Dollar General Corporation (NYSE: DG) is the largest discount retailer in the United States by number of stores. Dollar General competes with other discount retailers, such as Family Dollar Stores (FDO) and Dollar Tree Stores (DLTR), as well as wholesale retailers such as Wal-Mart (WMT) and Target (TGT). In fiscal 2010, DG posted net sales of $13 billion and net income of $627.9 million.
Discount retailers are poised to succeed during recessionary economic conditions, as consumers try to buy their everyday items at lower prices. Dollar stores struggle when operating costs increase, as such stores cannot raise prices of goods sold, and thus cannot pass costs on to consumers. The increased demand for discount retailers has exceeded costs of operations, which has lead to Dollar General to have double-digit net sales growth in each of its last two fiscal years.
Dollar General operates only in the United States. The firm has 9,414 retail stores located in 35 states, with the top 10 states (by number of stores) listed below:
Because Dollar General’s low-income customer base is highly sensitive to price and because the company competes largely with merchandise prices fixed to be under $2, input cost increases (such as inventory, overhead, and marketing) are difficult or impossible to pass on to consumers. Although the company has been able to raise some prices - changing an item that was 2 for $1 to 59 cents apiece, for example - the prices of the vast majority of its goods cannot be increased. Macroeconomic and company specific changes to cost structure, including higher freight costs, rising energy prices, and supplier or distributor consolidation increases the risk of large margin decreases that cannot be offset by price increases.
Family Dollar competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Family Dollar store operating within a few miles of a nearby Wal-Mart or Target, for instance, will struggle to compete on value and selection, and may instead gain customers via convenience and location. It also faces competition faces other “dollar stores,” that have similar or identical value propositions, such as Dollar Tree Stores (DLTR), Family Dollar Stores (FDO), and 99 Cents Only Stores (NDN). With low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores and collectively, these companies are approaching U.S. saturation. While Family Dollar has some competitive advantage in the southern US states, there is substantial risk of lower margins due to increased overhead expenses as well as stiff competition as other discounters pursue the same strategies.
Dollar General sells similar products as wholesale retailers Wal-Mart (WMT) and Target (TGT), but typically at lower prices. Because of this, during harsh economic conditions, many consumers may make the change of shopping at Dollar General instead of a regular wholesale retailer.