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How Big is Too Big? Dollar General's Aggressive Expansion May Not Be a Bargain

:There's a (relatively) new behemoth in town: If you're not familiar with Dollar General (DG), it probably won't be long before it supplants a neighborhood store near you soon. With 9,372 locations, the discount chain may be huge (it bills itself the largest), but its fourth-quarter profit more than doubled over last year and expansion plans continue at an aggressive clip more often seen in smaller, more nimble operators.

The question now becomes: how big is too big? Here are some things the retailer needs to consider as it grows.

A hungry, profitable giant
Steady growth has helped Dollar General diligently chip away at its long-term debt. The company managed to knock it down by another 3.3 percent from a year earlier. Most of that debt was taken on when private-equity firm Kohlberg Kravis & Roberts financed a leveraged buyout of $6.9 billion in 2007. KKR took Dollar General public in 2009. Fourth quarter sales jumped 9.4 percent to $3.49 billion and comps were up 3.8 percent. Profits for all of 2010 rose 34 percent.

Armed with those handsome figures, Dollar General's management is leading an aggressive charge that will cost a cool $600 million. More than half the money will go into the chain's planned 625 new stores and to remodel or relocate approximately 550 stores this year.

Another 25 percent is for special projects including approximately $90 million for a new distribution center in Bessemer, Alabama. If the profits keep rolling, that kind of spending is fine. But Dollar General should have a contingency plan at the ready in case sales slow.

Get your HR ducks in a row
Also on the plus side, the store openings in new suburban, rural and metropolitan markets such as Connecticut, Nevada and New Hampshire will create 6,000 new jobs. For perspective, 2011 is the third year in a row that Dollar General's hiring, rather than eliminating staff, adding a total of about 15,000 new employees.

Creating that many jobs in an unsteady economy would put a halo around any business. But let's not forget that having over 87,000 (and counting) in your employ is a massive responsibility. Dollar General needs only to observe the tribulations faced by Walmart (WMT), the largest private employer in the country with 1.4 million currently on the books.

The Bentonville-based chain is notorious for treating its employees like second-class citizens. As such it's had a number of human resource nightmares including a massive class-action sex discrimination suit. Walmart's also been taken to task for cutting employee pay and benefits in order to improve its balance sheet.
If employment message boards are any indication, DG's employees are jeering. Dollar General needs to clean up its act now, before it completely loses touch with the people staffing its stores. It certainly doesn't want a repeat of the lawsuit it faced in 2008 in which 2,500 female workers claimed they were treated unfairly.
Brand name gobble
It's no secret that Dollar General's savvy management trumped Bentonville's C-suite during the recession. DG steadily gained market share by keeping prices low and adding big name brands. In addition to Bobbie Brooks apparel (which Walmart used to carry) Dollar General stocked its holey, metal shelves with L'Oreal cosmetics, Rexall health and beauty aids and Heinz foods.
While it's smart to entice customers by providing an array of covetable goods all in one shopping trip, these brand gobbles take Dollar General that much further from its true dollar store roots. And each move away from the place where price -- not brand -- is to the value proposition is a step closer to where Walmart floundered.

Dollar General would do well to consider what remained successful for Walmart in apparel and other categories: basics. People shopping for toothpaste and laundry soap may pick up a six pack of tidy whities on their way down the aisle. A blinged-out sweatshirt or trendy button up -- not so much.

Location, location
While Walmart's bumping up against location saturation now, there are lessons to be learned from over-expansion. Dollar General's stores average just over 7,000 square feet (smaller than most supermarkets) but they are jammed with merchandise (think 12,000 core products) and not everyone wants a cram-jammed discount chain in their local strip mall, especially as the economy recovers.

Investing some time into a long-term roll out strategy for urban centers and other places where businesses co-exist more peaceably with residents now may prevent stagnant sales in the years to come.

Image via Dollar General

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