"There's nothing quite like it out there": Dollar General's Popshelf hopes to conquer a new market
The last year was not one of the most successful for launching new retail concepts. As the pandemic gripped the country, many in the industry invested their time and effort into establishing e-commerce capabilities.
Dollar General was one of the few, tough-minded companies that launched new store concepts for 2020. Its first store under the Popshelf banner opened in Tennessee last October, and didn't get many visits from media or financial analysts. It was the first time an analyst had seen the store in person and called it the most innovative concept he'd seen in almost two decades.
Scott Mushkin (CEO of R5 Capital) said that he walked into the building and thought, "Wow, this is something very special." "Five Below in 2005 was the only other one that left a lasting impression on me."
Dollar General has been long interested in customers with higher incomes than its base. Popshelf, an entire concept dedicated to a market that is not within the core of Dollar General, is called Popshelf. As such, it is a first not just for Dollar General, which opened its first store in 1955, but in many ways a first for the entire sector.
"From Dollar Generals perspective, they saw a market opportunity that was being underserved," Joseph Feldman, assistant director of research at Telsey Advisory Group, said. I hear it a lot from value-oriented retailers and dollar stores that there are great products out there, if you can go upscale a bit higher than you usually do in your core shop.
Dollar General opened eight Popshelf shops between October and May. They are approximately 9,000 square feet each. The performance of those stores "far exceeded our expectations," Chief Operating Officer Jeff Owen said in Dollar General's most recent earnings call.
As of May, annualized sales were $1.7 million to 2 million per store, as compared to $1.4million in the first year for a Dollar General. Owen reports that Popshelf's gross margin rate is approximately 40%. This is eight percentage points more than the Dollar General store.
The banner's success has allowed the company to accelerate its construction of the concept, as it targets thousands of locations in the U.S. The concept is still in its infancy, despite being a success. Dollar General will need to make informed decisions about the brand and scale a concept that is not like any other dollar stores.
Five Below for the Over-20 Set
In announcing the new format, Dollar General said that it targeted suburban female customers with household annual income ranging from $50,000 to $125,000. Popshelf was the first dollar store to exclusively target this demographic.
Although comparisons to Five Below may be inevitable, especially since Popshelf's target prices are $5 and less for most items, these comparisons are not accurate due to each format's target customers.
Mushkin stated, "There's nothing quite like it out there." It's very trendy. It's insanely expensive. It's just an amazing format. It's like Five Below grown up in some ways. However, that doesn't give it justice enough.
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There are many value-based and discount retailers competing for the middle-class suburban shopper's dollars. Feldman mentioned Ollie's and Big Lots as well as HomeGoods and Bed Bath & Beyond. Popshelf has a unique offer and merchandising that none of these stores can match.
It's too simple to compare a Popshelf to Five Below. It's more adult Five Below.
Joseph Feldman
Retail Analyst & Assistant Director Of Research, Telsey Advisory Group
Feldman also pointed out the unavoidable, but flawed comparison to Five Below. Feldman stated that it wouldn't surprise him if Dollar General noticed Five Below's success and saw HomeGoods' success and decided, "Hey, you're right, there's a niche there too," to cater to the adult market." It's not possible to compare a Popshelf to Five Below. It's more adult Five Below.
Retail Dive was told by the company that Popshelf is not designed to replace or improve existing retail formats. Popshelf is a brand and a store concept that's completely new.
Popshelf's merchandise, which focuses on seasonal, home decor, health, beauty, cleaning supplies and other categories, is key to the banner's appeal to customers.
Popshelf is headed by Emily Taylor, Dollar General Chief Marketing Officer. The retailer looks beyond traditional household items. Its aim is to trade in popular brands and products, and create a treasure hunting experience at Popshelf stores. This includes offering seasonal specials and limited-time deals, as well as continually updating merchandise.
Already, the company believes that the banner is resonating with customers. CEO Todd Vasos in May cited promoterHe described the scores as "unheard" and said they were in the upper 80% to 90% range. Owen stated that customer satisfaction scores at Popshelf are "very high" during the conference call.
The analyst wondered if Mushkin was merchandising the thing when he visited the store. Mushkin saw face mask bars and black cutlery as well as colored pens, shampoo, dog treats, and stations for making your own mops. He also saw healthy snacks and other consumables. His firm believes that at least half of the sales in Popshelf's stores will come from higher margin categories.
Mushkin stated, "You can't market anything better than they are doing."
Popshelf allows Dollar General to access products and prices that are not available in its traditional stores. Feldman stated that the banner will allow the retailer to "leverage its strengths, which are clearly purchasing and sourcing." It opens up a whole new world of goods and products.
It also means that you will be purchasing for a unit in the larger company, which has very different needs than the rest of Dollar General. This is because Dollar General is more focused on household necessities and consumables. The retailer has worked to increase sales of non-consumable items, which helped to create Popshelf. Feldman believes that even though the needs are different, Dollar General's existing infrastructure can be used to stock Popshelf.
Feldman stated that they already have the backing of Dollar General. You can get amazing pricing by going to the market and being able to carry that heavy pencil to place those orders.
Behind that "heavy pencil" is the financial firepower of a company that made $33.7 billion in annual revenue and $2.7 billion in net profit during a crisis year for the country. A large, established buying group also stocks Dollar General's over 17,000 stores.
Popshelf also has its own procurement team. This group aims to "to leverage core competencies of DG to support pOpshelf and collective buying power with suppliers for the benefit customer," Retail Dive was told by the company in written comments. There are also opportunities to learn from each other in the merchandising of Popshelf and core banners. Dollar General stated that DG has the power to influence pOpshelf but that it may be possible for DG to learn from pOpshelf and integrate them into DG stores.
Filling a niche
It is possible to open during a pandemic.
When asked about the matter by an analyst in December, Vasos stated that the concept was in the making for 18 months and had always been slated to open when it did. "So we were very much right on track to our initial launch times," Vasos said, according to a Seeking Alpha transcript.
Executive continued by stating that they didn't expect the "ampleness of real estate available" and that it has been a positive for them. This abundance was due to the closing of nearly 9,000 stores last year. It created opportunities for a retailer which already accounts for almost a quarter of all new store openings for 2021.
Popshelf may have been able to expand its reach by acquiring real estate from retailers that are closing down. This could also explain the company's stellar sales performance.
Owen stated in March that the company was speeding up its plans for Popshelf. The company now plans to open 50 stores under the Popshelf banner, an increase of 30 stores. It will also add the concept at 25 Dollar General stores throughout the year. Executives see potential for 3,000 Popshelf stores across the U.S. in the long-term.
Mushkin used Five Below as a proxy to estimate the potential Popshelf stores. It is unclear where all these stores will be located and with whom they will share strips.
Feldman spoke of Dollar General's employees as saying, "I think they just love being in high-traffic areas."
The concept's target audience is large enough, and the offer is broad enough to be placed in many shopping centers. Mushkin said, "It's right in the middle." "Bed Bath & Beyond and Kohl's -- any one of the ubiquitous strip centers in the United States with middle-income retailers within it."
He said that while Popshelf might be competing against Five Below in real estate, they are not necessarily competing for consumer wallets. This is due to the difference in the target customer's age.
Mushkin stated that Popshelf could be considered a co-locator for Five Below. This could allow family shopping on the same strip. Parents might shop at Five Below while their teens and tweens shop at Popshelf.
Do you prefer one store or two?
For Dollar General, there are big decisions to be made and risks associated with scaling Popshelf.
Executives signaling that they intend to add the banner as a shop in-shop within its namesake formats raises obvious questions. Is it possible for the brands to be complementary? If so, in what markets and to what extent? What are the drawbacks of merging the two brands?
The company hasn't yet revealed how many shops-in-shops will it open, or how large they might be in Dollar General's goal of 3,000 stores.
In a March call, a Goldman Sachs analyst asked executives, "As you think about your core customer, what gives you confidence that the customers will not feel an alienation to the core banner with this double signage outside in a store-within-a-store concept?"
Vasos said that the areas in which it could put a Popshelf within a Dollar General were those with higher incomes than its traditional core customer. Vasos noted that there have been strong sales in areas where there has been cross-pollination of products. This means that products sold in Popshelf are also sold within Dollar General without any Popshelf signage.
Mushkin is skeptical about the shop-inshop strategy and has stated that he has told company executives flatly that he does not believe the strategy is a good one.
Mushkin stated that co-mingling may have the upside of allowing you to put a Popshelf in your DGSs, which can increase returns by a certain amount. What's the downside to co-mingling? Popshelf's brand is tarnished and you don't get the results you want. You can ruin something that is just incredible.
He said, "It'sn't like you can do it all the time, but you preserve the brand and grow it yourself. That's what I consider more important.
Popshelf is now a separate entity due to its higher prices. 95% of the products are $5 or less. Feldman stated, "I don’t know if you could just drop in some of these stuff" at Dollar General stores. This could send the wrong message about Dollar General to customers.
Mushkin believes the banner could be sold or spun off eventually. He said that Dollar General was "something that is completely different in my mind." Popshelf's value potential, which he believes could add more than $50 in stock price to the retailer, is one.
They also have different operating characteristics. Popshelf's constant merchandise replenishment demands a different labor structure and training than Dollar General stores. According to the company, Popshelf stores will have 15 jobs for labor while traditional Dollar General stores would need 6-10 new jobs.
Mushkin stated, "I believe they can scale it. But it's different running 15 or 20 stores than it it is 3,000."
Popshelf is still in its early stages and the company has not yet indicated whether it will one day spin-off the banner. It is moving quickly from an experiment to a store chain. Dollar General believes that Popshelf's higher pricing and higher margins will make the company money.
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