 closures by the end of July.

Next Level Up

At Dollar General, the addition of food at stores continues to be the chain’s “most impactful merchandising initiative,” CEO Todd Vasos said in a conference call.  The chain’s steady increase in cooler doors since 2013 is also providing the sales volume for the company’s announced move to self-distribution. “In addition to being a great traffic and ticket driver, our success in expanding our cooler footprint has provided the scale necessary to initiate DG Fresh.”

The chain added 12,000 cooler doors in the first quarter alone.

The DGTP (Dollar General Traditional Plus) format—which has 34 cooler doors vs. 22 in the traditional Dollar General model—is responsible for many of them. The company converted 128 stores to the DGTP format in the quarter and added produce selections to 50 of them. “On average, our traditional remodel stores, which have an average of 22 cooler doors, deliver a 4% to 5% comp lift, and the DGTP remodel, which has an average of 34 higher capacity coolers, delivers a 10% to 15% comp lift, with the addition of produce driving comps to the high end of this range,” Vasos said.

Vasos said Dollar General’s core shopper “has more money in her pocket” but continues to feel economic headwinds from rent and healthcare expenses. “What we do very well here is we are able to move our promotional activity, our mix inside the store [and] our presentation to match where we believe she will be. We did that in the first quarter ... very successfully.”

Vasos also noted that upgrades to the Dollar General store base are also attracting bargain shoppers of all economic backgrounds. “That consumer that makes a little bit more money … that next-level-up consumer is the fastest-growing consumer that we have here at Dollar General.”

The DG Fresh initiative, announced earlier this year, is a strategic initiative to shift to self-distribution of fresh foods.

The program kicked off in January distributing dairy, deli and other refrigerated items from a Dollar General facility in Foxboro, Pa., and currently serves 800 stores in the Northeast.

“While it's still early, we’re already successfully reducing product costs on these type of items. We believe that [if] we continue to scale DG Fresh, it will meaningfully improve our gross margin,” Vasos said. “Two other important goals for DG Fresh are to drive higher on-time delivery and in-stocks, and we're encouraged by the early results, which are in line with our projections. In addition to the gross margin and in-stock benefits, DG Fresh will eventually allow us to control our own destiny in these categories.”