Winning in the Fog of Retail War: Dollar General (DG)
Photo by Alexandr Podvalny from Pexels
SHIFTING demographics RING UP BIG BUCKS fOR This discount retailer
America is a divided country. But where those fractures lie, as North America emerges from its pandemic-induced hibernation, is surprisingly unknown.
U.S. cities are supposedly seeing the deepest population exodus since the interstate highway system made suburbs convenient to car travel in the 1960’s. United States Postal Service data that tracks mail forwarding indicates that once-trendy urban areas, like Fort Myers, Philadelphia, Houston, Brooklyn, and Manhattan, lost nearly a million combined residents in the past year.
Such nouveau migrants were mostly rich and web-connected. Nearly 75% of all the top quintile earning workers worked from home in 2020, estimates the Brookings Institute. These elites took advantage of powerful, low-cost telecommuting technologies to decamp to unlikely real estate markets. Suddenly relatively middle-of-nowhere places like Whitfield County, located in the northwestern tract of Georgia, saw some of the largest increases in home values in the country. And similarly nondescript Ada County, Illinois, and Canyon County, Idaho, saw similar growth in home prices of between 25 and 30 percent, according to Zillow’s published data.
These rural real estate hotspots do not appear to be outliers. We studied the top 15 markets.
Who wins in this foggy area of retail topology? To us, it is not established retail giants like Walmart, Costco, and Lowes. Thinly populated areas cannot support such big-box stores. Instead the unlikely success story is the rather humble Dollar General (DG). This discount food, snack, and cleaning supply chain has emerged, through brute force expansion in rural areas as the logical answer to the challenges of understanding the changing demographics of the U.S.
Rural counties dominated growth rates in home prices in 2021.
And no county featured a major urban area.
And traditional heavyweight real estate markets, like San Mateo County, California, and Kings County, New York, saw home values drop around 5 percent.
Corporate boardrooms are taking notice of such deurbanization. Construction infrastructure giant Arcosa (ACA), paints and coatings firm PPG Industries (PPG), and the South Dakota Farmers Union all based their 2021 forward-looking strategies on serving –and profiting from – urban flight.
“I think this is a great opportunity to reposition the image of agriculture, particularly as we see more and more deurbanization, as people are moving into rural areas,” said Dr. David Kohl, a member of the Academic Hall of Fame at the College of Agriculture at Virginia Tech at a recent conference.
But are Americans really moving to the country in consistent, explainable ways? Probably not.
Finding the “Un-Deurbanized” Market
A deeper look into Covid-inspired urban flight reveals the national trek from the city to the countryside is a far subtler story. For example, let’s take a look at the bottom 15 markets, in terms of change of median home prices from 2020 to 2021. In terms of worst performance it is hard to beat tiny Pope County:
The bottom 15 markets data shows equally attractive rural areas with collapsing home prices. Exactly why is unclear.
Median prices in this southwestern part of Illinois fell from roughly $143,000 in 2020 to around $124,000 in 2021. Other rural areas like Lawrence County, Kentucky, and Gregg County, Texas, saw similar double digit drops in home values.
But market watchers and brokers cannot exactly explain why Whitfield County in northwestern Georgia orders of magnitude more attractive than Pope County in southwestern Illinois. Georgia has a denser population than Illinois in that part of the state. There are more amenities and better schools in that part of Georgia.
But by all appearances, Pope County offers a perfectly reasonable – if a bit snoozy – rural community experience. The county is tucked in between southern Missouri and western Kentucky. The 2010 Census estimates the local population to be just 4,250, that is spread out over 374 square miles. That’s just 12 people per square mile.
If Pope County were Manhattan, just 265 people would live there.
Despite the thin population, Pope County is proud of its spot on this divine planet. There are robust genealogy resources. The county seat is what appears to be the perfectly nice Golconda, Illinois. There is a Chocolate Factory, a recreation area, and a winery. It’s a reasonable 20 mile drive to Paducah, Kentucky, which offers some bigger town amenities, like the National Quilt Museum.
Like all rural areas, life is not exactly rosy for all: The median income in Pope County is around $19,000. Roughly one in 5 live below the poverty line. Burglary can be a problem, But there have been no murders or sex crimes, at least over the past two years.
And there’s serious value for money in Pope County real estate: Just $149,000 buys an attractive 4-bedroom home. Even $40,000 buys what appears to be a perfectly reasonable 2 bedroom structure. With today’s low interest rates, that works out to a $4,000 down payment and a $145 a month for a 30-year fixed rate mortgage. Meaning a dual-earner household could own this home free and clear from the two covid stimulus checks it just got and unemployment payments.
$40,000 buys a perfectly nice home in Pope County, Illinois. Yet home prices dropped dramatically over the past year.
Is Pope Country the ideal rural location for a hip urban family looking for a taste of nature and lower prices? Probably not. It’s a solid 2 1/2-hour drive to St. Louis. And the schools could be better.
But isn’t the point of deurbanization in the digital age that none of that matters? One should be able to Zoom, text, and virtually educate from Pope County, as well as from far-pricier Whitfield County, Georgia.
And real estate in Pope County is not the only rural area to underperform national averages. Of the bottom 1,000 U.S. counties, as ranked by the change in median home values from 2020 to 2021, only 8 (!) counties were from the top 100 markets, in terms of size. That means just .0125% of the total 1,000 worst performing areas come from highly populated urban counties. That’s statistically indistinguishable from zero.
Numerically speaking, de-urbanization probably doesn't exist.
Entering the Fog of Rural Demographics
Exactly why homes in one rural area are valued so much higher than homes in another is unknown. Some argue that the Census Data at the heart of most demographic analysis is turning out to be bizarrely inaccurate. For example, the 117th Congress District Map, one of the first assets created by the most recent 2020 census, contains some jarring demographic misrepresentations. In spite of the fact that pandemic-induced migration made Idaho the second fastest growing state in the U.S., it somehow failed to earn an additional Congressional district in the latest redistricting.
One argument why is that the census at the heart of congressional districting took place mostly before the covid pandemic. The survey simply did not capture the recent movement of Americans. It has been argued that real-time cell phone data can replace traditional direct sample surveys like the Census.
But researchers in geostatistics caution that while cell phone positional data can be astonishingly accurate, particularly when dealing with thinly populated rural areas, it takes serious resources and organizational commitment to get an accurate population picture from mobile phones.
No matter where Americans might move, they can’t help but be close to one of Dollar General’s 17,000 locations.
Selling Everywhere in the Real World
There are now nearly 17,000 Dollar Generals in 46 states. And the operation is opening locations at an astounding rate. Estimates say one in half of all stores opening in the United States are Dollar Generals. Regardless of where people are moving to, they are going to be moving close to a Dollar General.
Certainly Dollar General’s organizational scale has minuses. It can be an awful operation to work for, offering low wages and poor benefits. Discount stores can be horrific magnets for crime and neglect, particularly in poorer communities. Real estate developers worry stores are so easy to open that local landlords will have little leverage when their initial contracts expire.
But in terms of survivability in this most confusing of all retail eras, it is hard to argue with Dollar General. The operation throws off gobs of cash. Cash flow from operations was around 70 percent from 2020 to 2021.
And somehow, despite all this upside, the stock remains relatively cheap. It’s currently trading at about 20 times earnings. That’s a fraction of Walmart’s 30 times price to earnings. Considering that Costco is trading at a stratospheric 40 times earnings, Dollar General offers a serious value story.
But probably what matters most is, when the high-flying U.S. economy finally catches up with itself, and the world comes back in touch with the value of a dollar, that coming downturn might just be Dollar General’s finest hour.
