Dollar General likely to ‘drop items and … add new items’ rather than pass on price to offset inflation

By Elizabeth Crawford

- Last updated on GMT

Source: Getty/ ozgurcankaya
Source: Getty/ ozgurcankaya

Related tags Dollar General

Unlike many other retailers, Dollar General does not plan to pass through to consumers price increases to offset inflation, rather executives said the banner is more likely to change its product mix – a strategy that shifts the onus for cost management from shoppers to brands.

According to Dollar General CEO Todd Vasos, the banner’s “core consumer is in pretty good shape. She is working. She has money in her pocket,”​ but she also “is always stretched,”​ which is shaping the retailer’s business strategy.

Vasos explained at Barclays Consumer Staples Conference last week that while pandemic-related stimulus from the federal government “was a nice tailwind for our core consumer and really those consumers above even our core consumer … we want to be somewhat cautious because stimulus money is starting to wane, obviously, almost completely out of the system.”

Yes, new child tax credits and higher Supplemental Nutrition Assistance Program benefits will take effect in the fall and later this year – offering additional financial relief for many Dollar General consumers – but, Vasos said, that “extra money, if you will, is probably going to be offsetting … the stuff that falls off.”

The result is Dollar General’s core consumers will continue to have money to spend and overall be in “good shape,”​ but they will not have extravagant amounts of discretionary spending and so price and value will remain key attributes influencing their shopping decisions.

With this in mind, Vasos said Dollar General will prioritize offering value, even with inflation “starting to creep in.”

This means store buyers likely will “trade off products for our consumers. Where [brands] may be coming to us with price increases, we’ll drop items and we’ll add new items, just to make sure that we can keep the value withing the box for that consumer,”​ Vasos said.

‘We do service an even broader subset of the consumer base’

As important as maintaining price point and promoting value are to Dollar General, they are not the retailer’s only levers for retaining the surge of consumers who have flocked to its stores during the pandemic.

“Today, we do service an even broader subset of the consumer base,”​ as consumers hit hard financially by the pandemic have sought out more affordable options, Vasos said.

“I’m happy to say as we exited Q2, w more than doubled our expectation of retention of that ‘trade down’ consumer, if you will, or that cohort of consumers that is right above our current core consumer,  and that the retention rates have been as high as they are is a real testament to”​ a product assortment, or “box,”​ that appeals to many different types of consumers, Vasos said.

However, he added, Dollar General also has retained new consumers by digitizing the same promotional playbook that it used during the Great Recession in 2008 and 2009.

By taking its marketing and promotions from that era “off the shelf” and online, Vasos said that Dollar General has been able to appeal to a broader consumer base – including younger shoppers with children at home who are more digitally savvy and have slightly more discretionary spending than the retailers traditional core demographic.

Dollar General seeks to stay ‘top of mind’

The retailer’s digital advertising and promotions were about more than touting savings and price, it also was about “top of mind awareness,”​ Vasos said. “This was about keeping Dollar General in the consideration set, not only if you shop a consumable item, but also on this discretionary side because of all the work that we’ve done”​ to create a “very compelling offering in the box.”

Dollar General has also increased consumer retention by continuing to build up its fresh offering and rolling out more coolers across its stores, and more recently piloting its DG Market and pOpshelf store-within-a-store concept, which prices most of its products at $5 or less.

Vasos said that the pOpshelf stores “could be a real gamechanger for Dollar General as we continue to go forward”​ because of their projected strong margins and consumer appeal.

Finally, Dollar General hopes to further expand its consumer base and earn their loyalty by offer more health care products and services in stores.

Vasos said that Dollar General’s health care initiative is “still in the infancy stages,”​ but he added they will help meet the needs of consumers who live in health and medical deserts – a concept that he compared to food deserts, which the chain’s stores already help fill.

These initiatives combined represent “a lot of margin enhancing opportunities,”​ that have helped Dollar General expand its gross margins up 62 basis points over a two-year period, despite “pretty sizable near term headwinds,”​ Dollar General CFO John Garratt said at the conference.

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