This past week, Dollar Tree's new management team (effectively Dollar General’s team from the 2010s) presented their transformation vision of a newly revitalized Dollar Tree and Family Dollar that are now set to expand into new markets (+1K locations per year). The event was timely, given the shellacking that the retail industry has experienced this year as high food inflation has deeply bitten into less affluent households’ ability to buy discretionary goods. That large inflation bit has rocked retailers as diverse as Macy’s, Foot Locker, Advance Auto Parts, Target, and Dollar General. Moreover, as we wrote in our summary of Dollar Tree and Family Dollar’s Q1 2023 results (as well as the results from Walmart and the grocers), the grocery/club/discount/dollar industry has now entered into a “food fight” where each is striving to win share of visits and units-sold by amplifying the value of their private label product, increasing the shelf presence of that product, putting less mark up on their consumables merchandise, and "encouraging" their national branded suppliers to lower their own prices. The consumer is out for "value, value, value", and Dollar Tree Inc. views this moment as its opportunity to accrue meaningful market share.
Part of Dollar Tree Inc.’s success in sales and market share this past year has come from offering better value, more case-ready grocery SKUs, significant investment in store wages and store standards, modernizing its supply chain (allowing for better in-stocks and localized merchandising), and upgrading its IT systems (including digital coupons and the like). In dollars and cents, what this looks like is shown in the slide below. As the slide shows, the increase was disproportionate for the supply chain and IT systems.
As demonstrated by the improved comparable-sales trends below, these investments have reconditioned Dollar Tree and Family Dollar into a much stronger states of fitness.
The sales improvement also stems from progress in keeping its district and store managers--typically one of the best levers in retail to drive consistent execution and sales improvement--the store manager voluntary churn looks to have been cut in half (more on this below). The returns from the supply and IT investments will likely become more pronounced in 2024 and beyond.
Management’s presentation slides detailed significant other “low-hanging fruit” to be “picked” over the next few years in areas of merchandising and store modernization. The company has been testing a new store operating/merchandising model for both brands, the new model has produced a substantial increase in sales and units sold (the slide below), and that model will now be rolled out over the next year (this is a similar playbook to what CEO Rick Drieling used for Dollar General in the early 2010s). On the new standard format--known as the "H2.5" format--Family Dollar's Chief Merchant Larry Gatta stated, “we improved the overall shopping experience [with the H2.5 format] by fixing the adjacencies. We removed the drive aisle, which was a previous space dedicated to displays and the WOW bins down the main aisle of our store. Thinking about this and then put this into perspective, all we did was put in 24 feet of gondola. By adding that gondola, it equated to an incremental 60 stores based on our 2023 projects. That incremental gondola enabled us to expand categories that had significant leakage and that our customers were asking for, such as personal care, pet, and seasonal, which is that treasure hunt. Frozen food, immediate consumption, energy, and tea. And in the fourth quarter of this year, we're going to be launching Hispanic foods and beverages in our highly penetrated Hispanic stores. We have incorporated a new customized end cap displays that enhance the overall shopping experience in our H2.5s.” Dollar Tree's Chief Merchant Rick McNeely stated, “Most exciting is food, a $500 billion market, and we're less than 1%. And $52 billion is available to us at $2 and below and from $2.01 to $5, there's another huge market that is untapped for us. So that's where we're going first.”
Drieling characterized these efforts as “Taking it to the next level. Our clear path forward.” In describing the past and where Dollar Tree Inc. is coming from, Drieling shared, “Trouble was we didn't invest in our stores and we have many stores in this chain that are in pretty rough shape...Along the way, we haven't refreshed the decor. Our decor right now in both banners is right out of 1975…[Referring to the supply chain] We unload a 2,000-3,000 piece truck off the deck of the trailer…I don't know who has stood in a trailer before but when it's 110 degrees outside, it's probably 130 degrees inside that truck. People are manually taking stuff off that truck one case at a time [and it] takes us anywhere between 3 and 4 hours with 3 or 4 people to unload that truck. The future that is… [is] less than an hour…Along the way, because of our lack of performance with the vendor community, we weren't exactly on the top of the list for on-time arrivals, something that's been significantly changed. 60% of the inbound freight trucks came in on time. Now that means when the store draws that product, it wasn't even the warehouse to send them to. We had delayed store deliveries. We are now in a position where we guarantee a 4-hour window. One year ago, a store manager did not know when their truck was coming. Now I want you to think about having to unload that truck and there was nobody there in the store to do it. And of course, that all led to a terrible service level in the stores at the point of sale. As you all know, Dollar Tree was resistant to change...Consequently, the assortment in the store began to suffer and it led to customer traffic declining.”
Drieling continued, “One of the things our company struggled with is because of our wage structure; we have a significant amount of stores that do not open on time because they don't have proper staffing. They close early because they don't have proper staffing. And because of the maintenance issues in the store, sometimes they don't even open up. We have made significant progress on this...[With respect to] opening late and closing early, we've reduced that by 51% in those markets…Retail fundamentals is a fancy way of saying fantastic execution. And I think as you look at the history of companies, they do a fabulous job of executing, then they get all wrapped up in big-time strategies, and then they pull back to execution. And we are in the execution stage right now. That's our number one goal here. And we have the potential for growth.“
On sub-optimal working conditions in its distribution centers (DCs), supply chain leader Mike Kindy shared, “So when you take that heat, coupled with the heat from the summer, we get very, very warm DCs, and we get very, very low morale and performance out of our associates...We have a number of DCs that are located in very hot and humid areas of the United States. We've got Savannah, Georgia. We've got Marianna, Florida. We've got Odessa, Texas. You get the idea. In those facilities, we have conveyors also that generate heat…To alleviate both issues, the OTC issue and our performance and our associate challenges, we're adding temperature control to all of our distribution centers by late 2024, with our first DC plan to go live next month. This will allow us to set and maintain reasonable temperatures year-round in the entire DC, not just one room. With the entire DC and network being temperature-controlled, we can do a couple of things.” You read that right--DCs in Georgia, Florida, and Texas didn’t have AC coolers. And yes, that sad standard likely mirrors how associates and store managers were generally treated across both Dollar Tree and Family Dollar. Showing more consideration and empathy for associates will likely yield an outsized improvement in employee engagement which will drive sustained gains in store traffic and comp-sales.
What this means in terms of the brands’ footprints is a meaningful expansion over the next several years, as shown in the slide below. The +1K new locations per year are to come in one of three new sizes and formats: a standard format store, a specific store format for rural markets, and a third format for dense urban market. For context, Dollar Tree's expansion was around +300 new locations per year prior to the pandemic, while Family Dollar was contracting by about 50 fewer locations per year. The new rural model--a topic we've discussed in the past--produces a +20% increase in sales above the prior merchandise set/retail model and is set to challenge Dollar General’s consumer offering. Rural areas have been an open market for Dollar General (i.e., no competitors expanding, meaning no competitive encroachment and no competition for locations).
On the rural format, Gatta shared, “This is really the complement to our combo strategy. These stores are over 8,700 selling square feet. [T]hese stores have all the H2.5 elements, along with a broader seasonal selection. We are maximizing the Dollar Tree seasonal assortment.
All the work that Rick McNeely and his team do in order to create that treasure hunt. Focusing on the categories that grew incrementally in both dollars and in units. This freed up additional space and allowed us to expand to 34 doors of cold space, with the additional consumable categories. In those 34 doors, we're adding frozen food, private-label frozen food vegetables, frozen food fruits. We're adding protein chicken, so more items, more selections into the coolers.”
Drieling summarized the state of the company: "There's nothing structurally wrong with Family Dollar. It's just a matter of how it's been managed, and we're going to look at that in a different way. This is not about we get to 2026 and everything stops. This is the journey to 2026 knowing that there's plenty more to go after we get there. I think Dollar Tree is incredibly exciting. And I also think there's tremendous potential there. There's upside there, and we can do a better job of placing those stores in markets that we have historically kind of gotten away from. The supply chain for us is game-changing. I can't imagine what it must be like to unload a trailer by hand in this day and age. And then we wonder why we can't get stuff on the shelves, why we're always behind. I mean, I don't get it. And the important thing on the supply chain sooner or later, that will have make major, major differences on the P&L. I do think that the team here and we have to prove it. I think the combination of these people might want to be one of the best in retail right now. And obviously, I'm biased. But I do think once they--once we start getting this flywheel going, you're going to be very, very, very, very impressed...”