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A season of change at Dollar General

This will be a year of transition and investment for Dollar General, as the leading retailer targeting low-income consumers works to improve operational efficiencies, cut costs and fend off discounters, off-pricers and rival formats targeting its customer base.

Although operational issues will be the company's primary focus this year, going forward Dollar General will also look at ways to bring down pricing and boost sourcing, executives said during the company's fourth quarter conference call last week.

"We are absolutely convinced there are opportunities where we are out of line with our competition on the low side," said David Perdue, chairman and CEO. "We think we can build in a little bit of margin improvement and still come in lower than our competition, especially in the areas of sizing and packaging. But we are still constantly working to take cost out of products."

The 6,817-unit retailer will also ramp up opportunistic purchasing as part of the overall product mix, and may eventually implement category management in some areas, executives said.

"When I look at our current mix of brands and private label, we also have an opportunity to balance that," Perdue added.

In terms of sourcing, Dollar General has opened its first buying office in Asia. Direct imports now account for about 15 percent of the mix, with imports from suppliers making up an additional 15 percent.

The retailer also is working to significantly improve in-stocks. The 4,400 stores that are now on the new auto replenishment program have experienced sales increases 135 basis points higher than those not on the system. The system will roll out to the remainder of the chain during the first half of the year.

"We believe it absolutely will drive sales," Perdue said. "Basically, our stores have turned into mini distribution centers, where we force most of the managers to handle merchandise rather than interacting with customers."

For the first time, Dollar General will introduce a spin-off concept. With general merchandise retailers such as Wal-Mart and Target rolling out "dollar sections" in their stores, Dollar General this year will roll out a new format that focuses on food and consumables to drive traffic.

The retailer will open 20 Dollar General Market stores this year. Two units have been in test since late last year, both in the greater Nashville area.

The 16,000-square-foot stores — in Hendersonville and Pleasant View, Tenn. — carry a 50 percent food/50 percent general merchandise mix.

"The results are so encouraging coming out of that model, we decided we just had to do it," said Perdue.

Although 85 percent of the food skus in Dollar General Market stores are carried by regular Dollar General Stores, food is presented as the main traffic driver for the new units, which also contain some general merchandise.

"Although they're very young stores, they are attracting a lot of new customers to the concept," Perdue added. "The productivity of the stores is higher than our original model."

Most of the new markets will open in the second half of 2004. Dollar General will use the new fleet to test location variables, an assortment of product mixes and layouts.

The larger priority for the year falls in the operations area. In addition to the automatic replenishment program, the company has embarked on a workflow analysis with McKinsey and Co. that it expects to begin implementing later this year. Dollar General also is focused on reducing shrink, with a goal of getting shrink to 2.5 percent. It is also working to reduce its store manager turnover rate, and recently named 48 new district managers, 78 percent of them internal promotions.

In another new initiative, Dollar General will develop a central data warehouse and will also install PCs in some stores.

The company will spend roughly $300 million in 2004 to complete the installation of dual sortation systems in its Ardmore, Okla., and South Boston, Va., distribution centers; begin construction of a new DC in Union County, S.C., roll out a cooler program now in 2,445 units to an additional 3,500 stores; add new fixturing in some stores; and open 675 new units, including the Market stores.

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