Dollar Stores’ Big Push To Sell More Groceries Is Paying Off

Business is booming at the nation’s largest dollar-store chain and it’s due in no small part to America’s growing appetite for groceries under shutdown.

Revenue at Dollar General leapt 27% during its latest quarter as the chain of 16,000 stores added more fresh and frozen food, while driving down costs and undercutting competitors by building out its own grocery distribution network. The moves have made Dollar General a critical source of affordable groceries and household staples in rural and low-income communities.

“Grocery is really crucial to their business,” says Oppenheimer analyst Rupesh Parikh. “They are a big beneficiary in terms of what is happening during the pandemic.”

Dollar General has been working to fashion itself into a one-stop shop that brings together the items you might typically find in a drugstore, grocery store and big-box store, which has proven savvy as consumers continue to stock up on essential items, like groceries, cleaning products and pet food, which account for the vast majority of its business. Rival Dollar Tree, which relies more heavily on discretionary items like gifts, greeting cards and party supplies, said sales rose just 8%.

The sales jump was big enough for Dollar General to increase profits 70% to $650 million from the prior year, offsetting $60 million in bonuses it paid during the quarter to compensate employees for the extra risks the pandemic presents. The jump come as expanded cleaning efforts, risk pay and reduced hours has squeezed margins across the industry.

Dollar General has become a rising threat to grocery stores as it leverages its sprawling brick-and-mortar footprint and growing distribution network to offer fresh and frozen food at rock-bottom prices. It first got into the grocery business in 2003, when it began selling a small selection of perishable items like milk and lunch meat. However, in recent years, it has stepped up its efforts to capture a larger chunk of the roughly $800 billion that Americans spend to feed their families every year.

Dollar stores, deemed essential retailers across the country, were permitted to stay open during lockdown, sharing in the shopping boom that has benefited larger retailers like Target and Walmart. Grocery sales have been a bright spot for all of them, jumping 13% in April as more people eat at home, according to the Census Bureau.

A recent study from the University of Nevada, Las Vegas found that produce quality at dollar stores matched what you would find at regular grocery stores after comparing the color, cleanliness, freshness and firmness of fruits and vegetables. Over 80% of the produce was also cheaper.

Dollar General benefits from a core set of customers represented by the 19 million people in the U.S. who don’t live within a mile of a supermarket, while also expanding its customer base. According to NPD Group, millennials from households earning over $100,000 a year bring in a quarter of sales at dollar stores. Dollar stores are also poised to grab more market share during periods of economic hardship as budget-conscious consumers look to make their money stretch further. Forty million people — the equivalent of one in four workers — have now filed for unemployment benefits.

“We do very good in good times. We do fabulous in bad times,” said CEO Todd Vasos on a call with analysts and investors on Thursday.

To make room for more refrigerated and frozen food, Dollar General has been installing coolers in the majority of its new stores, as well as the thousands of stores it remodels each year. The sales benefit has been swift. At its traditional stores that have been remodeled with 22 coolers, there is a 4 to 5% rise in same-store sales. At its larger stores where there is room for 34 higher-capacity coolers, there is a 10 to 15% rise in same-store sales.

In 2019, Dollar General began building out its own distribution network to shuttle groceries to stores. By cutting out the middleman, it is able to cut costs and hang onto more profits. It has also helped it keep items in stock during the pandemic. The initiative, called DG Fresh, is currently distributing groceries to more than 6,000 stores from five facilities, with the goal of doubling that to 12,000 stores from ten facilities by the end of 2020. That should help drive margins higher starting this year, the company says.

It will also sell fruits and vegetable in 1,000 stores by the end of the year. While it won’t offer the selection at a typical grocery store, it comes close, promising to carry 80% of the produce categories that most stores carry.