Moving Up: Dollar General Takes on Walmart and Walgreens

Recently, we reported that Dollar General (DG) was going after Walmart (WMT) on its way to becoming a true discount store,. Now Dollar is going after Walgreens (WAG) as well.

Dollar General is expanding product initiatives that take it further away from dollar store status, where price, not brand, is important to the selling proposition. The new positioning moves Dollar closer to what discount stores once were -- places that offered inexpensive but consistent product assortments that working people with limited discretionary cash could afford.

The company is making its move at the right time, when a soft economy has made consumers more apt to check out retailers that offer low prices but promise quality and value. A big step was reviving the Bobbie Brooks apparel brand, one that has a long tradition, and even once was controlled by Walmart. Bobbie Brooks speaks to value with modest prices and an established level of quality that has made it attractive.

In a conference call, Rick Dreiling, Dollar General chairman and CEO laid out a series of initiatives the company has just initiated or plans launch over the coming year:

Launch the L'Oreal brand of cosmetics in its stores, a move that Dreiling said will "transform small box retailing."
Expand the Rexall brand, a well-established drug store label, from vitamins to a wide range of health and beauty categories.
Rollout a broad assortment of Heinz products in food.
Introduce Dollar General's own True Living brand in home dÃ©cor, lawn and garden, and outdoor toys.
Restage seasonal merchandise through the work of a new management team charged with upgrading holiday and related displays.

Traditional discounters were convenient places to shop for a wide range of inexpensive products. Health & beauty aids and over-the-counter drugs were part of the mix, and by expanding its assortments in those segments â€"- and using Rexall, a brand that has been found in drug stores for years -â€" Dollar General gives consumers another reason to stop by the store or to grab an additional purchase as they're picking up Bobbie Brooks jeans. L'Oreal, too, and enough glamor products to make the retailer a credible alternative to drug chains such as Walgreens in a category that dollar stores never explored in earnest. By emphasizing recognized brand names, and launching private labels, Dollar makes it easier for consumers to count on it across more buying occasions.

In a recent study, consumers actually put Walmart's brand on an equal footing with Macy's. The evidence of the study suggests consumers draw fewer distinctions between one store and another. It also suggests that a retailer such as Dollar General is free to reestablish its position in the market no matter its first name.

The gap between true dollar stores and discounters has grown wider over the years as brands such as Martha Stewart, Fieldcrest and Apple (APPL) sent Kmart, Target (TGT) and Walmart after a more affluent consumer. Dollar General is stepping into territory they might not have abandoned, but don't protect as jealously these days. In the fourth quarter, the company posted a sales increase of 13 percent to $11.8 billion and an increase in comparable store sales â€" those open for at least a year â€" of nine-and-a-half percent. Discounting one-time charges, Dollar General's earnings increased 121 percent to $172.9 million or 51 cents and gross margin, a figure that has sagged lately for many of retailers pressured on price, gained two percentage points to come in just over 31 percent. Given its recent results, consumers seem to welcome Dollar General's intrusion.

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