Chapter 32 - My Father's Business: The Small-Town Values That Built Dollar General into a Billion-Dollar Company
Today’s Chapter is based on the book “My Father's Business: The Small-Town Values That Built Dollar General into a Billion-Dollar Company”, an autobiography by Cal Turner Jr.
Buy it on Amazon here:
https://www.amazon.com/My-Fathers-Business-Small-Town-Billion-Dollar/dp/1478992980
Here’s what I learned from the book:
Small-Town Values
“If everybody else is doing it one way, you can find your niche by going in exactly the opposite direction.”
— Sam Walton
Dollar General’s story is a great example of the importance of finding your own niche. Similar to the famous proverb, “it is better to be a shark in a small pond than to be a fish in a large ocean.”, Dollar General was able to find success by starting their business in Scottsville, a relatively small town rather than in a big city.
One of the advantage of being in a small-town was that the company was able to identify their target addressable market easily. As a matter of fact, since they were located in a small farm town in America, Dollar General would be catered to the local farmers and as such, prices have to be low. Cal Turner Sr. once said that “the initial idea was selling the good stuff to the rich folks, but we were late getting into retailing and Mr. Karl Stark was already doing that in Scottsville. So we had to sell the cheap stuff to the poor folks. It was just the business we had to get into.”
"We've always lived in small towns, always done business in small towns, and we're their kind of people. Small-town people work harder for their money and often have less of it to spend, so they're more careful and practical about how they spend it. They judge quality by the garment, not the label, and they know a work shirt with a thread pattern flaw will last just as long as first line merchandise even if it only costs half as much. They don't mind shopping where there's no carpeting, indirect lighting or soft music, because they know it's the customer who pays for those luxuries.”
— Cal Turner Jr.
This was perfect for Cal Turner Sr. as he was an expert at buying merchandises for cheap. As a matter of fact, the family business started when Luther Turner, the grandfather of Cal Turner Jr., started by purchasing cheap stocks from failed retailers all over the South, usually at the courthouse when they couldn’t pay off their creditors. Once, they obtained the winning bid, they would sell the merchandises at a small markup either to other independent retailers in Kentucky and Tennessee or to middlemen. At the end of their first year, the Turners had sold over $65,000 worth of goods. When they started having too much merchandises, the Turners started to look towards going directly to the customers and to open their own retail stores, which was the start of Dollar General.
“Luther saw that many of these stores weren't going to make it. They had mortgages, utilities, vendors, and other creditors to pay, but their customers lacked cash, so they simply couldn't move their merchandise at anything close to what they had in it. What had happened to him and his two little stores in the early twenties was happening all over the rural South in the thirties. He also knew that where there was failure, there was opportunity. He had opened that first store with merchandise from a failed retailer. Here was the chance to do that with store after store. Someone would be buying the merchandise at bargain-basement prices, on the courthouse steps if nowhere else. It might as well be Luther.”
— Cal Turner Jr.
Another advantage of being in a small-town is that store location matters less. As a matter of fact, Cal Turner Sr, mentions that “we don’t have to have great locations, with our merchandise and our prices, we just need some kind of building around us. The concept conforms to the location.” As such, the company is able to build stores based on the neighbourhoods in which they are operating in without having to follow a certain standard. This is without saying that by exercising in small rural towns, Dollar General can do business less expensively compared to their big city competitors.
"We're in Scottsville, Kentucky, with our corporate headquarters and warehouses for many of the same kind of reasons. We can do business less expensively, with better help, and with more pleasant surroundings than our big-city competitors. We're country folks and we intend to stay that way, even though we think we're doing a big-city job of merchandising."
— Cal Turner Jr.
This concept of doing business in small-town due to their advantages reminds me of the concept of finding your niche that we have learned previously from Isadore Sharp from Four Seasons. As a matter of fact, specialized businesses can thrive by catering to a smaller niche market. Once they own the niche, they can be incredibly hard to dislodge.And, in the case of Four Seasons, Isadore Sharp was able to create one of the largest hotel chain in history despite competing with various existing giants in the industry such as Holiday Inn and Marriott by focusing on midsize hotels of exceptional quality to offer a differentiated product compared to the rest of the industry.
“But my mind was made up. “We will no longer be all things to all people,” I said. “We will specialize. We will offer only midsize hotels of exceptional quality, hotels that wherever located will be recognized as the best.” I resolved to sell any hotel that didn’t meet our new standards.” — Isadore Sharp
Know-Your-Customer
“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
— Sam Walton
Once a company has targeted its customers, it is primordial to understand their needs. This lesson was not learned the easy way at Dollar General. In fact, at the beginning, Cal Turner Sr. was much more focused on beating their competition rather than on fulfilling their customers’ needs. He believed that the key for the survival of the business was to control the company’s expenses better than the competition. To prove this point even further, the company’s first mission statement was “To serve better than anyone else does our customer’s need for quality basic merchandise at everyday low prices.”
“As Larry looked over the company, his eye lit on our mission statement: "To serve better than anyone else does our customer's need for quality basic merchandise at everyday low prices." He had real problems with that, recognizing it as the long, unwieldy, and off-base statement it was. He said, "It's not a mission statement when you compare yourself to the competition. A mission statement is about you, your unique situation, and the opportunities you want to strive for."”
— Cal Turner Jr.
Considering this, Cal Turner Sr. & Jr. often purchased merchandises without giving priority to their customers’ need and would rather focus on obtaining as many items as cheap as possible. As a matter of fact, they would often follow Luther’s concept of “If it’s bought right, it’s half sold.” However, this often led the company being stuck with half-sold inventory in their hands. This only changed after Cal Turner Jr. listened to one of his employees that convinced him that “If we're going to have this business grow, we're going to have to stock what the customers want, so that they come in more often and we can serve them better. We now have buyer push. What we need is customer pull.” From then on, Dollar General started to only stock items based on a customer driven approach.
“We took a look at it strictly from our customers' point of view. They were the same as they'd been since the beginning they didn't have much money and they needed a retailer who could help them make what they did have go further. To make our approach truly customer driven, we were going to have to do that not just with great buys, but also with the things they needed day to day.”
— Cal Turner Jr.
Furthermore, Turner Jr., by focusing on the customers’ need, noticed that low-price trumped over everything. As a matter of fact, he learned that, once a certain quality threshold was passed, customers would always purchase the cheaper version of two items even if the higher-priced item offered some higher quality. By consequence, the company, unlike other retailers, did not fall in the trap of trying to upgrade their products to higher-quality products and stuck with their concept of serving the low-income customers. This only helped the company as Dollar General would only stock “core” products that would never not be in-demand as they were basic products that are needed in anyone’s every day life. Sometimes, keeping it simple is the way to grow revenues. As Charlie Munger once said, “We have a passion for keeping things simple.”
“We were fortunate in our stubborn determination to stay at the low end and serve the low-income customer. There would be no French perfume, designer dresses, or diamond-studded dog collars. My father had always kept it simple.”
— Cal Turner Jr.
“We knew economics would always force low-income customers to know value and we knew there was a real niche in retailing for a low-cost provider of basics-things people use up and buy when they run out, such as soap, shampoo, toothpaste, and the like.”
— Cal Turner Jr.
This Dollar General story reminds me of the importance of listening to your employees and your customers that was reiterated by Bernie Marcus and Arthur Blank at the Home Depot through their inverted management and “cultivate the customers” concepts. In fact, Bernie Marcus and Arthur Blank believed that their sales associates are the spinal cord of Home Depot as they are the ones interacting with the customers. As such, it was important for them to visit the stores to talk to both customers and employees on how they could improve things as managers.
Similarly, Bernie Marcus and Arthur Blank knew the importance of great customer services as a retailer. In fact, they are all about customer cultivation, meaning that they are willing to go out of their way to take care of the customer to make sure that they will remember the Home Depot and come back to their stores.
“At The Home Depot, cultivating the customer is much more important than creating a bottom line. We teach our associates that if you can save a customer money, do it. We're not looking to fleece the customer. If I can save them $100, why not do it? That reflects one of our values: caring for the customer. Care for them today and they'll be back tomorrow.” — Bernie Marcus & Arthur Blank
Counterintuitive Measures
“Great work tends to grow out of ideas that others have overlooked, and no idea is so overlooked as one that’s unthinkable.”
— Paul Graham
In business and in life, sometimes the best ideas are the most counterintuitive ones. The Pareto Principle is a perfect example of this. As we have learned previously from Tom Monaghan, the founder of Domino’s Pizza, reducing products’ offering can be a major revelation and breakthrough for a company. As a matter of fact, once Monaghan decided to strictly sell one size pizzas and by doing so, Domino’s was able to leverage its profits even further. It may seems counterintuitive that simplifying a business may increase its revenue, but here’s how Monaghan explains it:
“The main argument for having only twelve-inch pizzas was faster service. But quality would be improved, too. A pizza maker has to learn how to make each size pie. The twelve-incher is easier and larger ones are much harder. There would be fewer mistakes too both in taking orders and boxing them. With three sizes of pies and just two inches difference between them, it sometimes happened during a rush that a worker would ruin a large pie by trying to jam it into a medium size box. Then there were the saving we would make in purchasing. Having one size would cut our box inventory requirements by two-thirds.”
— Tom Monaghan
Similarly, Cal Turner Sr. had the brilliant idea of simplifying his business by only selling products with $1 as the single price point. This idea came to him when he saw advertising of “Dollar Days” sales put on by big department stores in Nashville and Louisville. By opening stores with only one price point of a dollar, they would be able to simplify all of their operations, notably the checkout process.
Furthermore, Turner Sr. also had the counterintuitive idea of selling some popular items below cost in order to bring in customers. While the store would lose money on these items, Dollar General would make up for the losses through their purchases of other products. The key was to bring in customers to their stores.
“Dad knew there were times they'd have to sell below cost to give the best deals possible to the customers while sticking with that $1 price. If he was buying, for example, cold pack canners, big covered pots used in home canning, he might pay $12.75 a dozen. He knew they'd make great $1 items that would help bring in customers, so that's where he'd price them. On the other hand, he might be buying cheap ceramics from Japan at $5 a dozen. He'd price those at $1 too.”
— Cal Turner Jr.
Another brilliant counterintuitive idea from Dollar General was to completely stop advertising. As a matter of fact, since they were offering low-price basics every day, the reasoning was that their customers would be the one doing their advertising via word of mouth. This was even more the case considering they were located in small communities where word easily gets around. As such, they decided to slowly reduce their advertising costs. Truth be told, the advertising money would be better used to lower prices to boost sales in the long run and that is exactly what Dollar General did.
“We'd been running company-wide circulars for years as many as thirteen of them in a year-but our best advertising was word-of-mouth and I was convinced it was all we needed. We went through withdrawal each time we decided not to print a company-wide circular and we took short-term sales hits-up to 30 or 40 percent at first-but I was confident that using that money to lower prices would boost sales in the long run.In 1993, we printed just five circulars, and we gradually got the number down to two, and then to zero. In the process, we lowered our advertising costs from 3.6 percent to less than .25 percent.”
— Cal Turner Jr.
“The truth was we had better sales when we stopped advertising! They were better than the sales of our competitors who continued to advertise. We understood our customer, who bought when she needed something, at the best price she could find. If she didn't need it, a lower price wasn't going to entice her to buy it.”
— Cal Turner Jr.
Finally, if you thought eliminating advertising was crazy, Dollar General also used an ingenious counterintuitive merchandising strategy. The company decided to reduce the number of items with high profit margins. Instead, they would prioritise lower margin but faster selling items such as paper towels and detergents. They would also include consumable items such as snacks to increase customer traffic. While their profit margins would take a hit, the increase in sales and customer traffic would more than make up for it.
The success of Dollar General as a small-town business definitely reminds me of the story of Sam Walton at Walmart who was also very successful at building stores that would attract customers looking for the best value for their money and that would make profits through volume of sales rather than higher margins.
Beyond the Book
Read "Keeping Things Simple and Tuning out Folly" by Farnam Street
Read "Leverage: Gaining Disproportionate Strength" by Farnam Street