How a Small-Town 'Hunch' Survived the 'Retail Apocalypse'

Before there was Black Friday... there was Dollar Day.

Back in the 1940s and early 1950s, the retail landscape was completely different from today. It was an era that predated the suburban shopping mall. Big department store chains like Montgomery Ward, Sears, and Gayfers clustered together in larger cities. These downtown districts were where Americans did most of their shopping.

As people moved out of the cities and into the suburbs during the mid-20th century, downtown department stores struggled to keep customers streaming through the doors. So retailers conceived Dollar Day to fix that.

Major retailers agreed to conduct big sales promotions all on the same day, offering many products for just $1. (Back then, $1 was the equivalent of about $10 today.) The events drew big crowds. The Los Angeles Times reported that 200,000 people thronged into the city's shopping district for a Dollar Day in 1940.

A store operator in rural Kentucky named Cal Turner was intrigued by this success... Retail was in his blood. His father bought and liquidated bankrupt general stores, and the young Turner often helped. In 1939, at the age of 24, he opened his first store – Turner Department Store.

Turner was a son of the Great Depression and the prosperity that followed into the mid-1950s. As such, he knew that business success was often the product of daring to go where others hadn't. So, on a hunch, he decided to create a store where every day was Dollar Day.

On June 1, 1955, he reopened a converted Turner Department Store as the first "dollar store" in Springfield, Kentucky.

Turner's idea was a huge hit... Americans always love a bargain. Within two years, he was operating 29 of his "dollar stores" across Kentucky and Tennessee.

And today, Turner's "hunch" has turned into the biggest dollar-store chain in America...

We're talking about Dollar General (NYSE: DG)...

Dollar General is the largest "small box" retailer in the U.S., with more than 15,000 stores in 44 states. Its stores provide the winning combination of convenience and low prices.

The company specializes in low-cost products that need to be replenished regularly... things like food, snacks, health and beauty products, cleaning supplies, basic clothing, housewares, and seasonal items.

And most of these items cost less than $10.

Dollar General's former CEO (and a current U.S. senator from Georgia) David Perdue describes the company's competitive advantage best...

We went where they ain't [and] offered 7-Eleven convenience at Walmart prices.

Roughly three-fourths of the company's stores are in towns with populations of 20,000 or fewer. For people living in these areas, the nearest Target or Walmart could be dozens of miles away.

Most of Dollar General's customers have annual household incomes under $50,000, with one-third earning less than $25,000. CEO Todd Vasos says these customers are always under pressure financially, which is precisely why most retailers aren't interested.

Of course, these customers still have everyday basic and household needs. And Dollar General consistently meets those needs at competitive prices.

Retail consultant Craig Johnson of research firm Customer Growth Partners says Dollar General knows the low-income shopper "like the back of [its] hand."

For example, Dollar General has marked prices in five-cent increments for decades, making it easier for customers on a budget to estimate their total bills before they get to the register. Today, customers can download the Dollar General app on their smartphones, clip coupons, and place online orders.

And with this competitive advantage, not only can Dollar General avoid the current "retail apocalypse"... It can thrive in this environment.

You see, while e-commerce giants like Amazon (AMZN) have put many brick-and-mortar retailers under pressure, Dollar General can coexist with them.

Dollar General sells consumer staples to low-income households at rock-bottom prices in their own neighborhoods. The company targets customers with an income of about $40,000.

Meanwhile, the average Amazon customer has a median income of $85,000.

In fact, Amazon's weakest customer demographic is Dollar General's specialty – consumers who make less than the U.S. national median salary.

This also makes Dollar General a great business in economic downturns. As the Wall Street Journal explained in 2017:

Dollar General is expanding because rural America is struggling. With its convenient locations for frugal shoppers, it has become one of the most profitable retailers in the U.S. and a lifeline for lower-income customers bypassed by other major chains.

Dollar General's business is impressive, but so is its price action. Over the past year, the stock is up nearly 50%.

If you look at a longer-term chart, the gains get even better. The stock has nearly tripled over the past five years, and it recently surged to a fresh all-time high.

This business is immune to the retail apocalypse that has caused many other brick-and-mortar stores to suffer. And its competitive advantage in discount retail makes it a great investment in both good times and bad.

Sometimes investing is simple.