a16z Podcast - a16z Podcast: The Case Study of Dollar General and Surviving (Thriving!) Retail

Episode Date: September 4, 2018

with Jeff Jordan (@Jeff_Jordan), Cal Turner Jr., and Hanne Tidnam (@omnivorousread) The "death of retail" in the face of e-commerce and tech disruption is a very real phenomenon, but what about the flip side of that story -- that is, retail thriving despite all odds? Enter Dollar General, a multi-billion-dollar success story of the U.S. chain with 14,000 brick-and-mortar dollar stores. So in this episode of the a16z Podcast, general partner Jeff Jordan -- who was formerly an SVP for The Disney Stores (and has written much about declining malls, competing with Amazon, and the tipping point for ecommerce, among other things) -- with Hanne Tidnam interviews Cal Turner, Jr., the CEO of Dollar General and author of the new book, My Father's Business: The Small-Town Values That Built Dollar General into a Billion-Dollar Company. How did Dollar General go from the Great Depression to nearly filing for bankruptcy to IPO and entering the Fortune 500? It turns out, the journey -- not unlike startups and successful big companies -- is a case study in focus, focus, focus... whether it was pricing (natch) or inventory or a focus on customers or simply (but not so simply!) focusing on one's "true north".

Hi, and welcome to the A16Z podcast. I'm Hannah. We talk a lot on this podcast about disruption, but we don't talk as often about the flip side of that. In this episode, we wanted to dive into some of the lessons around one interesting story that continues to defy the general negative trend around physical retail, Dollar General, the American chain of dollar stores dating all the way back to 1936, which is today a 14,000 store billion-dollar success story. In this conversation, A16Z general partner Jeff Jordan and I chat with Cal Turner Jr., former CEO of Dollar General, and the third generation in his family to run the business. The story behind Dollar General goes back to a farmer in the Depression with a third grade

reading level, all the way up through from facing Chapter 11 to IPO and now a Fortune 300 company. We talk about the lessons of leadership and management we can learn from the success story, including the core principle that sustained the business through generations, the inspiration that actually began the Dollar Day everyday pricing philosophy, the key turning points where the company had to reinvent itself, and what keeps Dollar General alive and thriving in the age of the big box store? I used to be a CFO of the Disney stores in a prior life, so I'm pretty familiar with physical retail.

And when I became a venture capitalist, I blogged a lot about how digital was going to have a huge negative impact on physical retail. And largely that has come true. And then sometimes you come against a contra example like you. I remember when we just called it retail. Your baby is thriving in an environment where very, very few physical retailers are thriving. Dollar General has a market cap of about $28 billion, revenue over $20 billion. I don't think it is the best-known retail concept in the world,

and that's just a fascinating juxtaposition. That company has always been under the radar screen. When we went public in December of 1968, Wall Street didn't know what to do with Dollar General. fit no category. You created a category. My dad indeed did that when he opened the first dollar general store in 1955. We lived in this small town, and the company and the town and retailing were all just intermingled. Retailing invaded our family life. We had to pray for snow if daddy was overstocked on overshoes or when we had to, we had

We had to pray sometimes for the snow to melt if customers couldn't get out and shop at Christmas time so that he could pay the banks off this year because he was always strapped for capital and always struggling, but he knew the customer. The business actually, you described the roots as going all the way back to the Great Depression, right? The roots of the company go back to J.L. Turner, my grandfather, and J.L. Turner only. had a third grade education. When he was 11, his father was tragically killed, and he had three younger siblings, and it was a heavily mortgaged farm. That doesn't sound like the beginnings of a Fortune 500 company now does. I love the way you describe his perception of his third grade education in the book. You said it turned him into a great observer and a great student for the rest of his life. Basically, he never stopped learning from anybody else.

And that is the makings of a good leader, that assumption that you should learn from others because everybody had something to teach him. I think it's only manager who says I should teach everybody something. A real leader wants to learn, wants to ask different questions, grow and develop. It's so interesting. As organizations get bigger, the elite, leader is less and less informed because people are intimidated to talk to them or they're not listening or whatever. For me, one of the biggest challenges was always really understanding the pulse of the customer, of the company, of the employees, and you had to do that by learning. Everybody tells the boss what he or she thinks the boss wants to hear. And if the boss really wants

to hear their truth, he or she has a big selling job to do, to overcome that barrier. between the CEO and everybody else. Let's talk about when it turned into Dollar General. What was that like? How did the business really start there? My dad observed that department stores would buy expensive newspaper ads in support of a dollar day's sale. He realized that something was working for them

or they wouldn't spend that much money consistently advertising. So he said, why can't we do that in a store? Every day would be dollared. And he saw it as a way of simplifying retailing and of really broadcasting value to the customer because it's easy to understand the value at this even price. It's easy to keep up with how much you're spending. And our struggling customers had to keep up with what they were spending

even while they were in the store. store and you could simplify keeping the books and checking out the customer and he presented it to his management group and every one of them had the same opinion it will never work that means it's a great idea but he was determined to try it and they'd put a dollar general store where they had failed to see if it was really viable and it proved to be indeed that. I think an important context is who your target customer is because you said

struggling customer. One of the interesting concept I've experienced in my business career is it's so much easier to communicate when the investors use your product. You've got a concept that most of investors probably have never purchased in. Well, our stores are in all of those small, rural

communities throughout our country. And the struggling farmers and hardworking people who really knew value were our customers. And my dad was always convinced that we had smarter customers than higher income and metropolitan clientele. Yeah, I think you said somewhere that they were better at understanding real value

versus perceived value. And we better be sure at Dollar General that we always had real value for them because nothing else would work. So there's an interesting subtlety you had in that because of your location philosophy, small, town, rural, your employees were actually your customers, too. Your employees understood the needs of the customer because there were their neighbors. You had a real North Star in this business. You knew your customer. They were someone who really valued value, and you and your family engineered the entire concept around that.

So how did you keep that North Star? I mean, that definitely is this thread throughout the entire arc of the business that you, You knew your customers. What are some of the lessons that we can pull out that people starting companies today that are trying to kind of zero in and really understand their core demographic or grow the business? Well, I as CEO am told all kinds of wonderful things about our programs and how well they're working in the stores. But until I get out to hear from frontline employees and from the customers, I don't get the real truth. Staying in touch with your core demographic is important, but that's even too impersonal, a description.

You have to stay connected to the persons who are your customer. At eBay, we encourage our employees to trade, buy, and sell on eBay. I'm on the board of Airbnb, and Brian Chesky strongly encourages the employees to host or be a guest on the platform because it keeps you connected to the value and philosophy and, you know, the entire thing. You represent your customer in sourcing whatever your customer needs. We had to concentrate on the consumable basics, and we had to remember we have the small stores that are convenient, easily shopped, and close to the customer. That is the convenience we offer, but we have to have low prices for our customer at all times.

We were talking about pricing, which is obviously a theme that runs throughout this entire story. Given that dollar general is ultimately, you know, kind of all about pricing. Can you talk us through what that kind of led to about thinking about pricing as a whole? Well, after the Second World War, my dad had bought too much of something as a wholesaler, and he discovered that the retailers weren't cooperating, even though the market had considerably plunged and prices had gone. He couldn't talk retailers into getting with the market and lowering their price and buying more product.

And he realized that he was not going to be able to succeed without being directly in touch with the customer. There's a real lesson in retailing there. The retailers who maintain that direct personal connection almost with customer are the ones who are going to succeed. Now, it is an interesting progression. He couldn't have been a retailer until he understood the wholesale distribution, but the wholesale for him was a limiter. So he went direct to consumer. Yes, exactly. Exactly. I don't think of it as keying on price so much as it does

on the total value you offer your customer, what are you doing for the customer? What is the value your customer needs from you as a retailer? Pricing is an important part of that, but it's not all about price. You have to attain a certain threshold of quality. Our price doesn't matter to these dollar general customers. Seems like all of the decisions almost flowed from that North Star that you kept, you know, right in front of you. Well, yes. And I learned we could recruit smart employees from our customer base and they can help us figure out this business with smart customers and smart employees. But it was also, I mean, even though you've been driven by this very clear understanding of your mission and your consumers, you went from everything from going public to

thorny acquisitions to facing bankruptcy and now to bucking the overall retail trend. So what were the hard decisions that you made at those critical points that you felt turned it around? We redefined the business we were in. The management team said, look, we're not a retailer. We are a customer-driven distributor of consumable basics. The product is already distributed, and it's out there close to the customer. So when the customer runs out of consumable basics, it's right there. We have pre-delivered. Now, even the Amazon's of the world have to get it to the customer.

Right, that pre-delivery is challenging. We already have it. there. It's a model that works and IFC continuing to work. Is that what you described when you talked about the shift from your dad's buying habits as being one of the things that set you apart where instead of studying the competition, he likened it to Christmas where you don't know what you're going to get, now go sell it? And then in the 1970s that there was some pushback there and the business model changed. Is that when you started thinking about it in this different way? Or how did that business model evolve? When we did strategic planning, I invited senior management to really

be honest. And one of them said, well, I'll tell you something that's wrong with the company. You always quote, your grandfather, who says, if it's bought right, it's half sold. So look at all this half sold inventory we're stuck with. We've got to work on the other half. We've got to have customer pull. What does the customer need? Your dad forces everything out to the stores because he knows what the customer needs, but he overbys, and we really need to learn what the customer needs instead of opportunistic retailing. We need to develop some of that conventional retail skill of keeping stock because there are things the customer needs from us that your dad hadn't found a great opportunity buy for. Well, that one challenge to me is what turned the company around.

I mean, that's a management lesson in itself. And then you took that critique and you institutionalize it across a large, sprawling organization and such that your customer could rely on being in stock on the basic needs and, you know, essentially flipped the murder. merchandising philosophy on its head. Yes. Yes, it was flipped on its head. The hardest and toughest decision I ever had to make was the decision to fire my brother, who was the chief operating officer.

And the company was really in trouble. We were on the verge of Chapter 11. And when you're in that situation and the CEO and the CEO don't agree on action to be taken, action must be taken. I was really ticked off to have to make the decision of whether to tear the family and the company apart by firing my brother. With the benefit of the hindsight, was it the right decision? It definitely was the right decision.

My brother wound up, liberated to be himself, and he had major success in his own right, and it's better than it would have been if we'd stayed in business together. I want to talk a little bit about technology, because you talk about introducing computers into the company early on, and your dad was very resistant to that. What was that like watching the introduction of technology into a business like this, which was about basic people relationships and value? The processes of retailing are all enhanced by technology, the repetitive stuff you have to do. And indeed, my father's opportunistic way of considering himself to be a buying genius meant that he didn't need a computer to tell him what to buy. He already knew what to buy. Nor would he be happy if the computer told him he'd made a bad buy.

So we didn't get into technology for the merchandising or the customer side. it was the processes. It was distribution. It was the reporting and the accounting that when you have little stores all over everywhere, keeping up with everything is a human impossibility. But it was required by your change in merchandise strategy. If you want to be in stock every day on good value basics, you can't do that across what's now 15,000 stores on a pen and paper ledger. That ain't happening. No, exactly. And my dad actually wound up, please, because it gave him store reports. He read reports every week on every store until a few months of his death. It might take him a month and a half to get through every store report. But he would have a new stack put in front of him, and he would write what in the company were called love letters. He'd make special handwritten notes, he'd want the store manager to actually get on that operating report. Jeff, how about this particular demographic? Are there technologies that you think will really transform or that need to come or that you've started to see for this particular customer base? Technology-wise, this customer base is starting to look like the rest of the world

really quickly. The smartphone penetration is so ubiquitous out there now that the playing field has been leveled. Now, it's interesting that creates other opportunities. We're investors in offer-up. And Offer-Up's a concept that is a classified site for the trading, cleaning out your garage or buying something locally at a bargain that happens through a mobile phone. And so people who value deals and are willing to put a lot of time into getting a better deal, you know, that was Offer-Up's early core customer. And it's arguably probably the same customer. Well, I always thought that we had the broadest customer base, given that we were selling the consumable basics because pretty much everybody uses them.

And how did you coexist with Walmart at the time, which was also exploding, featuring everyday values in rural America? Are your towns different from their towns? No. No, we're in the same markets. In fact, our stores close to a Walmart seem to do better than our stores that weren't close to a Walmart. Oh, how interesting. Why? I remember years ago going through a Walmart super center with David Glass, the CEO of Walmart, and he talked about their store being a convenience store. And I said, wait a minute, this great big old, he said, we're convenient and we have everything a customer might want to buy under one roof.

I thought, well, my goodness, isn't that interesting how being a convenient in the convenient store venue is completely different? for these two companies. Targeting the same customer with a completely different approach. They had everything under one roof, but it was a really big roof. Yes, but they needed to cater to every whim of the customer and every need of the customer. We were going for the consumable basics. So having seen this incredible change in the industry overall, in the business, having watched it go through such enormous evolutions, but also stay very core to its key principles. What do you think for founders striking out today trying to

figure out their own business, their own customers, what are the pieces of advice you would give them? Stay connected with your customers and your employees who probably understand them better than you do. Don't build such bureaucracy that there are barriers between you and the customer. don't take yourself to seriously ask questions and listen well to the answer. You've got to convince all those who follow you that you really respect them and you want to hear their truth. You don't want them to spoon feed your truth back to you. The humility involved in that is for me of one of the really important things. of some of the best leaders I know.

Honor your people and don't use guilt or blame in building your management and your company. I love the North Star of knowing exactly what you're trying to do and engineering the entire process and system around it. The best founders I work with, that's their goal to be. Relentless in making sure that the organization lives up to that commitment, just the coherence with which the system works. I mean, it's interesting because it sounds simple, but actually it must be incredibly difficult

as things get big and there's all these layers. A sprawling enterprise, 45 states in small towns across the entire country. It's pretty hard to keep it all together. At the end of last year, 75% of the continental United States lived within five miles of a dollar General store. And I think it'll be closer to 80% this year. Dollar General Silicon Valley, here we come. Yeah, well, I don't think there's one by me. We need one. All right. Well, thank you so much for joining us on the A16Z podcast. Yeah, thank you, Kelly. Thank you, Hamma, and Jeff. I enjoyed it.