Discount retailers seem to be ruling the market, especially after the recessionary period. This is mainly due to cost consciousness of customers and a change in their buying habits. Therefore, the one who provides lowest price wins the battle. Also, there are other factors such as customer service and marketing strategy which influences the buying decisions of customers. Dollar stores such as Dollar General (NYSE:DG) have been making the most of this change in spending habit. Dollar stores’ everyday low prices give the budget conscious people a reason to visit their stores. Also, retailers such as Costco Wholesale (NASDAQ:COST) have become popular as they attract shoppers through their thin margin strategy.
On the other hand, grocers such as Kroger (NYSE:KR) and Safeway (SWY) are adopting other strategies to drive store traffic. By providing enhanced services, which are focussed on customer needs, and strong marketing programs, these companies are trying to win back lost customers.
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Performance in the Past
The stock price movement, over the last five years, of all the retailers highlights the performance of each of them over the period. Dollar General has been the best performer with a total return of 149% in the last five years, whereas Kroger, Costco and Safeway stood at 98%, 91% and 65%, respectively. This was mainly because of Dollar General’s lower priced products which snatched away customer attention.
Dollar stores, which include Dollar General, provide most of the products for $1. The company posted great results as inclusion of tobacco drove store traffic higher. Also, Dollar General managed its costs well by having smaller format stores. This is in sharp contrast to Safeway and Kroger, which have larger stores, resulting in higher costs. Smaller stores make it easy for shoppers to navigate.
Moving on to Costco, it provides increasingly low prices along with great customer service. However, it charges an annual membership fee, which adds to its revenue. Costco makes all the purchases from manufacturers at a bargain price. This is then passed on to its customers only if the goods are bought in bulk. Its high volume and thin margin business model enables the warehouse retailer to attract people. Moreover, the retailer remains focussed on enhancing its e-commerce operations since customers prefer to order products online rather than going to the stores.
Kroger, on the other hand, has managed its way out mainly because of its customer-centric strategy. Its loyalty card program mails coupons to its loyal customers, on the basis of their past purchases made at its stores. Also, it has reduced the time taken at checkout lanes, making customer service more efficient. It has also entered into new product categories such as the popular yogurt business and the snack chips business which helped the retailer register higher sales. These moves helped Kroger provide a return of 98% to its investors.
However, Safeway had been witnessing a large number of problems in attracting customers. Therefore, it resorted to a similar strategy of providing discounts to loyal customers. The customer loyalty program is called “Just For U” and provides special discounts to regular customers. Also, it has made efforts such as remodelling its stores and providing fuelling stations in the parking lots. These strategies coupled with its loyalty program helped the company improve its performance to some extent.
Hence, it is important to provide what customers are looking for. Since shoppers look for value for money, retailers such as Costco and Dollar General are doing well. Also, Kroger managed to put up a great show by adopting its customer 1st philosophy. Therefore, investors should select the one which suit their portfolio needs. Dollar General, however, looks like the safest bet of all.