Forget the internet. The discount chain is opening three new bricks-and-mortar stores every day, betting that customers will respond to lower prices in places overlooked by other retailers.
When a supermarket in Olive Hill, Kentucky, population 1,500, went belly up, the owner approached Dollar General to see if the company had any interest in taking over the real estate. The answer was yes. In 2019, Dollar General relocated the store it opened 50 years previous to the supermarket’s spot on the main drag, named after the town’s most famous resident, late country singer Tom T. Hall. Then it proceeded to open three more Dollar Generals nearby, encircling the tiny town, in the last year.
With a speed seldom seen in the retail landscape, residents of Olive Hill went from one Dollar General to, figuratively at least, not being able to throw a rock without hitting one. Few other options exist. The closest Walmart or Kroger is 20 miles away, a costly trip when gas prices have soared past $4.20 a gallon. Residents are already struggling to stretch paychecks that average $28,000 a year, with a quarter of the population living below the poverty line.
“We think of it as an underserved market,” said Larry West, a district manager for Dollar General who oversees the Olive Hill stores. “There are so many people that just do not want to travel 30 minutes to go to the grocery store.”
Quietly, Dollar General has become the biggest U.S. retailer by number of outlets, and the company continues to spread like hot gossip across tiny-town America, opening roughly three new stores a day, many of them in places that real estate experts say couldn’t support any other kind of retailer. Its 18,000-plus locations are more than McDonald’s, Starbucks or CVS, putting it within five miles of 75% of the population. This year, it will open another 1,100 stores and plans to nearly double its store count.
Many customers do all of their weekly shopping there. Shoppers at the Olive Hill locations can buy bananas, onions, lettuce, deli meat, milk and other basic groceries in addition to everyday items like toilet paper, dish soap and cigarettes. If there’s a defining symbol of America in 2022, it may just be a bargain-hunter scouring the aisles of a Dollar General in Olive Hill, Kentucky.
“This is the corner grocery store on steroids,” said Mark A. Cohen, director of retail studies at Columbia University’s business school. “This customer has no place else to go.”
Forget the e-commerce era. Investors are on board with bricks-and-mortar, at least when done right. The company’s stock price has nearly tripled in the last five years. New stores deliver robust, after-tax returns of as much as 22%. Sales have risen every year since its IPO in 2009, during the depths of the financial crisis, with revenue growing six-fold to $34 billion. It’s highly profitable, too, with enviable margins that top big-box chains like Walmart and Target as well as smaller rival Dollar Tree.
“I don’t think there’s anybody that knows how to throw up more stores, more quickly, as these guys,” said Craig Johnson, founder of Customer Growth Partners, a retail consulting firm.
BETTING ON BRICKS-AND-MORTAR
No other retailer is opening more stores, faster, than Dollar General. Here are number of new locations announced in 2021.
The key to its all-out expansion? A winning combination of cheap land, cheap construction and cheap labor.
To determine where to open new stores, the company has built an algorithm that spits out suggestions, using several dozen data points like population, population density, traffic patterns, speed limits and nearby destinations that attract visitors, such as schools, churches and post offices. The Olive Hill locations are close to campgrounds at a nearby state park, which the retailer expects to be the source of customers during the busy summer season.
Dollar General has also begun including more data collected from mobile devices, like distance a customer travels to get to a store and the competitors they visit. The algorithm changes on a weekly basis, said Dollar General’s chief operating officer Jeff Owen, as it absorbs new information from its existing store network.
“We believe it’s probably the best in the business,” said Owen, referring to its real estate technology. “You can’t open stores at the rate we’re opening them if they’re not successful.”
The company has found success in small towns overlooked by most other retailers, a strategy that means it can simultaneously take advantage of dirt-cheap real estate and skirt pesky competition. Three-quarters of its outlets are in communities of 20,000 or fewer people. It likes to open stores on busy thoroughfares that drivers pass on their way to work. It also goes into residential areas, since many of its customers don’t own a car and need to be able to get to the store on foot or via public transportation.
“The good thing about Dollar General, and what makes them so overwhelmingly successful, is they can be profitable with a location out in the middle of nowhere. They don’t have to be in the middle of Daytona Beach or Nashville,” said Bryan Bender, managing director at Fortis Net Lease, who has sold 1,200 Dollar General stores.
Dollar General, Everywhere
Dollar General stores: 21
St. Augustine, FL
Dollar General stores: 8
Olive Hill, KY
Dollar General stores: 4
Underpinning the fleet of stores are thousands of investors, ranging from high-net-worth individuals to big real estate investment trusts, eager to play landlord to Dollar General. They own most of the chain’s properties and collect rent for the duration of the lease, which typically stretches 15 years. Dollar General is seen as such a strong, dependable tenant that the cap rate, which measures return on investment, has fallen from 6 or 6.5% to 5% or so in recent years, reflecting the company’s strong performance during the pandemic and growing consensus that its risk of closing up shop is small.
That stability, even during turbulent times, is what prompted Bender to focus on dollar stores when starting his real estate career in the middle of the 2008 financial crisis. He says he knew they were likely to do well in good times or bad. Now, as inflation rages and there’s talk of a potential recession, it’s as good a horse to bet on as ever.
The biggest concern real estate investors have is that the lack of population density could become a liability. If Dollar General doesn’t renew its lease, who on earth would take its spot? That has cut down on the number of locations that Barry M. Wolfe, senior managing director of the national retail division at Marcus & Millichap, feels comfortable recommending to clients.
“If they ever left, there literally may not be a replacement,” said Wolfe. “It’s particularly critical with Dollar General, frankly, because they do go into some really, really small markets.”
Yet, the company has found it can get big by going small. Its new stores span 8,500 square feet, a twentieth of the size of a Walmart, helping consumers get in and out quickly. Each store does about $2 million in annual revenue; a single Walmart rakes in $100 million.
The bare-bones structures typically cost just $250,000 to build, said Owen, compared to millions for a larger grocery or big-box store, but costs have crept higher in the face of supply chain woes. The company commented in its earnings call in March that it’s paying “substantially” more for commodities like steel, for instance, that it uses for its fixtures, HVACs and more.
Five dozen developers across the nation are in charge of building new stores, using a standard prototype that consists of a simple metal structure with linoleum floors, white walls and bright lighting. Frivolities like curb appeal don’t matter. If a store has a brick façade or fake windows, it’s because the town insisted on it to keep up a certain aesthetic.
“I don’t think there’s anybody that knows how to throw up more stores, more quickly, as these guys.”
“There’s no flash,” said Mike Hunkler, who has consulted on Dollar General construction projects for 25 years. “If they can find a way to shave a penny off something, they want to do that.” For instance, he said, the company would probably have gravel parking lots, rather than asphalt, if they could get away with it. Even the sign is simple. Someone at headquarters is always poring over expenses line by line. “Dollar General is a very difficult, challenging client,” he said.
Not all towns are rolling out the red carpet. There’s been a rise in the number of cities fighting the expansion of dollar stores, like Birmingham, Alabama, where lawmakers have prohibited them from opening within one mile of an existing location. In Fort Worth, Texas, dollar stores must devote at least 10% of their floor space to fresh produce, meat and dairy. The city of Stonecrest, Georgia, banned them, claiming they give the town a bad image.
It isn’t unlike the resistance once faced by other big chains, from Walmart to Barnes & Noble, with locals blaming them for undercutting small businesses on price and driving them out of business. “These overlarge chains are mom-and-pop killers,” said Cohen, the Columbia professor.
Plenty of other towns are caught off guard and only later wish they’d blocked the company’s expansion, said Kennedy Smith, a senior researcher at the Institute for Local Self-Reliance, which advocates for small businesses. “Communities just aren’t prepared for this,” Smith said. “The smaller the community, the more vulnerable it tends to be.”
Another growing pain: Keeping an increasingly large workforce happy. Last year, workers at a store in Connecticut attempted to form a union, seeking more job security and a better process for addressing grievances. (They lost.) Workers at a California warehouse have also sought to unionize. A store manager in Florida was fired recently for airing her grievances on TikTok, and is now using the social media site to encourage workers at other stores to form a union. A Dollar General spokesperson said it does not believe a union is in the best interest of its employees.
Unionization threatens Dollar General’s reliance on cheap labor. Stores are thinly staffed, often having just two or three employees on the floor. The store manager alone may be in charge of opening the store in the morning. A company spokesperson said that the average store has six to 10 employees. The company’s pay often lags other big chains like Amazon and Target, which have raised minimum starting wages to $15 an hour nationwide to attract workers. Dollar General said it provides competitive wages by market and position, and a robust range of benefits to meet individual needs.
None of it is slowing Dollar General down. It sees room for another 17,000 storefronts, including 1,000 urban DGX stores and 1,000 Popshelf stores, which sells home goods and other discretionary items to the higher-income suburban set. “The best thing about it is these Popshelf stores are going where a Dollar General would not have gone,” said Owen. The company is also beginning to expand internationally, starting with 10 stores in Mexico.
It’s also pushing further into grocery and health and wellness, offering prices it says are 20% cheaper than grocery stores and 44% cheaper than drugstores. The company has been adding coolers to more stores, and now offers produce in more than 2,100 locations. Last year, it hired its first chief medical officer and is adding 400 additional health-related items to its assortment. This helps Dollar General position itself as a one-stop shop, which should drive more visits and higher spending per visit.
All these stores put it in a position to serve new customers, too, which tend to flock to dollar stores in times of economic hardship in an effort to make ends meet. “As long as there is an underclass throughout America, which is to say folks living at or close to the poverty level, they are going to have a market,” said Cohen.