Retail is a very tough business, especially when companies are squarely aimed at serving the lower rungs of the income spectrum. This is exactly what Dollar General (DG -0.41%) is all about doing. However, the company has launched a new store concept called Popshelf that could be a growth engine for the business -- and potentially a big headache for peer Dollar Tree (DLTR 0.04%). Here's what you need to know.
The core business
Dollar General sells a wide array of necessity items at fair prices. It has around 18,800 stores across 47 states, with a focus on "convenient neighborhood locations." The basic idea is that people can make a quick trip, perhaps even walking, to a Dollar General to pick up basic items like toothpaste, snacks, or laundry detergent. The target demographic is not wealthy customers; rather, the company is looking to serve the needs of people lower down the income spectrum.
Image source: Getty Images.
It is not a bad approach considering that the local corner store has basically gone away. That opened up an opportunity for Dollar General and it happily stepped in. The retailer has been doing fairly well lately, which makes some sense given the concerns about raging inflation and slowing economic growth over the past year. In the third quarter of 2022, sales were up 11.1% overall, with same-store sales rising 6.8%.
Most notably, Dollar General's same-store sales growth was driven by "an increase in average transaction amount, as well as a modest increase in customer traffic." Essentially, it looks like people are coming in to buy more and more often. A key highlight here is that sales of consumable products rose while sales of non-essentials, like seasonal products, were weak. Basically, budgets got tight for the company's core customer, but they didn't give up on Dollar General; they simply shifted their spending at the store.
The explore business
What's interesting here is that Dollar General competes directly with peer Dollar Tree. Historically, it has been a head-to-head competition with Dollar Tree's Family Dollar store concept. But Dollar Tree's namesake stores have been working to increase prices well above the dollar its name trumpets. As a result, Dollar General now has two direct competitors owned by one company.
That helps explain why Dollar General has introduced the Popshelf store concept. According to Dollar General, "This new store aims to engage customers with a fun, affordable and stress-free shopping experience where they can find on-trend seasonal and home décor, health and beauty must-haves, home cleaning supplies, party goods, entertaining needs and much more--with approximately 95 percent of items priced at $5 or less!" That's basically what Dollar Tree is now attempting to do, but it is working from one dollar for every item up to higher prices.
Dollar Tree had long been a fun place to shop because consumers could find neat items for a low price. As it moves toward higher prices, the fun is starting to fade; foot traffic at its namesake stores has been weak lately. And that's the opportunity for Dollar General's new concept, which is fresh and aimed squarely at higher-income consumers that have likely started to sour on Dollar Tree's wares now that the prices are going up.
Dollar General only has around 30 or so Popshelf stores right now, but thinks it can grow that number to 1,000 by the end of fiscal 2025. That's a lot of store openings, each of which will help to boost the top line. And each one could help to pull more customers away from Dollar Tree. And Popshelf could actually turn into a sizable segment, given that it would allow Dollar General to have a roughly similar business model to Dollar Tree, with its namesake brand and Family Dollar concepts.
Looking up
Perhaps the most important takeaway for investors, however, is that Dollar Tree is working from a position of weakness as traffic falls while it is changing its pricing model at an old concept. Dollar General, however, is really working from a position of strength as it expands an exciting new store concept.
Investors tend to look more favorably on an exciting new idea rather than a tired idea that is basically trying to reinvent itself. If you are watching the dollar store space, Popshelf is a name you'll want to track very closely. If it gains traction, Dollar General will look increasingly attractive and Dollar Tree could end up with increasingly tough competition at exactly the worst time.
