Value Retailers: Dollar General and Family Dollar Cater to an Underserved Market

Segment

Dollar General, headquartered in Goodlettsville, Tennessee, and Family Dollar, based in Mathews,
North Carolina, are the two leading retailers in the fastest growing segment of the industry, referred to
as extreme value retailing. In 2005, Dollar General had over 7,500 stores in 30 states with sales
surpassing $7 billion. Its annual growth in sales has been above 20 percent for the last six years.
Family Dollar, with 5, 600 stores in 44 states, generated over $5 billion in sales in 2004. Both retailers
are opening new stores at rates exceeding a store a day.

The extreme value retail format has become increasingly popular among a variety of customers,
including rural and urban shoppers, low- to middle-income young families, ethnic groups, and older
customers with fixed incomes. Consumers have come to trust both of these retailers to provide good
quality merchandise at low prices without the hassle of crowds and lines. The breakdown by
geographic segments is 25 percent rural, 33 percent urban, and 44 percent suburban. This distribution
is about the same as the sales distribution for Wal-Mart and Kmart stores. About 25 percent of U.S.
households shop at an extreme value retailer once a month.

Sometimes these firms are grouped under the category of dollar retailers – retailers that sell
merchandise priced under one dollar. While Dollar General and Family Dollar keep their prices
typically under $15, most of their merchandise is priced over a dollar. Family Dollar has multiple
price points whereas Dollar General prices its merchandise at even-dollar price points.

About 50 percent of the merchandise sold in the stores is consumables (pet supplies, food, paper,
household cleaning and personal care products), with the remaining sales equally divided among basic
clothing, hardware and seasonal merchandise, and home products. The percentage of consumable
sales has been increasing over the past five years. Basic stock is supplemented with opportunistic
buys of closeout/liquidation and impulse merchandise giving the impression of a changing
merchandise mix in the stores. Vendors are developing new products and packaging to meet the needs
of these extreme value retailers. For example, Fruit of the Loom typically sells men’s underwear in a
nine-pack, but it offer small packs to value retailers. Procter & Gamble and Johnson Products also sell
smaller sizes of hair care products with lower retail prices to extreme value chains.

Most of their locations are in the Southeast, where the companies are headquartered. The stores are
small, 6,000 to 8,000 square feet, primarily located in small towns with populations under 40,000 and
in suburban strip shopping centers. Because the stores are relatively small, it is easy to find good
locations in almost any market the retailers choose to enter.

Initially, these extreme value retailers focused on low-income communities that were too small to
support a large Wal-Mart or Kmart discount store. Residents of these towns appreciate the
convenience of buying merchandise close to their homes rather than driving 30 minutes to a discount
store in a larger town. Many of their customers can walk to the stores. Not only are the stores closer to
customers, but shoppers are able to park closer to the stores in uncrowded parking lots and avoid long
checkout lines. With a small store, customers can get in easily, find what they are looking for, and get
out in a few minutes. The average transaction is between $8 and $9. To maximize operating
efficiencies, the retailers typically open a cluster of stores in a geographic area before entering a new
area. Dollar General and Family Dollar are now opening stores in suburban strip shopping centers,
using space that has been abandoned by drugstores that moved to stand-alone locations.
At one time, these extreme value retailers advertised sales using circulars. But both Dollar General
and Family Dollar reduced their advertising expenses when they converted to an everyday low-pricing
strategy. This cost saving allowed the retailer to pass even more savings on to their customers.
A recent Family Dollar annual report stated, “Supply chain efficiencies are vital to the success of any
retailer, particularly one growing as fast as Family Dollar.” Thus, Family Dollar and Dollar General
are making significant investments in point-of-sale terminals, store-level inventory tracking systems,
automated distribution centers, space allocation software, and replenishment systems to reduce
stockouts and increase inventory turnover.

Discussion Questions

1. What is the target market for extreme value retailers like Dollar General and Family Dollar?
2. Why are customers increasingly patronizing these extreme value retail stores?
3. How do extreme value retailers make a profit when their prices and average transactions are so
low?
4. Can extreme value retailers defend themselves against merchandise discount retailers like Wal-
Mart, or will Wal-Mart eventually drive them out of business? Why?

Source: This case was written by Valerie Bryan, University of Florida

Abercrombie & Fitch: Hiring for Looks

Clothing retailer Abercrombie & Fitch often recruited on college campuses and in the mall to find
attractive young people and then urged them to apply for jobs. This company, known for building an
attractive workforce, did so by aggressively hiring pretty young women and handsome young men to
match their all-American brand image. Abercrombie & Fitch refers to these great-looking sales
associates as brand ambassadors. They project the retailer’s brand and make the store a better
experience for customers.

Is seeking good-looking employees a necessary trend in the retail industry? Is hiring an attractive
sales force a smart and necessary practice to differentiate the store in the competitive retail
environment? Do salespeople need to mirror the images seen in the retailer’s catalog and home page?
Does all-American mean thin, tall, and white with blonde hair and blue eyes? If the store has great-
looking college students working in the store, will others want to shop there? How important are
retail experience and ability versus a pretty face?

In seeking good-looking employees, companies are risking lawsuits for discriminatory hiring
practices. Hiring attractive people is not illegal, but discrimination on the basis of age, gender, race,
national origin, disability, or ethnicity is. Employers may establish and enforce grooming and
appearance standards. Exceptions to Title VII are possible if the employer can prove that one of the
protected characteristics is a bona fide occupational qualification.

In 2003, Abercrombie & Fitch was named in two class-action lawsuits alleging discriminatory hiring
practices. Black, Asian, and Latino plaintiffs alleged that they were denied sales associated positions.
These workers were directed to low-visibility jobs in the stock room or maintenances department.
Abercrombie & Fitch did not admit guilt and denies that it engaged in any discriminatory practices
but settled these cases for $40 million distributed to several thousand minority and female plaintiffs.
The company agreed to appoint a vice president for diversity, use benchmarks, train all hiring
managers, and hire 25 diversity recruits in an attempt to alter its white, all-American image and more
accurately reflect the applicant pool in its stores. The settlement also calls for Abercrombie & Fitch
to increase diversity in its promotional materials.

DISCUSSION QUESTIONS
 1. Why would Abercrombie & Fitch want to hire employees with a certain look?

2. From a business perspective, do you think this is a good idea? What about from an ethical
perspective or a legal perspective?

Source: This case was written by Hope Bober Corrigan, Loyola College in Maryland.

SaksFirst Builds Customer Relationships

It’s Wednesday afternoon, and as usual, Gwendolyn has a fitting room ready for Mrs.
Johnson. She has picked out some of the new items in Mrs. Johnson’s size that came in the
previous week. She has everything from scarves to jewelry to shoes ready to go along with
the outfits.
“Good evening, Mrs. Johnson. So how was your birthday?” Gwen asked.
“It was wonderful. My husband took me to Italy. Thank you for the card.”
“I pulled some new items for you to try on.” Gwendolyn said.
“Thank you, Gwen. You are the best!” replied Mrs. Johnson.

The reason Mrs. Johnson has such a friendly relationship with Gwen is because Mrs. Johnson
is a regular customer and a SaksFirst member.

Saks Fifth Avenue started in the early twentieth century. Saks is considered the epitome of
class, style, and luxury. When customers go to Saks, they receive excellent customer service,
when they join SaksFirst – started in 1994 – they also receive a lot of additional benefits.
SaksFirst is a preferred customer program that helps facilitate more personal customer sales
associate relationships.

To become a member, a customer has to have a Saks Fifth Avenue credit card, and once she
or he spends at least $1,000 a year, the customer is automatically enrolled. For every dollar
spent, the customer will receive a reward point. At the end of the year, preferred customers
receive 2, 4, or 6 percent in bonus points based on how much they charged that year above
$5,000 at Saks.
SaksFirst customers receive many exclusive benefits. The tangible benefits include the
points, rewards, and discounts. Customers also receive complimentary shipping and delivery
for catalog and online orders, advance notice of sale events, the SaksFirst newsletter, catalogs,
promotions and giveaways, double- and triple-point events, and double points on their
birthdays. The intangible benefits include recognition and preferential treatment.

For the retailer, the main purpose of the SaksFirst program is to promote excellent customer
service. The better the relationship between the customer and the sales associates, the more
money loyal customers will spend. Every year there is a triple-point event in the first week of
November. That one-day event accounts for the highest volume sales day of the year, higher
than the day after Thanksgiving or Christmas. Knowing this, the company understands the
importance of the preferred program.

The SaksFirst program can also be used by sales associated as a selling tool. If a customer is
uneasy about purchasing large-ticket items, the sales associate can remind the member of the
bonus certificate that will return a percentage of the cost. Sales associates are motivated to
enroll as many of their customers as they can because they are given incentives such as
“lottery tickets” that are redeemed for cash.
 DISCUSSION QUESTIONS

1. How does SaksFirst build loyalty for Saks Fifth Avenue versus other upscale retailers
(such as Nordstrom)?

2. How effective is the SaksFirst program in developing customer loyalty?

3. Whom should Saks target the SaksFirst program toward?

4. Is the SaksFirst program worth what it spends giving back to customers?

Source: Case prepared by Teresa Scott, University of Florida

Borders Bookstore: A Merchandise Display Problem

Michael Chaim, general manager of the Borders Bookstore in Madison, Wisconsin, was
proud of his store. Located in a city that has one of the highest levels of book purchases per
capita, Chaim felt Borders’ selection; services and location near the 40,000-student university
served the community well. Even with competitive pressure from the newly opened Barnes &
Noble on the west side of town, his bookstore/café was often a busy place.

Chaim was taken aback when an article in a widely read alternative newspaper criticized the
bookstore’s merchandise arrangement as being prejudiced. The store carries a large selection of
literature and poetry, but it separates some specialty categories, such as African American literature,
gay and lesbian literature and feminist literature, from the general literature and poetry sections. In
part, this arrangement reflects Borders’ college town roots in Ann Arbor, Michigan, where specialty
collections were established to match course offerings.

The article described this arrangement as “ghettoizing” authors who were not white males, though
some female authors were in the general literature and poetry sections. The article and some follow-
up letters to the newspaper’s editor derided Borders for the few “nontraditional” authors who made it
into the general literature collection.

They felt that these African American, homosexual, Native American, and other nontraditional writers
probably would not have been separated from the general collection had the management known the
literature better. While Madison is known as a very liberal community, Chaim thought the accusation
was unfair. He strongly believed that he was doing his customers a service in highlighting authors and
literary genres that might be overlooked in a large, nondifferentiated collection. More immediately, he
knew that he should respond to the article’s accusations.

Discussion Questions

1. Although Chaim has several options, one is to duplicate the titles that could be shelved in either the
general literature collection or a specialty collection. What are the advantages and disadvantages of
this tactic?

2. The Borders store described in this case is in a college town. How should the merchandise be
arranged in a different location, such as a suburban residential location or a more urban setting?

Source: This case was prepared by Jan Owens, University of Wisconsin and Parkside.

The Gap and Old Navy

DONALD FISHER AND WIFE launched The Gap in 1969. Initially, The Gap stores were unique in
offering every size and style of Levi’s, arranged by size for convenience. When the teen-jean craze
slowed in the mid-1970s, stores were repositioned for people interested in a fashionable, causal
lifestyle. Donald Fisher, then CEO, and Mickey Drexler, then president, added other chains to The
Gap portfolio of specialty apparel stores: Banana Republic and Old Navy. Banana Republic is
positioned at the high end of the quality/price spectrum that includes the moderately priced Gap and
the company’s newest chain, Old Navy, featuring the least expensive clothing.

For years, the flagship Gap stores, with $11.6 billion in sales and an estimated $1.1 billion in profits,
made up more than a third of the entire company’s profits. But in May 1999, Gap began to lose the
edge it had enjoyed for several years. Other competitors such as Abercrombie & Fitch and American
Eagle Outfitter were beginning their assault on the fashion market with trendier clothes and better,
more aggressive advertising campaigns.

For six consecutive months, sales at Gap stores fell to all-time lows, taking the stock price down with
them. The apparel market was in a transitional phase that favored either high-priced designer-name
fashions or the low-end wear that has consistently sold well. This trend was reflected in large sales
increases in the high- and low-end Gap chains—Banana Republic and Old Navy were selling very
well. The challenge for Gap was that it needed a new marketing plan without disrupting the strong
sales of its other stores. Drexler was well aware of this fact and brought with him new and innovative
ideas that the company desperately needed. Drexler, the Gap’s president since 1983, became the CEO
in October 1999 when Robert Fisher, the president and son of the Gap founders, retired. The
company’s stock immediately rose 10 percent on the news of Drexler taking over.

Mickey Drexler developed the concept for the Old Navy chain to cater to the new lifestyle of teens
and young adults who want fashion but do not have much to spend on clothing. He selected the name
for the chain after seeing it on a building during a walk around Paris. Old Navy is consistent with the
growing strength of discount stores in apparel retailing. Consumers were predicted to spend $40
billion—nearly a third of their apparel dollars—at discount department stores, off-pricers, and factory
outlets in 1999. It is not only price that drives consumers into discount stores for apparel. The industry
has made great efforts in assortment, quality, and fashion. Discount stores have also come a long way
in improving display, borrowing ideas from regular stores. In 1999, the Old Navy, with 16 percent of
the stores, accounted for 35 percent of the sales of Gap Inc.

The Old Navy Clothing Stores have the same kind of merchandise as The Gap stores, but will be able
to keep prices low by using lighter-weight, less expensive fabrics in addition to scaled-down store
decor and lower-priced locations in strip shopping malls. Old Navy stores have unique design
elements featuring 1950 Chevies and merchandise piled on old freezers.

Although half of all Old Navy stores are within a mile of a Gap, they take only 5 to 10 percent of
Gap’s business, with all of the rest coming from elsewhere. As COO of Gap, Inc., John Wilson said,
“It’s a temporary hit, but the volume comes back; we’d rather cannibalize our own business than have
the competition do it.”
In April 1999, Jenny Ming was appointed president of Old Navy. Ming started her career at The
Gap in 1986 as a buyer. Ming has a knack for predicting what hip-looking clothing will appeal
to the masses and making big bets on producing large quantities to ensure that these items will
be in stock. One of her early successes was dramatically increasing the sales of T-shirts by
increasing the color assortment from six to a couple dozen and marketing them all year, instead
of just in the summer. More recently she was the key force behind the explosive growth of fleece
merchandise.

Old Navy’s new, four-story, 100,000–square-foot flagship store in San Francisco is its largest ever
built. This store is similar to its 80,000–square-foot showplace in New York, with a deejay booth
where shoppers can create their own CDs and a lower-level, fashion-forward, off-price department.

Discussion Questions

1. How do you think the growth of Old Navy will affect the sales in The Gap chain?
2. In the next five years, where should Gap, Inc., place the greatest resources: Old Navy, Gap, or
Banana Republic? Why?
3. In what ways could the Gap chain enhance customer appeal and loyalty?

Source: This case was prepared by Pirkko Peterson, University of Florida.

Cleveland Clinic

For years, Ohio’s Cleveland Clinic has ranked with the top world-class providers of medical care. It
pioneered coronary bypass surgery and developed the first kidney dialysis machine. King Hussein of Jordan
used the clinic, as does the royal family of Saudi Arabia.

Big-name health care institutions like the Cleveland Clinic are after new markets for their state-of-the-
art medical care, and are posing a new threat to local physicians. The expansions are also disrupting
traditional relationships between physicians and their patients, physicians and their hospitals, and
physicians and their fellow physicians.

Like any business, the Cleveland Clinic keeps close tabs on its core market, and the outlook wasn’t all that
bright. Seven Midwestern states provided 90 percent of the clinic’s business, though population growth in
that region is expected to be flat through the year 2010. But not so southeastern Florida, where the
population is still growing and, in many areas, is highly affluent. Southeastern Florida appeared to be a
dream market. Yachts lining the canals of the Intracoastal Waterway and a ubiquitous building boom reflect
wealth and growth so palpable that clinic officials have come to call it immaculate consumption. Moreover,
about 20 percent of the 3.7 million residents in Dade, Broward, and Palm Beach counties are over 65 years
old. About 50 percent of the population is over 45—a potential mother lode of patients. “We felt there was
room for us,” Dr. Kiser, CEO of Cleveland Clinic, said. “We decided to go on our own rather than wait to
be invited.”

When the Cleveland Clinic opened an outpatient clinic in South Florida, a war broke out. In a full-
page advertisement in the Miami Herald, Dr. Seropian, a local physician, pulled out the stops. He
likened the clinic to dingoes (wild Australian dogs) that roam the bush, eating every kind of prey. The
clinic filed suit in federal district court in Fort Lauderdale, charging, among other things, that some
physicians had conspired to hamper its entry into Broward County.

Famous medical institutions like the Cleveland Clinic and Mayo are victims of their own success.
Many of the once-exotic procedures that they invented are now routinely available across the country,
reducing patients’ need to travel to the medical meccas. For instance, the Cleveland Clinic might once
have had a hold on coronary bypass surgery, but no more. In 2000, more than 350,000 patients had
the operation at hospitals throughout the United States.

“These clinics used to be the court of last resort for complex medical cases,” says Jeff Goldsmith,
national health care advisor to Ernst & Young, the accounting firm. “Now, the flooding of the country
with medical specialties and high technology equipment has forced them to adopt a different
strategy.”

Their expertise and reputation mean formidable competition for the local medical community. “On
one level,” says Jay Wolfson, a health policy expert at the University of South Florida in Tampa, “it’s
like bringing in a McDonald’s. If you’re a mom-and-pop sandwich shop on the corner, you could get
wiped out.”

Discussion Questions
1. Compare the Cleveland Clinic to traditional retailers.
2. What was its retail mix?
3. What factors in its environment resulted in it changing its retail mix?