No. of Recommendations: 12
But I suspect their margin problems are not just shrink, but also the fact that they have been adding a lot of lower-margin food sales to the mix. If 81% of their sales are consumables, where they have big competitive disadvantages already against Walmart and other grocery stores, how is this fixable?
As mentioned elsewhere (e.g. post 360 in this thread), this is a feature, not a bug. They have a strong strategic goal to increase the fraction of goods that are consumables, because it has a huge effect on frequency of visit. The theories behind it are (a) higher turnover largely makes up for the lower margin, and (b) people who are there for consumables will frequently also buy something else with a higher margin. Like any business, there is no one metric (in this case gross margin) that tells the whole story, especially one that management has been (in effect, indirectly) *trying* to push down. It would be more informative to look at trends of gross margin in non-consumables, if it were reported separately.
An additional very US-specific reason is that a lot of the consumables can be paid for with food stamps, not an inconsequential consideration for many of their core clients. Dollar General is in the top 3 destinations for SNAP dollars. As of a May report, the share going to dollar stores was rising, and to supermarkets falling.
Of course, over longer periods of time this strategy of having more food&bev has to demonstrate its veracity, say comparing two similar periods in the business cycle to see if the overall margin dollars per square foot have risen in real terms. If the sales are staying the same and the *only* change is falling margins (comparing similar periods in the cycle) then the strategy isn't working, or at best is only working enough to counteract other bad trends. Right now it's kind of simple, in that there is no particularly good news to be had on any front. It's either an unfortunate cyclical point or a bad trend.
Jim
