Dollar Stores Have A Serious Problem

Includes: DG, DLTR, FDO, KR, TGT, WMT
by: Daniel Jennings


News reports provide evidence of safety violations and blocked aisles at both Dollar General and Dollar Tree.

Customers have complained of not being able to navigate the aisles at Dollar General.

The problems indicate that management might not be walking the store at both chains.

Dollar Tree has been cited for 200 health and safety violations by OSHA since 2009.

The Dollar Tree complaints cast doubt on that retailer's ability to absorb Family Dollar.

The nation's two biggest operators of dollar or standalone small-box discount stores, Dollar Tree Stores (NASDAQ:DLTR) and Dollar General (NYSE:DG), seem to have serious operational problems at some of their outlets that are not being addressed.

These problems are of the variety that could drive customers elsewhere, generate labor disputes and lead to regulatory action, recent news articles indicate. The problems are similar to those that Wal-Mart (NYSE:WMT) U.S. president Greg Foran blamed for falling foot traffic at the nation's largest retailer earlier this month.

Dollar General is facing $83,050 in fines because of four violations uncovered by inspectors from the U.S. Occupational Safety and Health Administration (OSHA) at an Atlanta area store, TV station WBS reported. The violations were apparently part of a pattern of violations found at Dollar Stores nationwide, an OSHA official told WBS.

"Continually exposing their workers to the hazards, blocked exits, locked exits, blocked electrical panels have been found throughout their corporation nationwide," Christie Griffin, the director of OSHA's West Atlanta office, said of Dollar General. "They seem to have not taken the message to all of their workers in protecting them."

OSHA called conditions at the store in Carroll County, Georgia, extremely dangerous for both customers and employees. OSHA has found more than 40 violations at Dollar General stores across the country since 2009.

Aisles Blocked At Dollar General

Nor is safety the only concern at Dollar General; boxes blocking the aisles at a Moundville, Alabama, location prevented both shopping carts and wheelchairs from moving through the store, TV station WBRC reported. Pictures provided to the station by customer Donna Shelton Smith show aisles blocked by boxes and carts filled with merchandise.

"My son is 15 years old and uses a power wheelchair," Smith said. "He cannot get through the store."

Smith said she has heard similar complaints from other family members of disabled individuals. A Dollar General spokesperson told WBRC that the problem was being addressed.

Apparently, the only way Dollar General's management is aware of problems at its locations is when the media reports on it. One has to wonder what sort of corporate communications are going on at that company.

Dollar Tree Cited For 200 Violations By OSHA Since 2009

OSHA has cited Dollar Tree for 200 health and safety violations since 2009, The Houston Chronicle reported. The violations reportedly occurred at Dollar Trees nationwide.

The violations included blocked exits and boxes piled dangerously high in the aisles. Things were so bad at one store in West Gray, Texas, that an OSHA inspector fined the company $116,200 for two repeated violations and four serious violations. A serious violation is one in which there is a substantial probability that death or serious injury could result.

OSHA officials told The Chronicle that they launched an investigation after receiving complaints that probably came from Dollar Tree customers. That sounds as if customers were annoyed because they could not get through the aisles or reach merchandise.

After reading this story, one has to wonder about Dollar Tree's ability to absorb Family Dollar Stores (NYSE:FDO), which it bought in January. If Dollar Tree cannot maintain safe conditions in its 5,000 existing stores, how is it supposed to maintain them in the 7,600 Family Dollar locations it acquired in January?

These stories also raise some serious questions about the dollar store business model. How are dollar stores supposed to compete with aggressive rivals like Kroger (NYSE:KR) and Wal-Mart if they cannot perform such a basic function as keeping the aisles clear so customers can reach the merchandise?

Are Dollar Stores Competitive?

Such basic operational problems point to a serious lack of management at both chains. That could be a real opportunity for both Wal-Mart and Kroger. In particular, it could benefit Wal-Mart's Neighborhood Market small box concept.

I recently visited a Neighborhood Market in Aurora, Colorado, and found it clean, well-staffed and well organized. Among other things, I noticed no blocked aisles and was able to get in and out of the store in less than five minutes. After shopping at that store, I have to wonder how Dollar General and Dollar Tree are supposed to compete with it.

Kroger, as I have noted elsewhere, has demonstrated a deep discounting ability that makes its prices competitive with dollar stores. I have noticed specific products at City Market and King Soopers (Colorado's Kroger brands) stores, including coffee, canned tomatoes, and broth, selling at lower prices than either Family Dollar or Dollar Tree seems to offer.

Since Kroger's stores, like Walmart Neighborhood Market, are usually well-stocked and organized, it presents a serious threat to dollar stores. I often see stocking taking place at Kroger stores, but I rarely see blocked aisles in them. When I do see blocked aisles or shelves at King Soopers or City Market, I usually find an associate who is willing to move the boxes so I can get to the goods I want.

Dodging The Bullet

Revenue figures indicate that dollar stores have been able to dodge this bullet so far. Dollar General reported a quarterly year-to-year revenue growth rate of 9.9% on January 31, 2015, and Dollar Tree reported a rate of 10.77% on the same date. In contrast, Wal-Mart reported a revenue growth rate of just 1.43%, and Target (NYSE:TGT) reported a rate of 1.15%.

Since revenue figures are based on sales, it would seem that Dollar General and Dollar Tree have been successful at attracting new customers. What I have to wonder is how long that can continue if conditions at some of their stores are as bad as the news articles indicate.

The dollar store business model is based largely upon convenience and speed. People go to the dollar store because it is located in the neighborhood and they can get in and out quick. How are customers supposed to get in and out quick if the aisles are blocked with merchandise?

This leads to another problem I have noticed at both Family Dollar and Dollar Tree stores near my home in Colorado (there's no Dollar General in my area): poor stocking. I often find bare shelves and missing merchandise when I go into both stores. That would seem to indicate serious deficiencies with their distribution system and logistics.

Sometimes, I have noticed the merchandise I want is in the store, but it is not on the shelf where I can get at it. Instead, it is sitting on a cart in the aisle, often blocking other things I want to buy. That seems to indicate a lack of staff or a staff that is not doing its job.

It looks as if both Dollar Tree and Dollar General are in serious need of process improvement. One has to wonder how long these two chains can avoid addressing these problems.

I also have to wonder, are Dollar Tree and Dollar General executives actually walking their stores so they can examine the actual conditions on the ground? It appears that they might not be, which indicates a lack of basic retail skills and knowledge.

Despite their recent revenue growth, Dollar Tree and Dollar General look like stocks to be avoided until their management teams start addressing operational issues like stocking and keeping the aisles clear.

Disclosure: The author is long KR.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.