When we think about grocery stores, certain big-name chains come to mind, but Dollar General (NYSE: DG) may not be one of them. That could change in the near term, though. The discount store giant is in the process of expanding further into the fresh food space, and it could impact the grocery market as a whole.
Capitalizing on the pandemic boom
Though the retail sector got hammered in the course of the pandemic, discount stores like Dollar General managed to not only survive but thrive. At a time when the U.S. jobless rate soared to sky-high levels and money suddenly grew tight for millions of households, dollar stores saved the day, offering products at prices more households could afford.
Now, Dollar General is planning to capitalize on that momentum by building up its grocery business, with a particular focus on fresh food items. And based on its physical footprint, it's well suited to take a lot of business away from existing grocery store mainstays.
It's estimated that 75% of Americans now live within five miles of a Dollar General, and that percentage is only likely to increase as the discount store giant makes plans to expand. In 2020, Dollar General opened more than 1,000 new stores and remodeled another 1,670 locations despite the fact that the pandemic continued to rage at the time. This year, Dollar General intends to open 1,050 new stores, remodel 1,750 stores, and relocate 100 stores.
Historically speaking, the more stores Dollar General opens, the more revenue it manages to generate. And so the company has big plans to potentially expand to the tune of 34,000 stores or more over time. Furthermore, while Dollar General intends to focus on rural locations, the company is also looking to expand to more suburban areas, especially in the wake of pandemic-related migration patterns that drove many people out of cities and found them relocating to towns offering much more living space.
Bringing more fresh food into the fold
Dollar General already is, to a large degree, a one-stop shop for consumers, with its extensive inventory of shelf-stable goods. But now, the discount store giant is experimenting with new formats and layouts in the hopes of offering more fresh-food items in the near term.
In 2019, the chain launched its DG Fresh initiative that brought more fresh and frozen products to stores. As of late 2020, about 1,100 Dollar General locations offered perishable grocery items, and the company plans to add produce to around 700 additional stores in 2021, bringing the total number that carry produce to over 1,800.
Dollar General also plans to open two new DG Fresh distribution centers this year and add tens of thousands more cooler doors across individual stores. So far, adding coolers has been profitable for Dollar General. At its traditional stores with coolers, the company has seen a 4% to 5% increase in same-store sales. And at its larger stores with more cooler capacity, there's been a 10% to 15% uptick in same-store sales.
The investor takeaway
At a time when shopping centers are grappling with vacancies due to pandemic-related store closures, the fact that Dollar General is expanding is a very positive thing. And while it may drive some grocery stores out of business, ultimately, its expansion plans are more than robust enough to make up for it.
Real estate investors should therefore regard Dollar General's grocery takeover as good news. Introducing fresh food into the mix will secure the retailer's position as a one-stop shop -- a model that's historically worked very well for other shopping centers anchors like Walmart and Target. And given that the U.S. economy still has a ways to go on the road to a full recovery, the demand for dollar stores is likely to stay strong.