Dollar General growing quickly, quietly

NASHVILLE, Tenn. -- Dollar General is sometimes mocked as the low- rent Wal-Mart, an even cheaper version of the world's largest retailer.

But Dollar General has quietly used a very different business model to become one of the fastest-growing retailers in the United States, opening more than half its 6,653 stores in the past five years. Instead of operating superstores with huge inventories like Wal-Mart, Dollar General opens smaller, more convenient stores in rural areas, or in poor neighborhoods of midsize cities.

"It's cheap and just like the stuff in Wal-Mart," said Naomi Gullette, who shops at a Dollar General store near a housing project in Nashville. "You can find anything at Wal-Mart. You can't do that here, but the price is right."

Analysts who follow the company give it good ratings.

"It's an excellent concept," said Daniel Barry, an analyst at Merrill Lynch & Co. in New York. "The company does a great job of serving the low-income consumer and offers a good selection of commodity items at low prices."

Dollar General sells food, beauty products, cleaning supplies, clothing and housewares, targeting customers with a median household income of less than $35,000. The typical transaction ranges between $8 and $13.

"We have one thing in common with Wal-Mart," said David Perdue, chief executive of Goodlettsville-based Dollar General. "Both companies took a down-home approach to satisfying an underserved customer."

The slow economy has helped the company's growth -- middle-income shoppers also find that Dollar General is a good place to buy certain everyday items, and households with a median income of more than $50,000 represent a growing source of revenue for the retailer.

But Dollar General doesn't try to compete with Wal-Mart's broad range of goods.

"When you're in a 'big-box' retail environment, you're obligated to compete on assortment," Perdue said. "In our 'small-box' environment, we don't have that luxury. So the merchandise mix we put in our stores has to be much more productive."

Wal-Mart stores continue to get bigger as the company has started selling groceries. The standard Dollar General store is only 7,000 to 8,500 square feet -- tiny when compared to Wal-Mart's typical 190,000- square-foot supercenter.

But Dollar General is testing a new format -- the Dollar General Market, which is about twice the size of a standard store and sells more food. The company says two test stores have exceeded revenue estimates, and there are plans to open another 20 next year.

A new Dollar General store can be open in nine months, including site acquisition, permits and construction, for a cost of about $82,000. The storefront may be as small as 50 feet and rarely exceeds 100 feet.

While Wal-Mart has moved into big cities, competing with major supermarket chains, Dollar General has stayed in small towns, opening most stores in cities with fewer than 75,000 people. Its major competitors are Family Dollar, Dollar Tree, 99 Cents Only and Fred's.

J.L. Turner and his son Cal started the company as a wholesale business in 1939, and the first Dollar General Store opened in Springfield, Ky., in 1955.

The company expects to open about 660 new stores this year and about 675 next year. It already has stores in 27 states, mostly in the South and Midwest, and it will open its first stores in Arizona, New Mexico and Wisconsin next year.

Sales are expected to rise nearly 15 percent this year, and net income is expected to be up about 28 percent. Its stock recently sold on the New York Stock Exchange near its 52-week high of $23.40 a share.

The company has maintained its growth despite a Securities and Exchange Commission investigation.

Former CEO Cal Turner Jr., grandson of the company's founder, resigned last September after Dollar General acknowledged overstating profits by $100 million from 1998-2000. The company fired its auditor and agreed in January to pay $162 million to settle related shareholder lawsuits.

"The company has new management -- the accounting scandal happened under the old team," Merrill Lynch's Barry said. "My guess is that the SEC will impose a fine, but I don't think it will be excessive."

Perdue took over in April and hired Lawrence V. Jackson, a longtime executive at Pepsi-Cola Co. and more recently at Safeway Inc., to be the company's president.

Customers don't seem troubled by accounting problems or management changes. Nashville forklift operator Melton Wilson identified the two main reasons he shops at Dollar General: It's "close to my house and cheap," he said.

Mattie Alexander, who bought a mop and Christmas decorations at Dollar General, agreed: "They have great bargains. It's a good store to have in the neighborhood," she said.

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