On the surface it's a seemingly odd move. Dollar General (DG +1.85%) is a discount retailer. Though it sells the most basic of at-home health staples like bandages and aspirin, moving deeper into healthcare waters is a move away from its core retailing business. The company made the announcement on July 7, informing shareholders and customers that it intends to "establish itself as a health destination."
Dollar General didn't offer much in the way of details as to what this means, other than to say this journey begins with "increased assortment of cough and cold, dental, nutritional, medical, health aids and feminine hygiene products." Given the tone and other details of the news release, though, it appears the organization may have something much bigger in mind.
The strategic decision, however, is a brilliant one no matter what it ends up looking like. For largely the same reason Dollar General has managed to penetrate a market dominated by Walmart, the small-format retailer is well positioned to penetrate the healthcare space in the same underserved markets where its stores are something of a fixture. Here are three reasons investors should expect big things from Dollar General's new venture.
1. Dollar General's customers are primed for such a solution
The secret of Dollar General's surprising success in an industry that includes the likes of Walmart and Target is that Dollar General makes a point of not competing with them. About 75% of the company's 17,426 stores are located in communities with populations of less than 20,000 -- markets too small for Target and Walmart to set up shop in.
Mainstream healthcare providers generally don't devote time and resources to such markets, either. The U.S. Department of Health and Human Services estimates that nearly 90% of the country's counties are underserved in one way or another in terms of access to healthcare, with most of those lacking access to two or more different sorts of key healthcare services. Residents of these usually rural underserved areas can receive fuller care in more populated areas, but not all of them can readily get there.
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It's not clear to what extent Dollar General will widen its reach in terms of primary or secondary care. Cold medicines and nutrition-minded products are important, but not necessarily unattainable even in the most remote parts of the country. As was noted, however, Dollar General's announcement implies something more significant is in the works: "This effort marks the first major step in Dollar General’s strategic journey toward increasing access to healthcare offerings."
2. Albert Wu is more than qualified
Underscoring the notion that the discount retailer is eying a major effort is the person the company hired to head this project. Dr. Albert Wu has been named Dollar General's chief medical officer, making the company one of the few to employ a licensed physician as an executive in charge of such an initiative.
To this end, Wu is certainly no stranger to the establishment of entirely new medical institutions. At McKinsey & Company, Wu's team specifically built a cost-of-care model for a quarter of a million rural patients in addition to leading billion-dollar hospital turnarounds. Dollar General was clearly not his only career opportunity. He was hired with a specific purpose in mind, and presumably, he sees the potential of Dollar General as a means of widening the availability of healthcare options for Americans.
3. It addresses customers' personal universes
Finally (and most philosophically), a deeper foray into primary care jibes with Dollar General's overarching strategy to evolve from being a mere retailer into a full-blown lifestyle company.
It's admittedly tough to see. First and foremost, its customers see the store chain as a local place to buy basic goods. There's more underway in this regard than there may seem on the surface, though. Dollar General is thinking about ways of making its customers more loyal. Fresh produce, custom-sized packaging from suppliers that better align with shoppers' budgets, in-store pickup of online orders, and a customer rewards program are just some of the ways the discounter is widening its reach.
This customer ecosystem mirrors similar efforts from Target and particularly Walmart, which is already deep into the primary-care business with Walmart-branded health clinics and its own private-label insulin. Clearly, there's something to the idea.
Bottom line
To be clear, there's still more we don't know about Dollar General's healthcare ambitions than we do know. It could take years for these plans to fully flesh out.
The initiative is in great hands, though, and given the retailer's surprisingly successful navigation of a marketplace that was expected to cede share to the big-box names at the expense of the smaller, more remote retailers, there's reason to be encouraged by this latest development.
It's not a reason in and of itself to buy the stock -- at least not yet. However, Dollar General was a name worth owning before the recent announcement. This strategic move merely bolsters the bullish case for the stock, which is currently toying with a move to yet another record high following a bit of weakness earlier this year.
