Dollar General to cut SKUs, including food, to improve margins, manage shrink
As a leading discount retailer in the US, Dollar General is well positioned for growth as consumers prioritize value to stretch their budgets in challenging economic environment, but as CEO Todd Vasos revealed during the company’s third-quarter earnings call last week the retailer’s current performance is mixed – prompting it to take a “fresh look at all areas of our business as well as the challenges and opportunities in front of us.”
Vasos explained during the company’s most recent quarter ending Nov. 7, Dollar General gained market share in both dollars and units and saw net sales increase 2.4% to $9.7bn. But, he added, its operating profit and earnings per share fell a staggering 41.1% to $433.5m and 45.9% to $1.26, respectively.
To rebuild margins and returns, Vasos said Dollar General is “getting back to basics in our stores, in our supply chain and within our merchandising,” which includes SKU rationalization.
“We have got between 11,000 and 12,000 total SKUs in our stores today, depending on the format … but we believe we have an opportunity to take out a meaningful number of SKUs,” some of which will be dropped due to the amount of shrink that is in the company’s stores, as well as “with the consumer in mind first” and with “profitability in mind throughout the entire supply chain,” Vasos said.
SKU cuts include ‘food-type items’
The bulk of the cuts so far have focused on “the non-consumable piece,” which CFO Kelly Dilts noted is down 15% on a year-over-year basis and down 19% on a per store basis, but Vasos added the retailer is looking to manage overstock of “core everyday goods,” including “basic paper, cleaning, [and] food-type items.”
Vasos explained that SKU rationalization is “always an ongoing piece at Dollar General, but I believe that it’s time to really step back and energize that even more in 2024.”
He noted the company has “already … gone deep here, turned of a lot of SKUs,” but he added, “there’s going to be a lot more to come” with a focus on “eliminating SKUs that are more in the secondary or tertiary type of line.”
Vasos said he does not believe consumers will notice the difference, and if they do it will because their shopping experience is “simpler.”
SKU rationalization will easy supply chain, labor constrains
The reduction, however, will have a significant impact on supply chains, labor and ultimately the retailer’s margins, he said.
“As our store teams have fewer SKUs to manage, we can lower our cost to serve, while driving higher inventory turns and higher sales of products that are most important to our customers,” he explained.
Cuts will help combat shrink
Cutting SKUs could also help the retailer manage shrink, which Dilts described as a “sizeable headwind” of about 100 basis points, which she expects will remain a challenge well into 2024 “as any shrink improvement typically takes at least a year from a store’s most recent count to show up in our financial results.”
The retailer also will combat shrink and theft by increasing the number of employees helping in the check-out area of store and reducing its reliance on self-checkout.
Simultaneously, Dollar General will redirect labor hours to store level inventory management, including a greater focus on stocking shelves more quickly, which also should be easier with reduced SKUs.
