Dollar General: Why Small-Format Stores Are Key

Dollar General (DG) operates dollar stores that offer a variety of inexpensive merchandise, including home products, seasonal products, consumables, and apparel. The company’s business model is about offering products at competitive prices (typically less than $10) in a convenient, small-store format. Its core customer category includes low-to-middle-income customers.

The company’s stores are located in convenient locations that are easily accessible to its customers. It follows a small-box format and the stores have an easy ‘‘in and out’’ shopping set-up.

Dollar General’s stores have an average store size of ~7,500 square feet. These are much smaller in size compared to mass merchandisers like Walmart (WMT) and Costco (COST), which have an average store size of ~1,25,000 square feet. Supermarkets chain Kroger (KR) and Whole Foods Market (WFM), by comparison, have an average size of ~40,000 square feet.

A smaller-box format along with a relatively limited offering of products helps the company maintain a low-cost structure and thereby remain competitive on prices.

Also, a small store offers the convenience of quick shopping to customers who would not want to walk through a large Walmart supermarket store to buy basic items like milk and eggs.

Dollar General stores are mostly located in smaller communities. About 70% of its stores are in areas with populations of fewer than 20,000 people. These locations might not be profitable for a bigger store like Walmart (WMT).

Investors looking for exposure to Dollar General through ETFs can consider the SPDR S&P Retail ETF (XRT), which invests 1% of its total holdings in the company.

Read the next part of this series for a quick overview of the US drugstore industry.