Dollar General and the Economics of Rural America

I think investors need to avoid Dollar General (NYSE: DG) because of the horrendous economy in rural America.

To explain, Dollar General operates dollar stores in small-towns where other retailers refuse to go. For example, Baldwin, Florida, where the town government has to finance a grocery store with tax money.

Baldwin is so small and poor, no grocer wants to operate there. Consequently, the town government operates a supermarket they call the Baldwin Market, Food & Wine reports. The town of Baldwin used $150,000 in government funds to reopen an empty IGA market, The Florida Times-Union reports.

Town leaders opened the market to keep people from moving away from the food desert. Strangely, Baldwin’s dilemma shows the problem with Dollar General.

Can Dollar General Make Money on Main Street?

Dollar General operates 15,370 dollar stores across the United States, Statista estimates. Many of those stores are in small towns; such as Baldwin, where for-profit retailers cannot make money.

Dollar General survives in those places with its simple, no-frills business model. However, making money in such environments is difficult. Both incomes and margins are low in rural environments.

For instance, the Median Household Income in Baldwin, Florida, is $44,271 a year, the World Population Review estimates. Meanwhile, the average household size in the United States in 2017 was 2.16 people, Arcgis.com estimates.

If you divide $44,271 by 2.16 you get $17,027.31. Thus, Baldwin, Florida, could have a median individual income of $17,027.31 a year. Consequently, it will be hard for any business to make money in Baldwin.

Dollar General’s problem is that America is full of Baldwins; towns with low incomes and declining populations. Dollar General operates in such places because it has little competition on those Main Streets. However, Dollar General has little competition because nobody else wants to operate there.

How Amazon Threatens Dollar General

Dollar General’s problem is compounded by its biggest direct competitor; Amazon (NASDAQ: AMZN).

Amazon ships almost everything shoppers want straight their doorsteps, even in towns such as Baldwin. If UPS (NYSE: UPS), FedEx (NYSE: FDX), and Amazon Logistics can reach a town, Amazon can serve customers there. Additionally, if there is a post office in town, Amazon can ship there.

This is a problem for Dollar General because Amazon’s resources are infinitely greater than DG’s. For example, Dollar General had $276.08 million in cash and short-term investments on 31 October 2019. Meanwhile, Amazon had $43.401 billion in cash and short-term investments on the same day.

Therefore, Amazon has unlimited amounts of cash to pay deliver drivers to haul stuff to small towns. Moreover, Amazon could afford to undercut Dollar General’s prices, yet still make money. For example, Amazon Prime could sell deodorant or corn chips at half the price of Dollar General, in hopes the customer will also order a new chainsaw or a pair of boots.

Meanwhile, Dollar General will need to borrow money to operate if sales are bad. Notably, Dollar General reported $10.451 billion in long-term debt on 31 December 2019.

How Amazon could Destroy Dollar General

A greater danger for Dollar General is that Amazon will take all the customers with money in small towns. To explain, all the middle and upper-class residents will do their shopping on Amazon Prime.

Consequently, Dollar General will be left only with the old, poor, and uneducated customers. Essentially, Amazon could leave Dollar General with only the customers with little or no money.

This phenomenon is already plaguing food deserts such as Baldwin, Florida. To clarify, in such towns middle and upper class people either order everything online, or drive to Costco (NASDAQ: COST) or Walmart (NYSE: WMT) to shop.

That leaves Main Street merchants with only the poor and old. Consequently, grocers, drugstores, and others leave town because they cannot make money there. Dollar General; and its rival Dollar Tree (NASDAQ: DLTR), stay because their margins are low enough to survive in such an environment.

The grave danger is that the amount of economy activity in a small town could fall so low, even Dollar General could lose money there. Magnify that crisis nationwide, and I have an easy time imagining Dollar General collapsing.

Why Dollar General could Collapse Quickly

I think Dollar General (NYSE: DG) could collapse quickly because it makes little money.

For example, Dollar General made a gross profit of only $2.065 billion from its 15,370 stores in the quarter that ended on Halloween 2019. In contrast, Amazon reported a quarterly gross profit of $28.679 billion on 30 September 2019.

In addition, Dollar General reported an operating income of $491.42 million and a net income of $365.55 million for the last quarter. Furthermore, Dollar General reported an operating cash flow of $530.59 million and ending cash of $16.51 million on 31 October 2019.

Will Dollar General fall into the Death Spiral?

Thus, Dollar General has little cash, so it could run out of money quickly.

Moreover, Dollar General reported a financing cash flow of $289.53 million on 31 October 2019. I think the financing cash flow shows Dollar General borrows money to finance its operations.

I think the financial numbers show Dollar General could be close to the retail death spiral. The death spiral occurs when a retailer does not generate enough cash to pay its debts. This could happen at Dollar General anytime.

Notably, Dollar General reported a negative ending cash flow of -$11.54 million on 31 July 2019. That shows Dollar General burned more cash than it generated through sales.

Consequently, I think it all it will take is a few months of recession in a few states to throw Dollar General into the death spiral. Another scenario is that a few months of deep discounting by Amazon Prime could drive Dollar General out of business by taking all of DG’s middle class customers.

What happens if Dollar General collapses?

The collapse of Dollar General could to a catastrophe on Main Street because millions of poor people now use dollar stores as their “grocery store.”

To explain, millions of Americans live in food deserts. A food desert is a town or neighborhood with no grocery store. A good example of a food desert is an urban neighborhood not in walking distance of a supermarket.

In food deserts, people without cars; or the money for Amazon Prime or Instatcart, rely on retailers such as Aldi, CVS Health (NYSE: CVS), or Dollar General. If CVS; or Dollar General, closes those people could lose access to food. Notably, drugstore operator CVS Health is now one of America’s largest grocers, Market Mad House claims.

Food Desert USA

Thus the collapse of a retailer such as Dollar General could lead to hunger or food riots in some parts of the United States. Under those circumstances, many local governments could follow Baldwin’s example and open their own grocery.

Frighteningly, America’s largest drugstore operator, and urban grocer, Walgreens (NASDAQ: WBA) is in such sorry shape its management is considering taking the company private. Thus America could soon see the collapse of a major drug store or dollar store operator.

I have to wonder if there could be pressure for the federal government to step in bail out a retailer such as Walgreens or Family Dollar. Notably, The Washington Post describes Baldwin, Florida, as a “deep red town” where President Donald J. Trump (R-Florida) is popular. Yet Baldwin’s leaders had to resort to socialism to keep groceries on residents’ tables.

Is a Basic Income the Answer?

America needs to address the growing retail apocalypse on Main Street before it leaves families without access to food. I think one way to address the retail apocalypse is to deal with income inequality and poverty.

I think the best means of dealing with income inequality is a basic income scheme such as presidential candidate Andrew Yang’s (D-New York) Freedom Dividend. In the Freedom Dividend, Yang proposes using a value-added tax to pay for a $1,000 a month basic income for all Americans.

Other potential solutions for income inequality include increased Social Security payments, a jobs guarantee, and a higher minimum wage. A terrible solution could be to ban or shut down Amazon Prime. However, I think there are no good capitalist solutions for the Food Desert crisis, and the income inequality that drives it.

Why Investors Need to Stay away from Dollar General

I think investors need to stay away from Dollar General (NYSE: DG) despite the 32₵ quarterly dividend it will pay on 6 January 2019.

Investors need to stay away from DG because it could collapse quickly and make the stock worthless. Thus, Mr. Market Grossly overpriced Dollar General at $156.65 on 20December 2019. Meanwhile shares of a dying retailer; the J.C. Penney Company (NYSE: JCP) were trading at $1.09 on the same day.

However, you could make money from Dollar General because of the 32₵ dividend it will pay on 6 January 2020. Dividend.com credited Dollar General with a 0.84% dividend yield, an annualized payout of $1.28, and a payout ratio of 19.26% on 17 December 2019.

Conversely, I think the risks at Dollar General exceed the potential returns. Investors and speculators need to watch Dollar General closely because this retailer could collapse.