Should Dollar General Enter Markets Like India?

Dollar General is probably one of the few retail companies that keeps marching on to growing sales every year, even in the times of Amazon and Walmart e-commerce. Dollar General knows its target audience and does everything to keep its prices low, and so has enviable profit margins. It operates in 42 of the 48 states in US and probably doesn’t have to expand beyond, given all of its finances are in the green.

But for a moment, let’s say you know this fact – E-commerce is not as prevalent in India as in the US and for obvious reasons – low internet penetration, good weather conditions year round so people can actually step outside to visit their local grocery stores, time taken to shop online vs. visiting the store (convenience) – and that most of the Indian market usually makes purchase decision based on price (not brand), and loves to buy lower quantities of several items rather than in bulk. All these sound like Dollar General is a good fit for the Indian market and it will flourish there. Yet, I’d like to think that Dollar General shouldn’t enter the Indian Market because –

  1. Lower Profit Margins – Dollar General is able to enjoy huge profit margins in the US because it sources good internationally and given the foreign currency exchange rates, it translates into bigger gains for the company per unit sold. If it were to operate in India, it would have to keep its prices really low, much closer to the marginal cost of producing the goods (say 1/6th of a dollar for a toothpaste) and that would eat its way into the profit margin.
  2. Competition – There is huge competition for Dollar General not only in the products it sells, but from other similar stores doing the same thing already. Much has been written about the Indian Kirana stores, and these are the Dollar General for Indians. We need to understand that real estate in India is hard to come by, especially in neighborhood corners which are already inhabited by kirana stores. This means DG has to open its stores far from residential places, and then has to compete with bigger local hyper-marts such as Spar, more. Star Bazaar etc., losing their customers to kiranas due to convenience. Also, given these stores are all competing on price, there is very little to gain from operating here.

If we had the numbers, we probably could calculate to see how much profit DG would make if at all they entered and would it be worth all the effort. But for now, DG can enjoy its superior cash generating business model in the US!

Note: FDI policy in India states that a foreign retailer can enter the Indian market only if it sells a single brand (unlike Wal-Mart which is a multi-brand retailer and cannot open its stores), so Dollar General can sell only its unique private labels, further compressing its ability to compete with homegrown brands. If this rule changes in future, DG has more scope to think about entering the market. 

SimplySindhu.com is a blog where I share thought-provoking 1 minute business bytes. Follow the discussion!

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