Last year was not a banner one for launching new retail concepts. Many in the industry put their efforts into building out their e-commerce and omnichannel capabilities as the pandemic raged across the country.
Dollar General was among the small, hardy group that launched new store concepts in 2020. Its first store under the Popshelf banner opened in Tennessee last October, and didn't get many visits from media or financial analysts. The first analyst who did take a look at the store in person called it the best new concept he has seen in nearly two decades.
"I walked in there and went, 'Wow, like, this is something special,'" Scott Mushkin, CEO of R5 Capital, said in an interview. "The only other one that made such a significant impression on me was Five Below back in 2005."
Dollar General has long been courting customers in higher income ranges than its traditional base. Popshelf is an entire concept devoted to a market outside of Dollar General's core. 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 General's perspective, they saw an opportunity in the market that's being underserved," said Joseph Feldman, retail analyst and assistant director of research with Telsey Advisory Group. "I hear this a lot from the dollar stores or value-oriented retailers, that there's a number of great products out there if you could go upscale a little bit, higher than what you normally do in your core store."
Between October and May, Dollar General opened its first eight Popshelf stores, which are around 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.
Annualized sales as of May stood at $1.7 million to $2 million per store, compared to $1.4 million in first-year sales for a traditional Dollar General. Gross margin rate at Popshelf stores is roughly 40%, eight percentage points higher than at Dollar General stores, according to Owen.
With the banner performing well, the company has accelerated its build-out of the concept as it eyes thousands of locations across the U.S. While successful already, the concept is in its infancy. Dollar General will have to make calculated decisions about the brand along the way, and the retailer will have to scale a concept not quite like anything either it or its dollar store peers have ventured into before.
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 is really the first dollar store to devote itself entirely to that demographic.
Comparisons with Five Below are perhaps inevitable — especially as Popshelf's target price is $5 or less for most items — but those comparisons are also not very accurate based on each format's target customer.
"There's nothing like it out there," Mushkin said. "It's very much on trend. The merchandise is insane. It's just a really fun format. In some ways, it's like Five Below all grown up. But that probably doesn't do it enough justice."
To be sure, there are many discounters and value-based retailers vying for the dollars of the middle-class suburban shopper. Feldman named Big Lots, Ollie's, HomeGoods, even Bed Bath & Beyond, as well as other dollar stores. But none quite align with Popshelf's specific offer and merchandising.
"It's too simplistic to call a Popshelf just similar to Five Below. It's more like an adult version of Five Below."
Joseph Feldman
Retail Analyst & Assistant Director of Research, Telsey Advisory Group
Feldman also noted the inevitable but imperfect comparison to Five Below. "It wouldn't surprise me if Dollar General saw the success of Five Below, and sees the success of HomeGoods and others, and thought, 'Hey, you know, there's a niche for us in there too,' to cater to the adult community," Feldman said. "It's too simplistic to call a Popshelf just similar to Five Below. It's more like an adult version of Five Below."
For its part, the company told Retail Dive that Popshelf "is not an attempt to replicate or refine an existing retail format. It's a new and, we believe, unique store concept and new brand."
Key to the banner's proposition to its target customers is Popshelf's merchandising, which focuses on seasonal and home decor, health and beauty, cleaning supplies, party goods and other categories.
With Popshelf led by Dollar General Chief Merchandising Officer Emily Taylor, the retailer is looking well beyond the household essentials and general fare at its traditional stores. Its goal is to trade in trendy brands and products and create a treasure hunt experience at the Popshelf stores. That effort includes combining continually refreshed merchandise with seasonal specials and limited-time offers.
The company already thinks the banner is having resonance with customers. CEO Todd Vasos in May cited promoter scores in the upper 80% and 90% range, which he described as "unheard of." Owen, on the same conference call, said customer satisfaction scores at Popshelf were "very high."
When Mushkin visited the store, the analyst thought, "Who the hell is merchandising this thing?" He saw party crafts, face mask bars, black cutlery, colored pens, pet treats, shampoo, and stations to build your own mops and design T-shirts, as well as healthy and organic snacks and other consumables. His firm estimates that at least 50% of a Popshelf's store sales are likely to come from higher margin categories.
"You just really couldn't merchandise anything any better than they're doing," Mushkin said.
Popshelf opens doors for Dollar General to products and price points largely left out of its traditional stores. The banner allows the retailer to "leverage their strengths, which are clearly buying and sourcing," Feldman said. "It opens up this whole world in goods and items."
But it also means buying for a unit within the larger organization that has very different needs and makeup than the rest of Dollar General, which is much more focused on consumables and household essentials. However, the retailer has been working to grow sales of non-consumable products — an initiative that helped spawn Popshelf. In Feldman's view, while different in needs, Dollar General's existing sourcing infrastructure can help it stock Popshelf.
"They already have the scale of Dollar General behind them," Feldman said. "To go in the market and then to be able to bring that heavy pencil to write those orders — you can get great pricing."
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. There is also a massive, mature buying organization that stocks Dollar General's more than 17,000 stores.
Within the organization, Popshelf has its own dedicated procurement team, which also tries "to leverage core competencies from DG to support pOpshelf, including collective buying power with vendors for the benefit of the customer," the company told Retail Dive in written comments. The company also sees opportunities for cross-learning in the respective merchandising of its core and Popshelf banners. "As much as DG can influence pOpshelf, we may see learnings from pOpshelf to integrate into DG stores," Dollar General said.
Filling a niche
Opening during the pandemic does have its advantages.
Asked about it in December by an analyst — who was "curious in terms of decision to launch the new concept right now during the pandemic" — Vasos said that the concept had been in the works for 18 months and was always 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.
The executive went on to note that "we didn't anticipate ... the abundance of available real estate that would be out there, and that's been a real positive for us." That abundance came from the store closures last year, which hit nearly 9,000, and which created opportunities for a retailer that already accounts for nearly a fourth of all new store openings in 2021.
Real estate vacated by retailers closing shop may have helped fuel Popshelf's expansion, along with its stellar sales performance.
In March, Owen said the company was accelerating its plans for Popshelf this year. It now expects to open 50 stores under the banner, up from 30, and to additionally add the concept to 25 Dollar General stores during the year. Long-term, executives see room for 3,000 possible Popshelf stores in the U.S.
Using Five Below as a proxy, Mushkin came to a similar estimate for possible Popshelf stores. As to where all those stores will go, and what fellow retailers they'll share strips with, that is not yet clear.
"I think they just like being in high traffic areas," Feldman said of the Dollar General organization.
The concept's target demographic is large enough and its offer broad enough that it could go in a diverse set of shopping centers. "It's right down the middle," said Mushkin. "Bed Bath & Beyond, Kohl's — any of those ubiquitous strip centers across the United States that have middle-income retailers in it."
He added that Popshelf may be competing with Five Below for real estate, but in terms of consumer wallets, the two retailers aren't necessarily going head-to-head given the age difference in their target customers.
"You could almost say they could co-locate," Mushkin said of Popshelf and Five Below. That could allow for family shopping at the same strip, with parents going into Popshelf to shop while their teen and tween children shop at Five Below.
Two stores or one?
Along with the opportunities of scaling Popshelf come big decisions, and some risks, for Dollar General.
The signal from executives that they plan on adding the banner as a shop-in-shop inside its namesake formats raises some obvious questions. Are the two brands compatible, complementary? If so, to what extent and in which markets? If not, what's the downside of intermingling the two brands?
The company has not said how many shop-in-shops it will open or to what extent they may comprise Dollar General's target 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 replied that those areas where it might put a Popshelf inside a Dollar General are those where incomes are higher than the retailer's traditional core customer. Vasos also noted strong sales when there has been "cross-pollination of items" — that is, products sold in Popshelf also sold within a Dollar General, sans any Popshelf signage.
Mushkin is skeptical of the shop-in-shop plans, and said he has even flatly told company executives he doesn't think the strategy is a good idea.
"The upside of co-mingling is maybe in some of your DGSs you can put a Popshelf and you can enhance returns a certain amount, and that's good," Mushkin said. "What's the downside? The downside is you freaking tarnish the Popshelf brand and you never get the results. The downside is significant because you can screw up something that's just amazing."
He added: "It's not like you can't do it ever, but you protect the brand and grow it independently. To me, that's more important."
Along with the differences in assortment, the higher price points — with 95% of products $5 or under — are one reason to demarcate Popshelf as its own banner. "I don't know that you could simply drop in some of this stuff" into Dollar General stores, Feldman said. That could send the wrong message to customers about the Dollar General banner.
Mushkin thinks the banner could eventually be spun off or sold. "Dollar General is something that is a completely different animal in my mind," he said. For one is the value potential in Popshelf, which he thinks could add more than $50 to the retailer's stock price.
There are also operating differences between the two models. Popshelf's constant merchandise refreshment requires different training and labor structure than Dollar General stores. As for labor, Popshelf stores are being launched with spots for 15 workers, compared to 6 to 10 new jobs slotted for traditional Dollar General stores, according to the company.
"I think they can scale it, but it's different running 15 to 20 stores than it is 3,000," Mushkin said.
With Popshelf still in its early stages, there is no hint from the company as to whether it might one day spin off the banner. For now, it is rapidly moving from experiment to an actual store chain. One way or another, Dollar General is betting that Popshelf's higher prices and higher margins will be a money-maker for the company.
